NEW YORK (CNN/Money) - What exactly is a mutual fund -- and who do you buy one from and what is the charge or commission you pay for a fund?

-- LaNita Smith, Inkster, Mich.

Those of us who've been writing about and investing in mutual funds for many years tend to forget that there are many people out there -- some of them just starting out in the investing world, others who for whatever reason have stuck to savings accounts or CDs over the years -- who may be familiar with the term "mutual funds" but aren't up to speed on what they are and how they work. Obviously, in the space of a column I can't tell you everything you need to know about funds. But I can give you a quick lesson I'll call Mutual Funds 101.

Basically, a mutual fund is a type of company (the technical name is an "investment company") that pools money from thousands of investors like you and me and then hires an investment adviser (aka a fund manager) to invest that money in stocks, bonds, short-term debt securities like Treasury bills or commercial paper (i.e., corporate IOUs) or a combination of those investments. When you invest in a fund, you purchase shares that represent part ownership in the entire portfolio of securities, as well as a share of the income and gains (or losses) those securities generate.

Funds come in more flavors than Baskin & Robbins ice cream: some specialize in shares of large well-known companies like GE, GM and IBM, others focus on shares of small companies you've probably never heard of. Still others stick to specific sectors of the market, like tech or utilities or retail stocks, while others specialize in foreign stocks. And, of course, you've got a similar panoply of choices in bond funds: ones that buy government bonds, corporate bonds tax-free municipals, the list could go on and on.

The price you pay for shares depends on the fund's net asset value, or NAV, per share, which is simply the value of all the securities the fund owns divided by the number of shares outstanding. So, for example, if a fund has a portfolio of stocks valued at, say, $100 million and has 10 million shares outstanding, the fund's net asset value would be $10 per share.

That means if you wanted to invest, say, $1,000 in the fund, the fund would take your thousand bucks and give you 100 shares. Of course, if the fund invests in securities like stocks and bonds, the fund's net asset value would go up and down each day, along with the value of the securities it owns. Each day, funds are required to calculate their net asset value and you can check the NAV of a fund in the financial section of many newspapers, which list fund prices much like stock prices, or you can get up-to-date prices by entering the name of the fund in the quote box in the upper left hand corner of the CNNMoney site.

Now, as to who you can buy funds from and what you'll pay, well, those two issues are related. If you buy funds from a stock broker or financial planner or other investment counselor, you may end up paying a "load" or sales charge, essentially a commission to compensate the sales person. That charge could be an upfront fee which would typically run 3 to 5.5 percent of the amount you invest, which means that $300 to $550 of a $10,000 investment would go to commissions and the rest would be invested in the fund.

Or, the sales charge could be levied as a "back-end load." In that case, your entire ten grand would go into the fund, but if you withdraw your money within first five or six years, you would be assessed a fee that usually starts at 5 percent and then declines by a percentage or so each year. So you would be assessed a 5 percent sales charge if you withdraw your money within a year, 4 percent if you withdraw your money in the second year, 3 percent the third year and so on until the charge disappears for withdrawals after the fifth year or so.

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You can avoid those sales charges, however, by buying what's known as a "no load" fund -- that is, one that's sold directly to investors by the fund company. This way, your entire investment goes to work in the fund. Of course, if you go this route, you've got to put in some time and effort researching which type of fund you want (a large company fund or small-company fund, one that concentrates on fast-growing stocks or one that homes in on undervalued companies) and, once you decide that, which specific fund in each category you ought to buy.

Whichever type you buy -- load or no-load -- you will also end up paying an annual fee that compensates the fund's manager or investment adviser for choosing and monitoring the securities in the fund. This annual fee, which is directly deducted from your fund account, typically runs between 0.75 percent and 1.5 percent (or about $75 to $150 for a $10,000 account), while bond funds usually charge between 0.5 percent and 1 percent per year ($50 to $100). You can easily find funds that charge much less than this and, since annual expenses directly reduces the return you earn, I suggest you stick to funds that charge below average fees. You can identify such low-cost funds by checking out our fund screener.

That's the quick answer to your question. But before you start buying funds on your own or through a broker or planner, I recommend that our very own Money 101: Investing in Mutual Funds lesson. It gives a much more detailed but still understandable tour of the fund world than I've outlined here. Once you've read that lesson, you might want to surf over to the Morningstar site since Morningstar is generally regarded as the godhead when it comes to mutual fund news and analysis.

I'll leave you with one final thought. Most investors come to funds with the idea that the challenge is finding the "best" fund, which they usually think of as one that's had the highest returns or appeared at the top of some magazine's or Web site's top performer's list. I believe you'll do much better if you skip the vain quest for a Holy Grail-like ideal fund and, instead, focus on combining several different types of funds into a portfolio that can provide solid long-term returns without getting so hammered during market downturns that you panic and sell. If you learn that lesson, I believe you have a good shot at doing better than most individual -- and professional -- investors.

Walter Updegrave is the author of Investing for the Financially Challenged and can be seen regularly Monday mornings at 8:40 am on CNNfn.