I talk a lot about index funds and sometimes I hear things like “I would never invest in a mutual fund.” While, I think the intentions are right (to avoid higher fee, under performing investments) I think it’s worth pointing out the nuance in what we call things.
A “mutual fund” is a big umbrella term. It basically means a bunch of people (mutually) pool their money (a fund) together for a simplified investment. i.e. instead of each individual investor trying to navigate the logistics of buying hundreds of different stocks. The individual investors just put their money into a big bucket, and let the manager of that fund deal with the specifics of buying the stocks and paying out the owners based on the performance of the fund.
INSIDE of a mutual fund, lots of different things can be going on. There can be stocks or bonds. There can be high fees associated with the fund (that the managers charge for their work). There can be different investment strategies that range from aggressively buying speculative stocks to keeping the cash in banks and CDs (a “money market fund” is a type of mutual fund).
That said, these days mutual funds are really broken down into two major types: “Actively managed” mutual funds and “passively managed” mutual funds. Actively managed means there’s a smart manager who picks and chooses investments in an attempt to outperform the market. “Passively managed” means there’s no human making decisions about which stocks to buy, whether the fund just automatically follows an index of stocks. “Index fund” is simply a shorter way to say “passively managed mutual fund”.
So for all you mutual fund haters out there, you probably really just want to avoid ACTIVELY managed mutual funds :)
As always, reminding you to stay healthy by following the two PFC rules: 1.) Stay at home and 2.) Wash your hands early and often.