At the end of 2009, nearly 100 million Americans owned at least one of the more than 9,000 mutual funds available. Despite the popularity of this type of investment, however, studies continue to show that surprisingly few investors can describe what a mutual fund is or how it works.

My experience shows that they want to learn. In this first article of the series, I discuss the basics of mutual funds and their advantages and disadvantages. Next month, I’ll cover the best ways to invest in funds and help you understand the importance of expenses and fees. In the third and final piece in the series, I’ll show you how to choose a fund—how to do research, where to get information about funds and how to put together a group of funds to build a portfolio.

What is a Mutual Fund?

A mutual fund is an investment vehicle that pools the money of hundreds or even millions of investors and uses it to buy securities—stocks, bonds or even gold or real estate. The pool is sliced into pieces like a pie and sold to various investors, who share in the gains, losses and expenses, according to the amount of their investment. Each fund employs a professional manager and has an investment objective, such as seeking current income or growth of principal. If you already own some funds, we’ll show you how to research them and figure out if they’re good ones.

Here are 10 advantages of investing in mutual funds:

1. Diversification. When you buy a fund you instantly become part owner of an entire basket of securities that might be as broad as the entire U.S. stock market or as narrow as technology companies in India.

2. Marketability. You are not locked into a mutual fund. You could turn around and sell your investment the very next day if you choose. Because there is an open market for funds—the fund company or a brokerage—you need never worry that your money is out of reach (unless, of course, it is in your retirement plan, which has special rules for withdrawal). This liquidity is an important attribute for most investors.

3. Convenience. It’s not quite as easy as buying bread at the corner deli. But you can buy mutual funds at many places: by mail, by phone, over the Internet, from a banker, a broker or an insurance agent.

4. Flexibility. Not only can you buy and sell funds easily, but you can move money between funds or even take money out of an investment, usually over the Internet or with a phone call. Even those funds in your retirement plan can generally be moved from one type of fund to another with a phone call.

5. Professional management. Most of us do not feel comfortable selecting and buying stocks and bonds on our own. When you buy a mutual fund, you pay for professional management. The fund manager works with a team of researchers and analysts who have contact with hundreds of companies.

6. Variety. As the fund industry has boomed over the past 30 years, the variety of funds has exploded. You can now invest in almost anything you can think of. If you choose a newer type of mutual fund, called an electronically traded fund (ETF), which trades on the stock market, you have even more choices. You can buy an ETF that owns gold bullion, for example. A decade ago, the closest you could get to owning gold in a mutual fund would have been to buy a fund that invests in gold mining companies.

7. Transparency. Mutual funds provide investors with a “report card,” or prospectus, which details the expenses of operating the fund, the sales commission, if there is one, the securities held in the fund, investment objective, performance and financial history. We’ll look more at these reports in Part Three.

8. Track record. Established funds have a track record that you can examine. When you consider buying a stock, you need to do research to discover the financial outlook for the company. When you buy a fund, you are looking, instead, at the track record and outlook of the fund’s manager. What you want to see is a long, steady and consistent record of growth. You also want to find out if the fund has recently changed managers.

9. Low minimums. Many mutual funds allow you to get started as an investor with a low initial deposit, particularly if you set up a plan where you make contributions at regular intervals such as once a month. This is a great way to invest because you establish an investing discipline rather than trying to figure out whether the market is going up or down, something even most professionals can’t accomplish.

Here are a couple of things to watch out for when you plan to invest in a mutual fund:

1. Mutual funds offer no guarantees. They don’t guarantee a profit. And they don’t even guarantee that you’ll get your money back. If you put your money in a bank deposit that’s insured by the Federal Deposit Insurance Corporation (FDIC), you’re guaranteed the safety of your principal. As with the stock market, mutual funds carry no such guarantees.

2. All funds charge you fees and/or expenses. And some charge a lot. These expenses come right off the top and can dramatically affect the return on your investment. Some funds also charge up-front sales fees or even ongoing sales charges. I think fees and expenses are the biggest pitfall for unwary investors. (In Part Two, we’ll show you how you can avoid them.)

3. In most cases, you receive no face-to-face help. Of course, you can buy a mutual fund at a bank or at a brokerage and receive help from a salesperson. I recommend you don’t do that. Most salespeople sell from their own in-house roster of funds. They are not giving you independent advice. They are picking one of the funds off their list and charging you a sales fee for that “advice.”

I used to believe that anyone could invest in mutual funds without help. I still believe that’s true. However, you must commit to spending time on researching and selecting funds and on monitoring them. If you don’t have time or if that type of work doesn’t appeal to you, I suggest you get the help of an independent financial advisor. A growing group of advisors in the U.S. charge an hourly fee and they will work a la carte, helping you with just one financial project if you wish.

Next month: Part Two—The best ways to buy mutual funds and what you should know about fees and expenses before investing in a fund.