Final answer:
Mutual funds are investment funds that pool money from multiple investors to buy a variety of stocks or bonds, managed by professionals. They offer diversification and ease of investment, with a significant percentage of U.S. households investing in them for purposes such as retirement savings. Index funds are a type of mutual fund that tracks a market index.
Step-by-step explanation:
Mutual funds are investment vehicles that allow investors to pool their money together to invest in a diversified portfolio of stocks, bonds, or other securities. These funds are often managed by professional investment managers, which adds convenience and expertise to investors who may not have the time or knowledge to manage their investments. The key advantage of mutual funds is diversification, as they provide a mix of various assets, thereby spreading the risk and potential upsides across several investments.
According to the Investment Company Factbook, the popularity of mutual funds has been significant, with about 44% of U.S. households having a financial investment in mutual funds in 2012, and this figure increased to just over 47% by 2021. Such investments often encompass retirement savings or pension funds. Index funds, a type of mutual fund, seek to mimic the market's overall performance, providing an investment option that tracks a market index.