These funds combine the money of many investors to buy many kinds of investments, like stocks, bonds, real estate, etc. Index mutual funds invest in companies that are part of a published index like the Standard & Poor's 500. In a mutual find, a fund manager trades the fund’s underlying securities to realize a gain or a loss and collects dividends or interest income.
There is risk because no one insures your investment. If the price of the fund drops, you lose money. But mutual funds can be safer than individual stocks. Why? You are spreading your money around in a mutual fund – diversifying. Buying lots of different stocks and bonds lowers your risk. The theory is that if one investment drops, the other stocks and bonds will hold their value or do well enough to make up for the loss.
With mutual funds, you have freedom. You can withdraw any or all of your money at any time. However, at the time you sell your shares (the number of units you own in the fund), you are paid what the shares are worth that day – calculated at the end of the trading day. Their worth may be higher or lower than what you paid for them.
Mutual funds are professionally managed by fund managers with lots of experience investing money. They bring wisdom to what and when the fund buys and sells. As experts, they are taking care of your money, and their past performance can be measured. But you have to remember that their past performance does not guarantee success in the future.
Mutual funds need money to operate – to pay the fund managers and to do business. The fund gets this money by charging fees to anyone who invests in the fund. Think of it as paying "dues" to belong to the fund.