Mutual Funds are just a collection of stocks and bonds, and instead of each investor owning bonds or stocks of a particular company, they own a portion of a whole portfolio derived from all sorts of financial firms.
Basically, you own multiple financial instruments from multiple firms in a mutual-funds investment.
The advantage to this is that it spreads your overall risk to several investments, instead of on a single one in more conventional methods.
Also, it is more liquid compared to handling individual bonds and stocks, meaning that you have the option of converting your investments into cash at any time you want.
Now, let's delve into the finer aspects of mutual funds.
First, we should know about the various types available to us:

• One type of a fund is the closed-end fund.
  In this, the firm offering closed-end funds issues a set number of shares to the public but only once, which is the initial public offering.
  Also, the shares can't be liquidated on demand, reducing the investor behavior solely to trading.
  This adds a demand and supply dimension to the fund shares market.
  
• Another type of a fund is the Open-End fund.
  In this, the firm does not offer a set number of shares, rather new shares can be issued as the company feels fit.
  So, it allows the investor to get the shares directly from the fund provider, rather than just trading it and getting it through another investor; which acts as an advantage, as the price of issuing new shares reflects the performance of the fund.
  So, the investor can look at the prices of new stocks and better decide upon the investment, which he cannot do if he is investing in a closed-end fund.
  
• We can further divide Open-End funds into Load, and No Load.
  A load is another word for sales commission.
  So basically, this means that if an investor owns an Open-End fund with load, he will have to pay a commission on the shares owned by him to the firm.
  No-Load mutual funds have no such expense associated with them, which is why they are preferred by investors as they have a relatively low cost of ownership.
  

So, now we know the basic types of a mutual-fund investment, and have some basic information about how they work.
But the question now arises, why should you choose mutual funds offered by a firm instead of managing investments yourselves? Well, the answer to that is, as mentioned before, your risk is lower in this type of investment than in other options.
Also, the firms offering these are dedicated to the job, and have all the time in the world to manage your portfolio; which you cannot do just by yourself.
So, it is better to invest through mutual funds than through regular financial options.
For inexperienced investors, this is especially true as the low risk of loss associated with it gives a solid platform for the investor to start off in the business world.