How does mutual fund works?

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a mutual fund is a basket of stock holdings managed by a fund manager, you can choose the category that you would like to invest in and hold many at once, therefore spreading your loses and your profits.
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A mutual fund is something you buy a share of, just as you would a stock.

But, instead of buying stock in an individual company, you are pooling your share in the fund with many other shareholders. The manager of the fund takes the money invested by all the shareholders and makes a (hopefully) educated guess on what companies to buy stock in, based on the goal of the fund (be it agressive, overseas, moderate, conservative, large cap, small cap, etc).

As the stocks the fund manager has invested in rise and fall, the value of your shares in the fund rise and fall accordingly. Note that for most funds, the fund manager does take out a small fee for doing the legwork.

Some of the advantages of investing in a mutual fund include spreading the risk over a number of different stocks and also having a professional make those choices for you. Some disadvantages include the management fee and, along with the decrease in risk, your potential for gain is also proportionally limited.