Mutual Fund and Fund Manager

Imagine this scenario: You have only $500 to invest. You believe that it's risky to invest in only one stock, but you also know that you shouldn't and can't spread yourself too thin with that amount of money.

 But what if you gathered 20 friends who each had $500? Together you'd have $10,000, enough to invest in several stocks without commission costs running too high. Nice job. Uh-oh, now who decides what to buy and when to sell? Ah, another problem.

Perhaps your group chooses to pay some guy in a bow tie and suspenders to manage it for you. If so, then you've essentially got a mutual fund on your hands. A mutual fund is thousands of people's money, pooled together by an investment company and invested in stocks, bonds, and other things.

With a mutual fund, you gain instant diversification with a relatively small amount of money. You might also get "professional management" from Wall Street "experts" -- for a hefty fee, of course. Keep in mind, however, that most mutual fund managers don't beat the stock market (as measured by a broad index such as the Standard and Poor's 500) over the long term, which is why Fools recommend low-cost index funds.

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