There are several reasons mutual funds are so popular among today's investors. The biggest advantage of investing in mutual funds is diversification. Diversification means spreading out your investment dollars among a number of different securities. Let's say you have $10,000 to invest. If you invested all $10,000 in one stock, and the stock went bust, you'd lose everything. It's smarter to invest in several different stocks and other types of securities. But doing so on your own would require a lot more time, effort and money than you would probably be able to give. Investing in mutual funds takes care of the problem for you, since mutual funds contain many different securities, often 100 or more.

Another advantage of investing in mutual funds is access to professional money management. When you invest in a mutual fund, you're handing your money over to well-trained professionals whose full-time jobs are to make smart investment decisions for you. These managers spend all day, every day, researching and analyzing all the factors that have potential impact on your money.

Mutual funds are also very convenient. They're fairly simple to trade, and they also provide you with easy access to your money because you can cash out of them at any time. The ability to easily convert your investment back into cash is known as liquidity.

Yet another advantage of investing in mutual funds is minimal risk. The United States Securities and Exchange Commission (SEC) (www.sec.gov) regulates mutual funds very carefully to make sure they're managed properly. And because mutual funds invest in a variety of different securities, their risk of bankruptcy is virtually nonexistent. However, that doesn't mean that certain mutual funds aren't riskier than others. There are thousands of mutual funds to choose from, so you can decide for yourself how much risk you're willing to take with your investment dollars, and then choose the types of mutual funds that suit your goals.

Mutual funds have disadvantages as well. They cost money to manage (you'll learn more about fees later), and you also will be required to pay taxes on your gains. If you do your homework, though, you can plan smart strategies to make your mutual fund investments as tax efficient as possible.