If you have a 401k or an IRA, you probably own at least one mutual fund.  Do you know what a mutual fund is, or what their purpose is? This is a very basic introduction.

Investing in companies, either in stocks or bonds, may be appealing to you, depending upon your financial situation. But for the vast majority of us, the amount of money we have to invest can be limited, and our appetite for risk may be low.

Say for instance, that you have $3,000 to invest. If you put all of that money in one company, and the company does really well, then you could really get some great returns. But, on the other side of the coin, a $3,000 investment in a company such as Enron would result in $0. Yes, you could actually lose everything if the company goes bankrupt. Because of this, it’s a good idea to own a whole “basket” of stocks, a concept called diversification. Diversifying your investments is a great way to cover some risk.

Mutual funds pool money from a variety of investors like you, and then purchase a whole “basket” of stocks. Actively managed mutual funds have portfolio managers who actually choose the stocks on a regular basis, while an index fund owns stocks that mirror a particular index (such as the S&P 500).

Since there is risk involved in all investments, including mutual funds, if you have questions on what is appropriate for you, it’s probably best to talk to an advisor.

Head on over to the forum to discuss your experience with mutual funds.

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Jodi is the editor of Mom’s Favorite Stuff and The Mindful Moms.