Mutual funds are essentially a collective investment in stocks, bonds, or other securities. The goal of any mutual fund is to minimize risk while providing the potential for large growth over extended periods of time. Basically, a group of investors give their money to a fund manager, who is an expert financial analyst and can make informed decisions as to what kind of securities are best to invest in at the moment. Mutual funds can have as many different strategies as an individual investor can, for example either focusing on a particular market segment or trying to follow a market index. Mutual funds can be actively managed, hunting for profit at the cost of turnover, or passively managed, trading as little as possible. There are three potential methods for profit. The first is much like the dividends that are issued to share holders of a stock and interest that is earned by bond owners. Annual payments of all dividends and/or interest accrued are issued to all investors in the mutual fund and this is known as a distribution. The second method to earn profits is by selling any securities that have experienced growth. These profits are also dispensed to all investors in the mutual fund as a distribution. Finally, any unsold securities can be sold to another investor in the mutual fund for profit (provided that the price of the securities has increased). The main advantages of a mutual fund include potentially reduced risk through greater diversification than would be otherwise possible (funds are only way to, in effect, buy a fraction of a stock) and the ability to cash out (sell holdings and withdraw from the mutual fund) at any time. Disadvantages include the difficulty of assessing the fund manager’s competence (as we’ll see later, past performance is not always a good gauge for future performance) and the expenses incurred by fund overhead (salary for the fund manager, for example).