What is a fund and why do I care?

On the Street, there are many different ways to put your money to work for you, referred to as investment vehicles. One such type is a fund, where people's money is pooled together to trade on a certain strategy, and the return to divided amongst each fund contributor according to how much they contributed, after a small management fee.

Why do you care?
If you are like most people, you don't have millions of dollars to invest nor do you have a lot of free time on your hands to watch and play and the stock market. Funds hire people who specialize in watching and playing the stock market.

When you have money sitting around, consider that every day it sits, you're actually losing money, due to inflation. Funds are the ideal way of knowing someone is managing your money without you worrying about it day to day.

How do you pick a fund?
Funds have two basic strategies: active and passive management

Active management is where the fund employs some sort of strategy, ie. we only buy stocks that have been winning in the last 10 weeks, and constantly changes what they owe to match that strategy. Such management allows for the possibility of really high returns, but also has the downside that you could lose all your money. In general, these types of funds all have high management fees (between 3-5%) of your money a year.

Passive management on the other hand is typically a strategy of indexing. What is indexing? Essentially buying every stock in proportion to their size on a certain criteria and holding it, ie. indexing all stocks on NASDAQ. A lot of people consider this a "lazy" approach to investing, but is actually very low in terms of risk, and most research show that the average passively managed fund outperforms the average actively managed fund. Of course if your criteria tanks that year, so will the fund.

What different kind of funds are there?
You're heard of hedge funds. They are in the news a lot, because they can either may 50% a year or just belly up. However, if you are reading my blogs for information, you probably don't fall into "professional, institutional or otherwise accredited investors"who are allowed to buy into hedge funds. What's left?

Mutual Funds - Click here to read an excerpt from Wikipedia about how to select a mutual fund.