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A mutual fund is a diversified managed portfolio.

For a small management fee, you can buy shares of the fund. In return for that fee, the fund is taken care of by professional investors.

Buying into a mutual fund is an easy way to diversify, but it is not the same as buying individual stocks, which has its pros and cons.

Probably the biggest advantage of buying shares in a mutual fund is its resilience.

When you buy a single stock, it may decline and never regain its value. A good mutual fund, on the other hand, will always recover if given enough time.

This is due to the broad diversification. When the general market recovers, the mutual fund usually follows.

Mutual funds can be excellent investment vehicles if you use them correctly, and the correct way to use them is to buy and hold.

To make big money, you need to hold onto them through several market cycles, bull and bear. This might mean decades.

This, of course, takes a lot of patience and discipline not to cash in.

Here’s a 3-step plan for getting rich off mutual funds:

1. Choose a diversified domestic growth fund that performed in the top quartile of all mutual funds in the past 5 years as well as in the last 12 months. Make sure it is an open-end fund (one that continuously issues shares when people want to buy them.)

Do not buy anything that concentrates in a single sector or industry. Instead, go for either an index fund or a broad growth fund.

2. Regularly invest into it. Don't worry about timing your buys. Just invest on a regular basis (e.g. 5% of your monthly paycheck).

3. Reinvest all dividends and capital gains to benefit from compound interest.

There’s no need to diversify into many mutual funds. One to three is more than enough for most people. The funds themselves are already highly diversified.

You may want to choose several funds with different objectives, e.g., balanced (safer), high-growth (riskier), or ethical investments.

Bear markets can last months, and in some cases, years.

When it comes to longer term investing, such as in mutual funds, ignore the market. Just stick with the three-step plan.

The market will recover eventually (it always does) and so will your funds.

In fact, when the media is saying how terrible everything is, it is a perfect time to add more money to your fund. When it comes to long term investing in mutual funds, it pays to buy the dips.

Here are the five most common mistakes people make when it comes to investing in mutual funds. Don’t do these things:

1. Not waiting at least 10 years before withdrawing the money.

2. Caring about management fees, turnover rates, or dividend payouts.

3. Caring about market news.

4. Selling during a bear market.

5. Switching funds too often.

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