Investors can buy a unit participation, or share, of that fund. Diversification is the process of building a portfolio of a large number of stocks so that any losses by particular stocks are absorbed by the positive performance of the majority of the stocks. This ability to diversify is what drives the interest in mutual funds, Burton said. There are many different types of funds in which investors can purchase shares. But the two biggest categories that investors pay attention to are income funds and growth funds, Burton said.
Income funds invest in stocks which yield high dividends.
Growth funds, on the other hand, purchase common stock in companies that pay out little or no dividends, but whose stock price is expected to grow. Burton and Dennis both advocate investing in index funds, another type of equity fund. Rather than frequently trading stocks on the market, index fund managers simply match a stock market index. It is relatively easy for an investor to buy mutual funds. Most of them can be purchased directly from the mutual fund company.