Glossary
Fund
A pool of many investors' money managed for them
A fund pools money from many investors so a professional can manage it on their behalf. It spreads across holdings that would be hard to buy individually, giving even small amounts real diversification.
There are two broad kinds. Active funds employ managers who pick holdings; index funds simply track a benchmark such as the S&P 500. Active tries to beat the market, index tries only to match it.
The fee gap is wide. Active funds often charge 1 to 2% a year against 0.1 to 0.5% for index funds. Long-run studies show most active funds fail to beat their benchmark after fees, which is why index funds suit beginners.
Funds price once a day, so you cannot trade them in real time and redemption takes several days. If you want the same diversification with instant trading, an ETF is the alternative. Before buying, check the total expense ratio before the past performance. Historical returns may not repeat, but the fee comes out every single year without fail.