Mutual funds come in a variety of different types. Fund managers select and group managed funds by industry sector (technology, international growth, etc.) as well as by risk level. A manager will buy and sell stocks within the area with the aim of getting the highest return on investment.
Mutual funds with potentially higher returns tend to be riskier, so an investor who needs to have his money back into his hands in three years will choose a less volatile fund so as not to risk losing the original investment. However, a person who is more prepared to lose money sometimes will likely gravitate towards the higher-return funds which will over the long term generate higher returns.
An index fund is a mutual fund that holds a portfolio that seeks to match the performance of an index, for example the S&P 500. These funds have lower management costs than actively managed funds and therefore often outperform managed funds.
Exchange traded Funds
ETF's are simply Index funds which can be traded like stocks. They have the same advantages as the index fund with it's low management fees. They are superior to index funds because trades can be placed at the same speed of a stock, versus the fund which cannot be purchased until the following morning.
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