What Is a Stock Mutual Fund?

Unless you are willing to bet on individual stocks, funds are probably the way to go. Stock mutual funds will invest in individual stocks for you, while spreading your risk. You can still lose money, but it’s generally less risky than choosing a single company’s stock. It would be hard to find two stock funds that are exactly alike. Large-cap funds invest in only the biggest companies (generally, these companies are worth tens or even hundreds of billions of dollars) while small-cap funds focus on smaller ones. 

Mid-cap funds, naturally enough, fall somewhere in the middle. International funds invest in foreign stocks; some concentrate on just a specific country. There’s a whole group of emerging markets funds that invest in stocks from countries that have yet to develop their economies to the extent of areas like the United States, Japan or Western Europe. Specialized sector funds focus on a particular industry, like technology or health care. Every stock fund has its own investment approach and its own balance of risk to potential returns. However, the main distinction you need to know is between actively-managed funds and their passively-managed (or index) counterparts. 

As their name implies, actively managed funds are run by people who take an active hand in managing their investments. These managers are constantly making decisions about which stocks to buy, which ones to sell and which ones to hang onto. 

When you invest your money in one of these funds, you’re really betting on the managers’ ability to buy the right stocks. Index funds are considered “passive” because their managers simply buy the stocks that make up a specific market index, like the S&P 500. They don’t make any active decisions on which stocks to own, and so they don’t have the costs of actively-managed funds for things like research or high-powered investment advice. This translates into savings for you in terms of lower overall fees over the long run. Even the best active manager can have a bad year, and there’s no guarantee that you’ll be able to pick the best manager. Over the long haul, research shows that you would generally be better off investing in index funds that follow the stock market as a whole.