A mutual fund pools money from many investors to buy a diversified portfolio of stocks, bonds, or other assets. A professional manager decides what to buy and sell. Investors own shares of the fund, not the underlying securities. The fund's value, called net asset value, is calculated at the end of each trading day.

Mutual funds come in two main types. Actively managed funds try to beat the market. Managers research companies, pick stocks, and adjust the portfolio. They charge higher fees, often 0.5 to 2 percent per year. Index mutual funds track a market index and charge much less, sometimes under 0.05 percent. Over long periods, most active funds underperform their benchmarks after fees.

Mutual funds offer instant diversification and professional management. They are easy to buy through retirement accounts and brokers. They also have drawbacks. Fees eat into returns. Active managers may trade too much, generating taxable gains. Some funds charge sales loads, which are commissions paid at purchase or sale. No-load funds avoid these charges. Investors should compare expense ratios, performance history, and tax efficiency before choosing a fund. The cheapest option is often the best.

Common types

• Equity funds
• Bond funds
• Money market funds
• Balanced funds
• Index mutual funds