Mutual funds are securities that give investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Shares are issued and can be redeemed as needed.  It has been shown in study after study that a majority of mutual funds fail to beat the market, which is why it is so important to pick the right ones.  The challenge is that picking mutual funds purely on the basis of past performance usually does not work.
Utilizing mutual funds for education savings is sensible for savvy investors or families with uncertain financial circumstances, due to the investment flexibility and lack of restrictions on contributions.  The opportunity cost of using a heavy mutual fund strategy is giving up large tax breaks, which could amount to thousands of extra dollars.

401kid’s Tax Savings Calculator shows the opportunity costs of investing in mutual funds versus 529 plans.

In 2005, 401kid CEO, Arman Rousta, interviewed Greg Frith, Portfolio Manager for FBS, a Pennsylvania-based Hedge Fund, about the differences between mutual funds and hedge funds.  To read the transcript of the interview, click here.