Most of the investment options within your 401(k) are mutual funds. For the novice investor, or for someone too busy to manage their own portfolios, mutual funds are great options for IRAs and other investment accounts.
A mutual fund is a portfolio of stocks and/or bonds, whose total value can be in the billions of dollars. Investors are “pooling” their money to hire a professional manager who will make the day-to-day decisions about the securities to buy or sell. Investors own “shares” in the portfolio, each having an undivided interest in the portfolio. With a very small investment, you can own a portfolio that offers you important diversification in various asset classes and in numerous sectors of the economy here and around the world.
Shares of mutual funds are issued and redeemed by the mutual fund itself, at a price calculated at the close of the financial markets each day. Another investment that has gained popularity is the exchange traded fund, or ETF, which trades like a stock, meaning it can be bought or sold at any time during trading hours. ETFs are also a good way to invest small sums of money.