Tips on How to Select the Right Kind of Mutual Fund for Your Situation

Mutual funds are an established way to invest in an uncertain economy. At their core, mutual funds are merely a collection of shares of individual companies' stock, possibly corporate or government bonds, and maybe some cash. By owning shares in a mutual fund, you actually own a few shares in dozens or possibly hundreds of different stocks or bonds.

After you have decided to invest in mutual funds, you have to decide on what kind of fund is well suited to your present financial situation. Here are some tips on selecting the right funds for you:

1) Understand Your Investment Objectives, Time Horizon, and Tolerance for Risk

If you're investing for retirement or college more than ten years away, you want to use common stock funds, which can outpace inflation. For shorter-term objectives, less volatile short-term bond funds or money market mutual funds are more appropriate. Regardless, never assume more risk that is necessary to meet your objectives.

2) Decide Whether You Want to be An Active or Passive Fund Investor (or both)

There are thousands of funfd choices and many variables to consider, including the fund company, portfolio manager, portfolio characteristics, cost of ownership, and past performance relative to peer groups. If looking at all these variables seem like too much work, then passive investing through common stock index funds may be for you.

3) Be Sure You Want To Buy Funds, Not Individual Funds

A bond fund has a substantial fixed maturity, so you're always exposed to a certain level of principal risk no matter how long you hold the fund; the maturity of a bond, however, declines steadily, and your principal risk declines each year you hold the bond. Here's how to decide what's right for you:

- If you want to maintain a fixed stream of interest income payments, buy individual bonds.

- If you don't have enough assets to buy a diversified portfolio of bonds, you're best off with a bond mutual fund.

- If you don't want to analyze bond fund criteria, select a bond index mutual fund.

4) Pay Attention to the Fund Fees

Some funds have upfront fees, called front-loads, which are really commissions that go to the sales force or companies. Others have redemtption fees, called rear-end loads, charged when you sell your fund. Still others nick you for a small percentage every year that you own the fund as an additional load.