You hear the phrase mutual fund tossed around a lot, and although it’s not as sexy as a “hedge fund” or a “strip club”, it’s an investment tool where a better understanding would benefit you.

There are portfolio managers out there who think recessions and downturns in the market are the best time to go cherry picking for mis-priced stocks. They’re essentially finding companies that are getting a bad rap and then buying them on the cheap.

On the other hand, there are also investors who feel now is the time to stay away and we should hoard our money like there might not be a tomorrow. Either way, it’s better to be informed for whenever you plan on making your move into the market.

Take for example the mutual fund, these are ‘technically’ companies that offer an investor a chance to get into a piece of a variety of stocks. You give them your money, the invest in a bunch of different stocks, if the stocks do well, you get big returns. This is called ‘diversification’, not to be confused with an old, old, wooden ship from the Civil War era.

Diversification is the best way to invest because it protects you from the incredibly likely chance of one sector or company doing poorly and you losing all your money. However, unless you have a lot of money to invest, diversification is difficult to do by just investing in stocks. That’s where mutual funds are your best bet.

Mutual funds can either be managed by an investment professional, hopefully some smart guy who knows which stocks to invest in, or they can be non-managed funds. An example of a non-managed mutual fund is one that is tied to an index like the Dow Jones Industrial Average. That’s why you might hear a lot of important sounding people talking about ‘The Dow losing 100 points today’ or something like that (The Dow is just a list of the 30 largest and most widely held companies in the USA). Sometimes non-managed funds linked to big indexes perform better than managed funds run by meticulous professionals, other times they do not.

Although anyone that tells you an investment is ‘safe’ is totally full of crap, mutual funds are considered much less risky than other investments. And as always, learn from MC Hammer and Wesley Snipes and do all your own research before you hand over your money to some dude.

Weigh in with your opinion of the ole fail-safe mutual fund option in the comments section. Your sister was assaulted by ‘a mutual fund’ once? Let us know, we want to hear!

TheMotleyFool: Mutual Fund Center Truth