But it's the rare manager that can do so year in and year out, which is one reason index funds, which reflect market performance, are popular. Because a fund makes many investments, you get the advantage of diversification . This means that, even if some of the investments are performing less well than the manager expects, others are apt to be doing better. A typical stock fund, for example, might own shares in more than 100 companies. And you can get added diversification by buying several different funds, with different objectives.
Professional managers direct the funds, continually buying and selling.
Investors are credited with profits or losses in proportion to the number of shares they own. Profits are either paid out as distributions or reinvested in the fund. Be wary of any fund whose high returns are based on one or two stellar years and eight or nine dull ones. Risk isn't bad if you're investing for the long term and you can tolerate some setbacks without selling in a panic if the fund drops in value. You can invest either directly or through your stockbroker or financial adviser, depending on the fund.