A mutual fund is a tool to let an individual investor own small amounts of a wide variety of assets.  For example, an investment firm may purchase many stock shares from many companies, say 3% of the money for Company A, 1% for Company B, and so forth.  The whole basket of stock shares is called a (stock) mutual fund.  Now the firm sells shares of the fund to investors.  Each share can be thought of as a slice of the whole basket.  It will have very little from each company, but it will still have the same relative amounts, 3% from Company A, 1% from Company B, and so forth.  Any gain or loss by the fund is a combination of the gains and losses of the individual stocks.

The two most common kinds of mutual funds are stock funds, consisting only of stocks, and bond funds, consisting only of bonds.  “Balanced funds” contain both stocks and bonds.  By the way, the two funds compared in Figures 1 and 2 are mutual funds.

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