Until financial fitness is a class you have to take in school, many people will leave their younger years still as clueless about finances as they entered. It isn’t until much later in life that people actually sit down and learn about them, but the earlier you start to learn, the better!

Mutual funds can be confusing if you’re not familiar with financial topics and investments, and not knowing about them seriously limits the possibilities you have for wise investment; here are five of the top questions people ask about them.

1. What are mutual funds?

A financial institution such as a bank will start a mutual fund with a group of investors and a fund manager. Through pooling together the money from many people, the fund manager can invest more and have a lot more flexibility with how he invests than when managing just one individual’s investments.

Everyone in the fund benefits when there are gains in the opportunities the manager invests in, and everyone suffers when the manager makes poor choices, so the fund manager is motivated to do the best job possible at keeping your money safe, though this is no guarantee of safety, and people have lost sums of money before in mutual funds.
2. When and why should I invest in mutual funds?

Mutual funds are a good bet, no matter what stage of life you’re in. There is such a wide variety of choices that you can go for riskier, but potentially higher-earning funds when you’re younger and have money to lose if necessary, or go for stable but lower-earning funds if you’re close to retirement.

Some funds are set up to invest in certain markets or industries, while others are based on security or high earning potential; thorough research is necessary before choosing a mutual fund to invest in.

They are a little safer than investing in stocks yourself, since the fund managers are experienced professionals who tend to do better at predicting which investment opportunities are profitable and which aren’t based on experience. Therefore, they are a fairly good investment for just about anyone.
3. How do I earn money with a mutual fund?

Just like regular share-based investing, when the companies your fund is invested in make a profit, your fund receives money (called a dividend), which they divide between the investors in the fund. If your fund manager decides to sell the shares in the investment, you will receive a portion of the profits (or lose out if they were sold at a loss).

Of course, it’s not guaranteed that you’ll earn money. The size of a fund means that rather than pouring all your money into one stock or opportunity, the manager is able to diversify the portfolio and insure against losing too much money with any one particular investment.

If you don’t already have professional experience investing in the markets you want to invest in, letting a fund manager do it for you can be a very good idea.

4. What are the downsides to mutual funds?

Like any other type of investing, there are downsides and disadvantages to investing in mutual funds, which you should keep in mind before doing so.

First, there is no one investor in control of the portfolio, so even if you think it’s bad idea to invest in a fund, you won’t get very far. You have to trust in the ability of your fund manager to make money and invest wisely, and not all fund managers are equal!

There may be fees associated with mutual funds, too – the organization or institution that is organizing the fund will want to make a profit, and the fund manager must be paid. Often, these fees are passed to individual shareholders of mutual funds.
5. How do I invest and how much do I have to invest?

Most mutual funds will require that you invest a certain amount of money to join the fund – $500 to $2,000 is not uncommon, just to ensure that the managers aren’t dealing with how to repay some people a few pennies and others hundreds of dollars.

The higher the limit, the more power your fund will have, of course. With more money from everyone else in the fund, your fund manager will be able to do much more with the portfolio, including diversifying it to find a few safe bets and a few possible high earners.

Before you choose a fund to invest in, it’s a good idea to do a lot of research on it. Find out why it chooses the companies and opportunities it does, its strategy for earning (when it sells and when it holds stocks), and who the fund is recommended for. If possible, meet the fund manager to talk about the opportunity or with a representative of the institution managing the fund.

It’s also a good idea to research the history of the fund manager and discover whether he or she is known for good sense or wild investments, how satisfied previous shareholders were with their investments, and any problems with the manager people have had.

Before agreeing to invest in a fund, figure out what the fees to you will be, whether they are taken out of your initial investment or if you have to pay them every year or month, and so on. Setup fees can be between 1% and 3% or even more, and some funds charge an annual fee to all shareholders. Any fees should be in the contract or agreement you look through, so make a note of them before signing anything.
If you’re interested in mutual funds, keeping these things in mind can help give you a broad overview of how to invest in them, why they are a good idea and why they aren’t, and what to look out for in a mutual fund.

Whether or not you choose to invest in mutual funds, knowledge is power; knowing how mutual funds work gives you the opportunity to invest in them.