Mutual funds are a great way to invest. They offer diversification, convenience, professional management and lower costs. With more than 8,000 to choose from, it can be difficult to select the mutual fund that is right for you. Consider these six steps to help make the process easier.

 

• Make a plan. To begin, you will need to decide on your investment goals. Why are you investing? Are you saving for a down payment on a home? Planning for retirement? Want to peg your bonus check on a rising international fund? It is all up to you. Your goals will affect the type of fund you choose.

 

Determine the best asset allocation for your investment. Asset allocation refers to the varying class options for your money. There are dozens of ways to allocate your assets, and it is a good idea to broaden your assets to help diversify your portfolio. An example of an allocation option is a large-cap fund. These funds come from companies that have been around for a long time and are known for being a solid and relatively safe investment (although there are no guarantees). Other asset allocation options may be value funds, speculative funds, growth bonds or income stocks.

 

Be sure to assess your risk tolerance level before investing. Can you handle the ups and downs of the funds you may select? If you will need your money within the next five to seven years, you may want to take a more conservative route; if not, you can be a bit more aggressive.

 

• Trim your options. After you have determined your plan, asset allocation options and risk tolerance, trim your investment options. Many people worry about which fund to choose from among the 8,000 available. It is a big task, but there are ways to tell the good from the not so good. The Internet is a great resource to help narrow the options. Two helpful screening tools are morningstar.com or smartmoney.com/fundfinder. Financial magazines, such as Fortune or Money Magazine, also provide lists to help trim the selection. Narrow your list to about 30 fund options and use the next three steps to select the final one or two funds for investment.

 

• Check past performance. It is not wise to base your decision solely on how well the fund has done in the past, but it would be ignorant not to take the past into account. Research shows that the highest performing funds don’t stay that way for very long, but the lowest rating funds usually do. By looking at past performance, you may be able to predict the good ones.

 

Another way to tell if it is a good fund is to look at the index. Compare the fund to a benchmark, like the S&P 500 or other funds with similar objectives. You can make an educated decision just by comparing it to the market.

 

• Understand the fees. You can never predict what your fund will do in the next year, but you can always predict how much it will cost. Control what you can. It is vital to consider the fees associated with the fund. Fees reduce the total return of your investment; research shows funds with low fees are likely to outperform those that give higher returns. Try to avoid funds with an expense ratio higher than 2 or 3 percent.

 

Select no-load funds over load funds. Load funds charge a sales commission to compensate brokers involved in transactions. No-load funds offer the same without commission.

 

• Know your manager. One of the great aspects of mutual funds is the professional management. But just because they are professional doesn’t mean they are good. Be careful who you entrust your money to; it is important to look at how long the manager has been around and producing good returns. Three years of supervising the fund is a good number to look for when assessing a manager. You can find information about fund managers online or in financial magazines. Good managers are generally popular in the media.

 

There is no set formula for the best way to invest. It just takes practice. There are many great articles online or in books that can assist in the process. The more familiar you become with investing, the better you will be. For more information, visit: http://datek.smartmoney.com/.