Mutual Funds and ETFs Maybe All You’ll Ever Need

Mutual Funds and ETFs Maybe All You’ll Ever Need

Funds give us easy access to stocks and bonds

Mutual Funds: An Excellent Choice 
Mutual funds are the investment of choice for most 
Americans, and for good reason. Mutual funds give 
us cheap and easy access to stocks and bonds (and 
other types of assets, such as gold) to increase our 
wealth. Over time, mutual funds can help us multiply 
our savings for such goals as retirement, buying a 
house or paying for college tuition much faster than if 
we kept our money in a bank account. Here’s how they 
work, and why they work so well:
Mutual funds combine the money of many inves-

tors. Most funds have many thousands of investors, 
and all of their money adds up to hundreds of millions, 

and sometimes even billions, of dollars to invest. 
With all that money, a fund can invest in dozens 
or even hundreds of securities. If you own just a few 
stocks, for example, and one of the companies gets in 
trouble and its stock drops, you could lose a big chunk 
of your money. But by spreading your money (called 
diversifying) among many stocks, one failure will not 
have a big impact. The same holds true for bonds and 
other types of assets.
Most investors wouldn’t be able to afford the cost 
of buying so many securities. Such diversification 
would be very expensive if you tried to do it on your 
own. Buying and selling small numbers of stocks 
would involve paying high commissions. But because 
a mutual fund trades large blocks of stocks, the cost 
of trading is low.
Low cost to start. Some funds accept as little as 
$250 to open an account. More typically, minimums 
range from $1,000 to $2,500. Once you open an ac-

count, you can usually add as little as $100 at a time. 
As we’ll see a bit later, exchange-traded funds (ETFs) 
let you in for even less.
When you buy mutual funds, you’re also buying 
the skills of the people who manage those funds. 
Choosing among the thousands of stocks and bonds 
available is a task that most people don’t have the 
time, the interest or, frankly, the skill to do. Mutual 
fund managers do the choosing for us. 

Funds help you achieve long-term goals

Automatic reinvestment of earnings. Dividends 
paid by stocks in the fund’s portfolio, interest from 
bonds and capital gains earned by selling securities 
can be automatically reinvested for you in additional 
fund shares. Reinvesting earnings is a critical element 
in any long-term investment plan. 
For all these reasons, mutual funds are one of 
the best vehicles for achieving long-term goals. 
According to the Investment Company Institute (ICI), 
the fund industry’s trade group, more than 44% of 
American households own mutual funds. As investors, 
your challenge is to choose among the thousands of 
mutual funds available. This publication is designed 
to help you do just that. 
The Different Types of Funds
Before we discuss all the different things funds invest 
in, look at the four main forms mutual funds come in. 
Index funds. These are relatively simple funds that 
aim to track indexes, or broad baskets, of different 
securities. They are not actively managed by experts 
trying to beat the market; instead, their goal is to 
match the market. Consider funds that track Standard 
& Poor’s 500-stock index, which measures the 
performance of 500 large U.S. companies. Many 
funds are designed to mimic the S&P 500, which over 
long periods of time has returned nearly 11% per year, 
on average. Other index funds mimic other bench-

marks. These include stocks of small U.S. companies, 
different types of foreign stocks, assorted segments 
of the foreign and domestic bond market, and indus-

tries such as energy and health care.
Actively managed funds. These funds employ pro-

fessionals who, within the parameters laid out in the 
funds’ charters, choose from among thousands of 
securities in an attempt to deliver the best possible 
results. These managers and analysts use a wide

variety of strategies. For example, when choosing 
stocks, some managers will thoroughly research com-

panies in an attempt to determine which will succeed 
based on factors such as products, competition, sales 
and profits. Other managers will look at sweeping 
economic factors and pick companies in the industries 
that they believe will do best in their big-picture view 
of things.
Exchange-traded funds. Exchange-traded funds are 
a cross between index funds and stocks. Like index

Mutual Funds and ETFs Maybe All You’ll Ever Need