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What are mutual funds?
According to the Mutual Fund Investor's Center, a mutual fund is "a company that pools the money of many investors -- its shareholders -- to invest in a variety of different securities."
Basically, mutual funds allow you to "diversify" your holdings -- spread them out among different stocks or even different kinds of investments, such as stocks, bonds, and cash. They also offer professional management. Each fund employs administrators to guide the fund by making appropriate buying and selling choices.
In almost every case, the fund's primary investment strategy is very explicit. It may be "small-cap value" (invests in companies that are worth less than a 500 million dollars and whose stock price is low in relation to their profits). It could be "large-cap growth" (big companies with increasing revenues). Or even "index" funds, which are just comprised of representative or complete samples from popular stock indexes, like Standard and Poor's 500.
A final benefit is cost. While all funds have to pay their management team and take a small percentage of the pooled money to do so, those costs are miniscule compared to the amount an investor would have to spend to go out and make the dozens or even hundreds of individual, commissioned trades needed to achieve the same diversification and investment strategy.
For more on mutual funds and how to choose them, check out Morningstar or Quicken.com's Mutual Funds site.
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