Many students are heeding this advice and finding that mutual funds provide a profitable way to invest their earnings. By purchasing shares of a mutual fund, an investor essentially buys small portions of a wide array of securities that one person alone could not afford to purchase. A fund manager pools the money from hundreds or thousands of investors, and then invests this money into a number of stocks, bonds or whatever the particular fund prefers. One of the most popular types of funds is an equity fund. Also known as a stock fund, an equity fund is a mutual fund that buys a lot of different stocks.
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.