This is an investment vehicle, also known as an Open-End Fund, which is essentially a pool of funds from a bunch of different investors which is given to a fund manager to invest in a variety of different assets and build an investment portfolio. Each investor owns shares which represent a portion of their holdings in the fund, and the fund is structured to match the objectives stated in its prospectus.
An investor can earn money from dividends when investing in stocks and interest on bonds, since mutual funds pay out any income they receive to its owners, but also if the fund sells securities which have increased in price thus attaining capital gain which usually gets passed on to the investors. Also, if fund holdings increase in price but are not sold by the fund manager, causing the fund’s shares to increase in price, the investor can then sell them for a profit.
Mutual funds are a pretty easy, low cost way for a novice investor starting an investment portfolio to get a full-time experienced professional manager to make investments and monitor their money, and they also offer diversification since mutual funds tend to typically invest in a very large number of assets, which a novice investor acting alone might not be able to do. However, there is usually a minimum amount on purchases or sales, and any new withdrawal or investment affects the fund’s assets.
An Index Fund is a type of mutual fund where, rather than the fund owning a bunch of different stocks, they own an entire market, or a portion of the market, thus mirroring the returns of a specific market.