A mod is a set of instructions that performs changes (add, remove, or update) to existing code. Many other systems have this sort of modification, which they call a 'hack' . In SMF, however, a mod package bundles these instructions, and automatically applies those changes by using the package manager. Mods can modify existing code in the SMF files or can make use the 'hooks' which have been built into SMF's code own new files and functions to specific spots in the SMF codebase.
Mods, therefore, make it possible to add additional features to your forum, modify the functionality of existing features to meet your needs, and really do essentially anything, within the constraints of the package manager, to customise your forum.
Most mods released for SMF can be found on the SMF Customization Site. For information on installing mods on your forum, please see the documentation for the Package Manager section of your admin panel.