Investment funds are essentially a form of collective investment. Individual investors (like you) buying shares from the Fund and the Fund invests funds raised in different types of assets. These assets can be financial instruments (mostly shares and bonds), currencies, precious metals, commodities, real estate and others.
According to the type of management there are two types of mutual funds: actively managed (the majority in the country) and passively managed index funds. Actively managed funds have managers who say what will invest the fund. Index funds are passively managed funds – they must be drawn an investment “formula” and it follows automatically, regardless of events in the relevant market. (In Bulgaria there is one or perhaps already two such funds, but I would not recommend them.) (More: Financial Stability)
According to the risk funds are low-, medium- and high-risk. The medium is also called “balanced” and subprime – “aggressive.” Along with the degree of risk usually change and two things: profitability and time. That is, low-risk funds offer lower yields and shorter investment horizon and high risk seek higher returns and longer investment horizon. As a rule, the more time you have, you can take greater risks, because even with the collapse of investment in the short term, it has time to recover in the long run. Usually you can get information from the fund what is the recommended “investment horizon”. In low-risk funds he is one to three years, balanced – three to five, while aggressive often five years and up. (More: The formula for getting rich – how to become rich)
Does this mean that you can not withdraw the money earlier? No. But if you do, you probably will not have reached the target yield (that “advertised” the Fund), and may even make a loss.
When you invest in a mutual fund, you buy shares of the fund. When the “exit” from the fund, you sell back their shares of the fund. This is called “redemption”.