Money market. Load. No load. NAV. What do all these words mean? They are all terms associated with mutual funds.

A mutual fund is a diversified portfolio of investments that a person hires a company to put together. Diversification means the mutual fund includes different types of investments. According to the U.S. Securities and Exchange Commission (SEC) Web site, a mutual fund company "pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments."

For the first-time investor, mutual funds are recommended over purchasing individual stocks.

"Opening a mutual fund is the most powerful thing a young person can do," said David Ikenberry, a university finance professor. "It exposes young people to the economy. Also, at some point, you will retire. If you start saving young, the opportunity to gain interest is great."

Even though college students and graduates might not have a lot of money, a small investment could pay off in the long run.

"The eighth wonder of the world is compounding," Ikenberry said.

Compounding is piling up of returns from an original investment. For example, a $1 investment with a 10 percent return rate per year will increase to $1.10 by the end of the year. At the end of the second year, the amount increases to $1.21 because of the return on the original dollar plus 1 cent because of a 10 percent return rate on the 10 cents returned from the first year.

Julie Crothers, director of public relations for investment advisors at Bank One, stresses the diversity mutual funds allow — an investor can decide what percentage to put into the desired type of mutual fund.

With individual stocks, "all of your money is just tied up in those few investments," she said.

Crothers notes three main types of mutual funds: stock (or equity) funds, bond funds and money market funds. Stock funds include sector funds that put all their money in one area of business, such as technology.

"These are riskier than a broad array of stocks," she said.

A variety of stocks can be found in a type of stock fund called an index fund. David Sinow, a finance professor, said index funds follow and try to "mirror" the returns of the Standard and Poor 500, which are the top 500 leading stocks.

Bond funds are less risky than stock funds, Crothers said. According to the SEC, bond funds are included in strategies that try to produce higher yields.

The safest type of fund appears to be money market funds, Sinow said. These funds will allow the investor to earn interest and write checks against the account.

Although each type of mutual fund involves a certain degree of risk, Kevin Waspi, finance lecturer and chartered financial analyst, advises people not to forget the link between risk and return: Generally, the lower the risk, the lower the return, and vice versa.

Waspi said investors must ask themselves, "What objectives do I want to accomplish? What risks am I comfortable accepting?"

Mutual fund companies may either sell their funds directly to the investor or be intermediaries like brokers.

In regards to purchasing a mutual fund, Sinow said a mutual fund has two prices — the offer price and the New Asset Value (NAV). The offer price is the price the investor pays to buy into the fund. The NAV is the fund's value per share and may include a "load," or sales charge. If the offer price is the same as the NAV, it's a no-load mutual fund, Sinow said.

The complexity of mutual funds causes first-time investors to make several mistakes.

"People chase winners," Waspi said.

He said although a mutual fund's past performance doesn't always indicate how it will do in the future, people still purchase funds that did well during the past year. Waspi describes this type of investing as "driving by using the rear-view-mirror."

Sinow sees another mistake in improper fund selection. He said investors purchase three or four types of the same mutual fund and don't do enough individual research.

"Educate yourself and ask for information," Crothers said. "There are a plethora of Web sites."

Sinow recommends Morningstar.com, which analyzes stocks on a "star" rating of one to five. Both Waspi and Sinow recommend The Wall Street Journal Guide to Understanding Money & Investing.

Another tough decision for new investors is deciding which company to use.

"It is like going to a store and looking at 20 different brands of white shirts," said Michael Weisbach, finance professor. "All look the same, but who have you heard of?"

Weisbach said the reputable companies are the ones whose names are well-known.

Despite all the risks and complexity, according to the Oct. 24 edition of the Knight Ridder/Tribune Business News, more than 95 million Americans have retirement or savings plans involved with stock funds.

According to Crothers, "(Mutual funds) are still the best way for an average person to invest for the future."