A lot of mutual funds spend a lot of time and money trying to choose the right stocks for their portfolios. Fund managers choose stocks that they think will go up in price and dump stocks that they think will go down in price. These types of funds are called actively managed funds because someone actually has to watch the fund carefully to determine whether to buy or sell the fund’s assets. These actively managed funds charge investors a lot of money for their efforts in trying to increase the value of the funds.

The dirty little secret though in mutual funds is that there are funds that need no managers, and yet still do very well. These types of funds are called index funds and you can see examples of such funds examples of such funds on the table below. The most common index funds are made up of stocks in the S&P 500. (In another section of this site we discussed that the stocks in the S&P 500 are 500 of the biggest companies in the country). Another common index fund is a fund that mirrors the Wilshire 5000—an index which reflects the U.S. stock market. See the table at the bottom of this page for a description of the various U.S. stock market indices from which funds are created.

According to data from Morningstar, the leading authority on mutual funds, the returns on index funds beat 70% of the returns on all actively managed funds. What this says is that a mutual fund that does nothing but hold S&P 500 stocks does better on the average than most funds that are actively managed by hot-shot Wall Street "geniuses". Although there is no guarantee that index funds that are not actively managed will continue to better than a strong majority of all stocks that are actively managed, index funds make for an easy choice for Teenvestors who don’t want to knock themselves out choosing funds out of the thousands available. Unless you are an investment genius, we recommend you stick to index funds.

Teenvestors should try index funds—at least when they start off investing in mutual funds. Three big index funds to consider are the following: the Vanguard 500 Index, the Vanguard Total Stock Market Index, and the T. Rowe Price Total Equity Market Index. The box below shows you a list of some of the major index funds available to investors.

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Below is a brief overview of notable U.S. stock indices:

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(For more information on stocks, check out our Stocks section.)