Up next in How to Understand Personal Finance Terms (53 videos)
Learn what financial terms like "amortization," "annuity," and "short sale" mean in these Howcast videos.
A mutual fund is a financial company, and basically they take your money and my money, they put it together, and they hire a team of professionals to make the investing decisions. So that's great, because instead of you or me trying to decide what stock to buy or when to sell, this team of professionals is doing that for us and that's called professional money management. That's one of the big benefits of the mutual fund. The other benefit of a mutual fund is that the average mutual fund might buy 50 or 100 investments all inside the one fund and so what that means is your money is diversified. If one investment that they choose isn't doing well, there are other investments in there to balance that out. So again, the two big benefits of a mutual fund are the professional management and the diversification. So when you want to invest in a stock or you want to invest in a bond, there's really two different ways to do that. You can go buy individual stocks on your own where you're picking the specific companies, or you can invest in a stock mutual fund where the mutual fund company does that for you. Most people I talk to quite frankly are too busy with their jobs, their families, their life to really take the time to learn a lot about investing. It's not that you can't, but people are just so busy, they often don't get around to it. And so for most people watching, using mutual funds for your investing is a much better way to invest than to try and pick individual securities on your own. Make sure you pick mutual funds that are in different types because there are a lot of different types of mutual funds out there. There are stock mutual funds or bond mutual funds or mutual funds that invest in technology or that invest in Brazil. Any way you want to invest, there's pretty much a mutual fund out there that will do that for you, and in a lot of cases it's better to have that professional management team there making the investment decisions on your behalf instead of you or I.