A mutual fund allows you to pool your money with other investors and mutually invest your money.  The fund is managed by a professional fund manager, who will select where the money is invested - by investing in a number of different assets, the fund manager spreads the risk and limits the impact of any single investment within the fund reducing in value.  Each fund will have a particular investment objective, an area of focus and a level of associated risk (higher risk funds aim to achieve higher rewards).  

Putting money into a fund, and keeping your money in the fund has a number of fees associated - you'll pay fund manager charges (such as an initial charge, a transaction charge and an annual ongoing charge) and platform charges (a dealing charge and custody charge).  The platform you chose should make these very clear to you before you commit your money.  Unlike buying shares, you cannot instantly pay your money into a mutual fund; the trades in mutual funds are executed once a day.

You make money by investing in a mutual fund by selling some or all of your share of the fund if it goes up in value, but on the opposite side, you will lose money if you sell your share of the fund if it decreases in value.  With an income fund, you gain from any dividend payments received from shares in the fund, or from interest on bonds.  For an accumulation fund, dividends and interest payments are automatically reinvested by the fund manager - check how the fund operates before investing.

Funds can be broken down further into:

• Actively managed funds.  These funds attempt to beat the return provided by the market.  As a result, the fund manager is more actively involved in the fund and is spending more time analysing the investments and making decisions.  They therefore incur higher fund manager charges than a passive fund.
  
• Passively managed funds.  These funds use a buy and hold strategy to try and match the performance (before fees are considered) of a particular index (an index tracks a group of financial assets and fluctuates in accordance with the price of the components of the index).  For example, the FTSE 100 is the 100 largest companies (by market value) on the London Stock Exchange (LSE).  As the fund manager is less involved than an active fund, fund manager charges are lower.

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