We’ve all heard of mutual funds, and most of us, especially if we have a 401(k) or IRA, probably own mutual funds. But, do you really know what a mutual fund is? Here’s a basic definition.

A mutual fund is an investment in which a group of investors have pooled their money and hired someone, called a portfolio manager, to invest that money in a variety of securities (such as stocks or bonds) on behalf of the group. The portfolio manager’s job, beyond the purchase of the initial securities, is to manage the fund by buying and selling additional stocks, bonds, and other securities according to the fund’s objective, which is spelled out in a document called the prospectus.

So, when a new investor buys shares of a mutual fund, the portfolio manager takes the money invested by the new investor and pools it with money of the fund’s other investors, in order to buy and sell further securities in accordance with the fund’s prospectus.

For conservative investors, mutual funds present several advantages. One is that, for a relatively low investment, you get a professionally managed and diversified portfolio. This reduces the hassle and the risk of buying a variety of individual securities on your own.

Diversification increases your chance for steady growth over time – even if one stock does very poorly over the course of a quarter or even a year, you haven’t lost your entire investment; other securities within the fund are likely to have done well.

Further, compared to other types of pooled investment funds, like hedge funds, mutual funds are strictly regulated – this gives investors confidence in the reliability.

Like any other investment, it’s essential to do your research and get the advice of a qualified financial planner before parting with your hard-earned money.

The Law Offices of James A. Miller is a member of the American Academy of Estate Planning Attorneys.