Instead of choosing individual shares, you can buy a share of a fund, and your money is combined with that of other investors and invested according to the goal of the fund. This gives instant diversification, because a single purchase can spread your money very widely. An exchange-traded fund, or ETF, is a fund that trades on an exchange just like an ordinary share, making it simple to buy and sell during the trading day.
A particularly popular type is the index fund, which simply aims to track a broad market index rather than trying to beat it. Because it follows a fixed set of holdings rather than paying experts to pick winners, an index fund usually charges very low fees, and low costs are one of the strongest advantages an investor can have over the long term. For many beginners, a low-cost, broadly diversified fund is a straightforward way to take part in the market without having to analyse individual companies.
Funds are not free of risk. They still rise and fall with the markets they hold, and a fund focused on a narrow area can be just as volatile as a single company. But by turning one purchase into a wide spread of holdings, funds solve much of the diversification problem in a single step, which is why they form the core of many investment portfolios.
This content is general information, not investment advice.