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also translate to bad performance for the fund. The fund in essence is at the mercy of the index.

So which fund should you invest in? The answer is that it probably doesn't matter. Many studies have shown that no matter how much a fund tries to outsmart the market, in the long run it will probably match the market at best. Many studies have also shown that a good number of actively managed funds have actually lagged the market over the long haul. Of course there are always a few shining stars. Fidelity Magellan, an actively managed fund headed by Peter Lynch in the late 70s and through the 80s, consistently beat the market during his tenure. Was Peter Lynch a great stock picker or just lucky? We may never know. Making a choice between an actively or passively managed fund comes down to personal taste. If you are a believer in indices then an index fund may just be your ticket; otherwise you could choose from a bevy of actively managed funds out there.

Portfolio Makeup

One general approach in categorizing funds is to consider the securities (stocks, bonds, cash) that they are invested in. Some funds invest in one type of security, but many invest in a mixture to achieve diversification and therefore minimize risk. Based on investments we can have the following types of funds: