Investment funds: Index funds

Another type of financial institution is an investment fund. Remember, a key aspect of investing is that we can reduce our risk through diversification, don't put all your eggs in one basket. But that can be kind of tough. Let's say I've got $3,000 to invest. It's kind of tough to take $3,000 and split it up and invest a little bit here and a little bit there and spread it out among 25 or 30 investments. An investment fund company helps me do this diversification for a fee. So here's what happens with an investment fund. First, you send them your money with instructions. Here's how I want you to invest my money. Then the investment fund invest the money on your behalf. Of course, you pay a fee to the investment fund. They efficiently diversify your investment, given your instructions, and they charge you a little bit of a management fee. It's a very efficient way to allow individual investors, people like you and me, to diversify our investments. There are different types of…