A mutual fund is simply a collection of various stocks and/or bonds. You can think of it as a company that brings together your money with money from other investors. Then professional managers invest the entire pool of money (the mutual fund) into stocks, bonds, property and/or other investments.

The advantage for most people is that you don't have to spend time picking out stocks and bonds. There is less risk because the fund will diversify or invest in many companies.

How do you make money in mutual funds? There are 3 ways really. First, your fund may pay what is called a "distribution" in the form of dividends or interest depending on the type of fund.

Second, if the fund sells securities it has invested in and those securities have gone up in value, the capital gain will be shared with investors in a distribution.

Third, if the funds shares increase in price, you can sell your shares for a profit. You will usually be given a choice whether to get a check for the distributions or have them reinvested and get more shares.

The risk of investing in a mutual fund depends on the kinds of stocks and bonds it buys. Let's say you choose a mutual fund that invests only in blue-chip stocks and bonds. This fund would be less risky than, say a fund that only invests in tech stocks.

There are many kinds of mutual funds. In order to choose one for you, consider your needs and goals, look at the data provided about the fund, and talk with family, friends and your broker.

Stock funds invest the money in stocks. Bond funds invest in the bond market and tend to be more liquid than stock funds.

Growth funds and Aggressive Growth funds invest in companies that may be small now but are expected to grow. These funds work well for people who can leave their money alone for years at a time.

Blended funds or balanced funds invest in both stocks and bonds, and sometimes property and other kinds of investments in an effort to provide growth and income to investors.

Sector funds invest in one part or sector of the economy, such as the oil industry or high tech companies.

Finally, the fees that mutual funds charge can often eat up half your profits. The fund will charge management, administration, custody, transfer, shareholder-service, director’s,

legal and audit fees, as well as interest costs, and marketing and promotion fees. Fees may be in the form of annual fees to keep you invested in the fund and/or transaction fees when you buy or sell shares in a fund.

About 45% of all mutual funds are called “no load funds”, which means they do not charge when you buy shares (“front end load fees”) or when you pull out of the fund (“back end load fees”).

Nevertheless, any fund can charge the other kinds of fees, which can amount to 5% or more of the profit on your investment. Since stock market investments have averaged a 10% profit since the 1920s, a mutual fund’s fees can take half your return.

In spite of everything, mutual funds have become very popular since the first one originated in 1924. In 1990 Americans invested $1 trillion, but just ten years later, that grew to over $7 trillion. There are 8300 funds with 95 million investors – that’s one in three Americans!

See what you learned.

Check out "Risks & returns when investing"