I am new to the finance world, and I keep hearing fund and portfolio.
What is the meaning of these words and how are they related? Can someone please explain with examples?
Is there any difference between them?
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A "Fund" is generally speaking a collection of similar financial products, which are bundled into a single investment, so that you as an individual can buy a portion of the Fund rather than buying 50 portions of various products.
e.g. a "Bond Fund" may be a collection of various corporate bonds that are bundled together. The performance of the Fund would be the aggregate of each individual item.
Generally speaking Funds are like pre-packaged "diversification". Rather than take time (and fees) to buy 50 different stocks on the same stock index, you could buy an "Index Fund" which represents the values of all of those stocks.
A "Portfolio" is your individual package of investments. ie: the 20k you have in bonds + the 5k you have in shares, + the 50k you have in "Funds" + the 100k rental property you own. You might split the definition further buy saying "My 401(k) portfolio & my taxable portfolio & my real estate portfolio"(etc.), to denote how those items are invested. The implication of "Portfolio" is that you have considered how all of your investments work together; ie: your 5k in stocks is not so risky, because it is only 5k out of your entire 185k portfolio, which includes some low risk bonds and funds.
Another way of looking at it, is that a Fund is a special type of Portfolio. That is, a Fund is a portfolio, that someone will sell to someone else (see Daniel's answer below).
For example: Imagine you had $5,000 invested in IBM shares, and also had $5,000 invested in Apple shares. Call this your portfolio. But you also want to sell your portfolio, so let's also call it a 'fund'. Then you sell half of your 'fund' to a friend. So your friend (let's call him Maurice) pays you $4,000, to invest in your 'Fund'. Maurice gives you $4k, and in return, you given him a note that says "Maurice owns 40% of atp9's Fund".
The following month, IBM pays you $100 in dividends. But, Maurice owns 40% of those dividends. So you give him a cheque for $40 (some funds automatically reinvest dividends for their clients instead of paying them out immediately). Then you sell your Apple shares for $6,000 (a gain of $1,000 since you bought them). But Maurice owns 40% of that 6k, so you give him $2,400 (or perhaps, instead of giving him the money immediately, you reinvest it within the fund, and buy $6k of Microsoft shares).
Why would you set up this Fund? Because Maurice will pay you a fee equal to, let's say, 1% of his total investment. Your job is now to invest the money in the Fund, in a way that aligns with what you told Maurice when he signed the contract. ie: maybe it's a tech fund, and you can only invest in big Tech companies. Maybe it's an Index fund, and your investment needs to exactly match a specific portion of the New York Stock Exchange. Maybe it's a bond fund, and you can only invest in corporate bonds.
So to reiterate, a portfolio is a collection of investments (think of an artist's portfolio, being a collection of their work). Usually, people refer to their own 'portfolio', of personal investments. A fund is someone's portfolio, that other people can invest in. This allows an individual investor to give some of their decision making over to a Fund manager. In addition to relying on expertise of others, this allows the investor to save on transaction costs, because they can have a well-diversified portfolio (see what I did there?) while only buying into one or a few funds.
A fund is a portfolio, in that it is a collection, so the term is interchangeable for the most part. Funds are made up of a combination of equities positions (i.e., stocks, bonds, etc.) plus some amount of un-invested cash.
Most of the time, when people are talking about a "fund", they are describing what is really an investment strategy. In other words, an example would be a "Far East Agressive" fund (just a made up name for illustration here), which focuses on investment opportunities in the Far East that have a higher level of risk than most other investments, thus they provide better returns for the investors. The "portfolio" part of that is what the stocks are that the fund has purchased and is holding on behalf of its investors. Other funds focus on municipal bonds or government bonds, and the list goes on.
I hope this helps.
Oddly enough, in the USA, there are enough cost and tax savings between buy-and-hold of a static portfolio and buying into a fund that a few brokerages have sprung up around the concept, such as FolioFN, to make it easier for small investors to manage numerous small holdings via fractional shares and no commission window trades.
A static buy-and-hold portfolio of stocks can be had for a few dollars per trade. Buying into a fund involves various annual and one time fees that are quoted as percentages of the investment. Even 1-2% can be a lot, especially if it is every year.
Typically, a US mutual fund must send out a 1099 tax form to each investor, stating that investors share of the dividends and capital gains for each year. The true impact of this is not obvious until you get a tax bill for gains that you did not enjoy, which can happen when you buy into a fund late in the year that has realized capital gains.
What fund investors sometimes fail to appreciate is that they are taxed both on their own holding period of fund shares and the fund's capital gains distributions determined by the fund's holding period of its investments.
For example, if ABC tech fund bought Google stock several years ago for $100/share, and sold it for $500/share in the same year you bought into the ABC fund, then you will receive a "capital gains distribution" on your 1099 that will include some dollar amount, which is considered your share of that long-term profit for tax purposes. The amount is not customized for your holding period, capital gains are distributed pro-rata among all current fund shareholders as of the ex-distribution date.
Morningstar tracks this as Potential Capital Gains Exposure and so there is a way to check this possibility before investing.
Funds who have unsold losers in their portfolio are also affected by these same rules, have been called "free rides" because those funds, if they find some winners, will have losers that they can sell simultaneously with the winners to remain tax neutral. See "On the Lookout for Tax Traps and Free Riders", Morningstar, pdf
In contrast, buying-and-holding a portfolio does not attract any capital gains taxes until the stocks in the portfolio are sold at a profit.
A fund often is actively managed. That is, experts will alter the portfolio from time to time or advise the fund to buy or sell particular investments. Note however, that even the experts are required to tell you that "past performance is no guarantee of future results."