Things You'll Need:
- Internet access
- 401(k) enrollment material from your employer OR
- enrollment material from your IRA provider
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Step 1
Determine what mutual funds are available to you. The funds should be listed in the enrollment material provided by your employer or IRA provider.
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Step 2
Compare each fund's historical performance to an appropriate benchmark.
For example, a fund that invests in stocks of large U.S. companies could be compared to the S&P 500 index. You would not want to use the S&P 500 as a benchmark for a fund that invests in large foreign companies or small U.S. companies because the characteristics of those companies' stocks will be very different from the stocks in the index. -
Step 3
Compare the expense ratios of each fund against one another.
Funds incur expenses by executing trades; the more trades a fund makes (a.k.a. "turnover"), the higher its expenses will be. The expense ratio shows a fund's expenses in terms of annual return.
The amount of expenses a fund incurs directly affects the fund's peformance. For example, say fund ABC returns 10% during the year with an expense ratio of 2%. ABC's net return was only 8% (10% - 2% = 8%). Fund XYZ also returns 10%, but with a 1% expense ratio. XYZ's net return was 9% (10% - 1% = 9%).
Over a several years, the higher net return of XYZ will make a significant difference in the amount of money in the fund. Using our example above, if you invested $10,000 in ABC and XYZ at the same time, XYZ would have about $2,100 more after 10 years and $9,400 more after 20 years. -
Step 4
Choose a fund that has a low expense ratio and has historically performed well against the appropriate benchmark.
If you have multiple good candidates, consider yourself lucky. You'll be fine with any of them. If you would like help narrowing it further there are many internet sites that rate mutual funds and provide more detailed analysis. Morningstar.com is a great place to start.
