Mutual Funds - The Down-to-Earth Basics

Mutual funds are designed for average investors who wants to invest but do not want to select and manage investments like stocks and bonds on their own. In other words, they are the investment of choice for most people.
When you invest in them, professional money managers deal with all the details. You select the fund(s) you want to invest in and they do the rest for you. The average person can have a diversified and balanced portfolio of securities (investments) by simply owning shares of the appropriate mutual funds.
If you know little about how to invest, you might want to know if mutual funds are good investments. The answer to that question is that the less you know about investing, the more attractive mutual funds are. I'll take that a step further. Most people who invest in stocks and bonds and other investments on their own would be better off just owning mutual fund shares, because few of them are capable of managing a portfolio (list) of investments on their own.
So, getting down-to-earth, you need to know your choices before you rush out and invest in mutual funds. Here they are in a nut shell.
There are 4 basic types of mutual funds based on what they invest in.
MONEY MARKET FUNDS are the safest and they pay interest in the form of dividends. These funds invest in safe short-term IOUs like CDs and U.S. Treasury bills, the safest investment in the world. The value of these funds does not fluctuate.
BOND FUNDS pay higher interest, also in the form of dividends. There is moderate investment risk here, and the value of your investment will fluctuate. These funds invest in bonds.
STOCK FUNDS are the riskiest type of fund, and there are many varieties. This is where investors go for higher returns (profits). The share price (value) can fluctuate significantly, because these funds invest in stocks.
BALANCED FUNDS go by various names. Examples include asset allocation funds, lifecycle funds, and target retirement funds. All of them invest in some combination of the three types of investments mentioned in the above three fund types.
There are 2 basic types of mutual funds based on how you buy them and what it will cost you to buy (or sell) and own them.
LOAD FUNDS are sold to you by someone in the investment business. You pay a commission or sales charge (called a LOAD) to buy, hold or sell these funds. Yearly expenses are also deducted from each fund you own.
NO-LOAD funds you must purchase on your own, traditionally through a mutual fund company directly. For your efforts you avoid a sales charge (load). Yearly fund expenses still apply, but if you know where to shop, they can amount to less than 1% a year.