A mutual fund is a selection of professionally bought and managed investments in which money is pooled by an investment company.
The funds continually offer new shares and buys existing shares back on demand. The share price of the mutual fund is based on the net value of the assets or the value of all the investments owned by the fund, less any debts and expenses for fund management.
The major advantage of mutual funds is a reduced risk - the money is spread across several investments: if one or two do poorly, the remainder may do better, averaging the loss. For many small investors, another advantage of mutual funds is that they do not have to watch the stock markets constantly, and do extensive research into each stock.
A mutual fund may invest in bonds, stocks, or both. The fund may track a major index (such as the Dow Jones Industrial Average or the Standard and Poor's 500) or may invest in a sector of the economy (such as a mutual fund investing in retail stocks, or bonds issued within the state of Texas). It may also be a mix of other mutual funds.
A special type of fund designed for long-term retirement investing is the "target date" fund. As its name suggests, when the fund is created it will invest heavily in stocks and more risky investments, but as the "target date" (usually the fund has the year in its title) approaches the fund will shift to conservative investments (though with some risk in order to keep pace with inflation) so as to preserve capital. An example is the "Lifecycle" Fund series within the United States Government Thrift Savings Plan; when a new Lifecycle Fund is created it is invested more prominently in its traditional stock fund offerings (C, I, and S) and less in its income producing fund offerings (G and F), but as the target year approaches the mix shifts more toward G and F and away from C, I, and S.
Sources
http://usinfo.state.gov/products/pubs/oecon/chap12.htm
