What is a mutual fund? A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate or other securities, according to its charter. Each investor in the fund gets a slice of the total pie.

Mutual funds make it easy to diversify – Most funds require only moderate minimum investments — from a few hundred to a few thousand dollars — enabling investors to construct a diversified portfolio much more cheaply than they could on their own.

There are different kinds of stock funds – For examples: growth funds, which buy shares of burgeoning companies; sector funds, which buy shares of companies in a particular sector such as technology or health care; and index funds, which buy shares of every stock in a particular index, such as the S&P 500.

Consider bond funds – If you want safe investments, consider government bond funds. If you’re not scared with high-risk investments, try high-yield bond funds, also known as junk bond funds. And if you want to keep down your tax bill, you should try municipal bond funds.

Consider the risk – Before buying a fund, you should look at how risky its investments are. Can you tolerate big market swings for a shot at higher returns? If not, stick with low-risk funds.

Low expenses are important – Funds charge a percentage of total assets. You should consider the percentage points a year because expenses create a serious drag on performance over time.

Don’t chase funds that rank very highly – Funds that rank very highly over one period rarely finish on top in later ones. When choosing a fund, look for consistent long-term results.

Consider index funds – Index funds track the performance of market benchmarks, such as the S&P 500: Index funds tend to charge lower expenses and be more tax efficient, and there’s no risk the fund manager will make sudden changes that throw off your portfolio.

Don’t be too quick to sell a fund – Any fund can have a bad year. Then you shouldn’t sell a losing fund too quickly. Check if earnings have been consistently below par. If yes, it may be time to move on.

Taxes take a big bite out of performance – Even if you don’t sell your fund shares, you could still end up stuck with a big tax bill. If a fund owns dividend-paying stocks, or if a fund manager sells some large gains, shareholders will owe their share of taxes for the gains. Tax-efficient funds avoid short-term trading (high short-term capital gains taxes) and trade positive trades with negative trades.