On our blog, we've spent the past month or so focusing on stocks and the stock market. For good reason, stocks represent the best way to accumulate wealth in all the financial markets.

But there is another way to trade in stocks. And in bonds, too, for that matter -- mutual funds. These are pooled funds of money that invest in groups of stocks and bonds, offering cheaper access to both.

While Americans broadly get the credit for founding the idea of a mutual fund, the truth is that the idea of pooling money together for investing purposes started in Europe in the mid-1800s.

The concept of mutual funds came to the U.S. via that conduit of many cutting-edge ideas - Harvard University. The faculty and staff of Harvard created the first pooled fund in the U.S. in 1893. About thirty years later, on March 21st, 1924, three Bostonian securities executives got together, threw their money in a pot, and the first official mutual fund was born. Called the Massachusetts Investors Trust, it was widely heckled by the investment community at the time. Little did they know how popular mutual funds would become as the century wore on.

What Is a Mutual Fund?

One of most effective investment tools ever created, mutual funds are cost efficient and provide easy access to a wide variety of stocks and bonds with little effort on the part of the investor.

A mutual fund provides an opportunity for a group of investors to work toward a common investment objective more effectively by combining their monies to leverage better results. Mutual funds are managed by financial professionals responsible for investing the money pooled by the fund’s investors into specific securities (usually stocks or bonds). By investing in a mutual fund, you are becoming a shareholder of the fund – you’re buying a piece of a pie that you hope will grow over time.

Just as carpooling saves money for each member of the pool by decreasing travel costs for everyone, mutual funds decrease transaction costs for individual investors. As part of a group of investors, individuals are able to make investment purchases with much lower trading costs than if they tried to do it on their own. The biggest single advantage to mutual funds, however, is diversification.

Funds can provide a steady flow of income or can be engineered for growth in the short or long term. The success of the fund depends on the sum of its parts, which are the individual stocks or bonds within the fund’s portfolio.

Currently, the number of mutual funds exceeds 10,000 thousand. Consider that as recently as 1991 the number was just over three thousand and at the end of 1996 it was listed at around six thousand. As noted earlier, mutual funds have become extremely popular. Stock funds are growing as a way to play the market without having to make all the choices of when to buy and sell. However, bond funds are also growing, partly because of the complexities associated with understanding individual bonds, and as a way to hold more bonds than the average investor could afford if buying them on an individual basis. Money market funds offer a safe alternative to bank accounts, providing higher interest rates.

As late as the early 1950s, less than 1 percent of Americans owned mutual funds. The popularity of funds grew marginally in the 1960s, but possibly the largest factor in the growth of the mutual fund was Individual Retirement Account (IRA) provisions made in 1981, which allowed individuals (including those already in corporate pension plans) to contribute up to $2,000 a year tax-free. Mutual funds are now mainstays in 401ks, IRAs and Roth IRAs.

In the next few weeks, we'll delve into mutual funds, explain how they work, and how to use them to maximum benefit. It's a trip worth taking, as far as your financial future is concerned.