A Mutual Fund (like those offered by Vanguard, Fidelity, Janus, etc) is a “basket” of stocks or bonds, put together to try and beat a certain Benchmark. The most well known Benchmark is the Dow Jones Industrials (or DOW). Other Benchmarks are the S&P 500, the Wilshire ??. Benchmarks can also be a specific country or region or Sector. Sectors include the Semiconductors, Internet, Energy, Chemical, etc.

Mutual Funds were put together as a product that would make it easier and less expensive for the individual investor to diversify their portfolio. Before Mutual Funds you would have had to buy every stock in a given Benchmark to replicate that Benchmark. This could run into the thousands of dollars for one Benchmark and multiple commissions. With a Mutual Fund, the fund purchases the shares and then sells a share that represents a portion of the total “basket”. This allows investors to get a diversified portfolio at a much lower price.

Some Mutual Funds are passively managed, such as ones that represent the DOW. They buy shares in the companies and do not make changes to the portfolio, unless changes are made to the Benchmark. Other funds are actively managed, these have fund managers that attempt to beat a Benchmark by using a certain strategy.

In my opinion Mutual funds are better investments, for the individual investor, than individual stocks or bonds. They provide an inexpensive opportunity to diversify your portfolio. Diversification is required of all portfolios, everyone should remember what happened to Enron.

Cons: Mutual Funds charge fees, and these fees differ greatly between different funds. Most Mutual Funds do not beat the Benchmark that they are trying to match. The main reason for this, is the fees that they charge. The best Mutual fund family concerning fees, in my opinion, is Vanguard. Funds also must make distributions. Whether they be Capital Gains or Dividends, the individual investor will be required to pay taxes on most of these distributions, and has no control of when these distributions are made.