Short on time or investing experience? Simply want an easy way to invest your nest egg? You aren’t alone. Company-sponsored retirement accounts and college savings accounts have introduced tons of folks to the joy of mutual funds. By the end of 2008, almost half the households in the United States owned shares in mutual funds, according to the Investment Company Institute. Why? Because they’re easy to use and they work well, as you’ll learn shortly.
This chapter begins with the three main flavors of funds: index funds, mutual funds, and exchange-traded funds (ETFs). Index funds are a bit like funds on automatic pilot: They’re set on a course to replicate the performance of an index, like the Dow Jones Industrial Average, and off they go. Under their skin, index funds are either mutual funds or exchange-traded funds, but they’re so helpful in setting up an investment portfolio (Asset Allocation Made Ridiculously Easy) that they earn a separate designation as a type of fund.
Mutual funds, which many people own through retirement and college savings accounts, are available directly from the companies that manage the funds or through a broker or financial advisor. They pool your money with other people’s money and then invest it. You can find mutual funds that track indexes or that are actively managed, which means there’s someone at the helm of the mutual fund ship.
Exchange-traded funds, a relative newcomer to the investment scene, work akin to mutual funds, except that ...