Question

What are mutual funds? What different types of mutual funds are there? And why do you think they are so popular with investors?

Short answer

The funds are a pool of money that the mutual fund company invests.

Actively managed funds and index funds are the types of mutual funds.

They are so popular with investors because they are less risky.

Step-by-step solution

Step 1. Mutual funds

A mutual fund is a company that gathers a pool of investments and maintains a professionally managed portfolio. The company purchases the portfolio by pooling the money of many investors. Because these investors provide the money to purchase the portfolio, they own it and any gains or losses generated by the portfolio flow.

Step 2. Types of mutual funds

Actively managed funds have portfolio managers who continuously buy and sell assets to earn high returns. On the other hand, index funds are passively managed funds. The assets in their portfolios are chosen to match whatever stocks or bonds are contained in their respective underlying indexes exactly.

Step 3. Popularity of mutual funds

The funds are so popular with investors because it is less risky than other investments like the stock market. As the pool is larger, the investments are made in large and hence receive better returns. One more benefit to investors is that the mutual fund's companies have the expertise, and the investors need not hold the knowledge of investments.