Originally Posted by La literatura
My understanding of a mutual fund is its a basket of selected investments that a company packages together and sells to you.
I can't spend forever on basics, but a mutual fund is a group of investments which are "sold" as a bundle, BUT there are different types of mutual funds -- there are managed mutual funds -- in which a guy who is paid alot of money specifically selects the investments that are in the fund -- versus index funds.
Index funds are also mutual funds, but they consist of a basket of investments that are determined by something other than some bright guy reading the WSJ. the Vanguard 500 index fund is a mutual fund which tracks the 500 largest US companies (by market capitalization). The companies that are "in" the 500 change from time to time, but not daily, and the Vanguard 500 simply reflects this.
But it's more than just that -- the Vanguard 500 also contains the same weighting as the market itself.
There are index funds for damn near anything. You can do the Vanguard 500 for teh biggest, or the Russel Small Cap (rules exist about what qualifies), or even "total market" indexes. Real estate via REIT index funds, international via international, etc. There are also bond index funds, so don't think it's just stocks.