Saving and Investing for Students

• 
Other investors that you would need to sell to think the 
company’s stock is too expensive given its performance and 
future outlook.
• 
The people running the company are ensnared in fraud.
• 
For whatever reason, you have to sell your investment 
when the market is down.
MUTUAL FUNDS AND EXCHANGE-TRADED
FUNDS (ETFs)
Because it is sometimes hard for investors to become experts 
on various businesses—for example, what are the best telecom-
munications, pharmaceutical, or computer companies—inves-
tors often depend on professionals who are trained to investi-
gate companies and recommend companies that are likely to 
succeed. Since it takes work to pick the stocks or bonds of the 
companies that have the best chance to do well in the future, 
many investors choose to invest in mutual funds and ETFs. 
What are mutual funds and ETFs?
A mutual fund or ETF is a pool of money run by a profes-
sional or group of professionals called the “investment adviser.” 
In a managed fund, after investigating the prospects of many 
companies, the fund’s investment adviser will pick the stocks or 
bonds of companies and put them into a fund. 
Investors can buy shares of the fund, and their shares rise or 
fall in value as the values of the stocks and bonds in the fund 
rise and fall. Investors may typically pay a fee when they buy or 
sell their shares in the fund, and those fees in part pay the sala-
ries and expenses of the professionals who manage the fund.

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U.S. SECURITIES AND EXCHANGE COMMISSION
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Even small fees can and do add up and eat into a significant 
chunk of the returns a fund is likely to produce, so you need to 
look carefully at how much a fund costs and think about how 
much it will cost you over the amount of time you plan to own 
its shares. If two funds are similar in every way except that one 
charges a higher fee than the other, you’ll make more money by 
choosing the fund with the lower annual costs.
For more information about mutual funds and ETFs, be sure to 
read our brochure “Mutual Funds and ETFs—A Guide for Inves-
tors,” which you can read online at Investor.gov. 
MUTUAL FUNDS AND ETFS WITHOUT ACTIVE 
MANAGEMENT
One way that investors can obtain for themselves nearly the 
full returns of the market is to invest in an “index fund.” This is 
a fund that does not attempt to pick and choose stocks of indi-
vidual companies based upon the research of the fund manag-
ers. An index fund seeks to equal the returns of a major stock 
market index, such as the Standard & Poor’s 500, the Wilshire 
5000, or the Russell 3000. Through computer programmed 
buying and selling, an index fund tracks the holdings of a cho-
sen index, and so shows the same returns as an index minus, of 
course, the annual fees involved in running the fund. The fees 
for index mutual funds and ETFs generally are much lower 
than the fees for managed funds.
Historical data shows that index funds have, primarily be-
cause of their lower fees, enjoyed higher returns than the aver-
age managed fund. But, like any investment, index funds in-
volve risk.

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