How to Choose Mutual Funds

Many people who are new to investing struggle with the question of how to choose mutual funds. They might have heard that investing in mutual funds is a good investment plan, but they become overwhelmed when they discover the wide variety of mutual funds that are available from which to choose. Choosing mutual funds is not that difficult do to once you analyze your own financial goals. Here is how to choose mutual funds.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Investment money (at least $3,000 for most non-IRA funds)

1. Understand what a mutual fund is. Mutual funds are run by investment companies. The investment company raises money from shareholders and uses that money to invest in a wide variety of financial investments, such as stocks, bonds or money markets. When you purchase a share of a mutual fund, your money goes into the pool of the money raised and is invested into multiple investment vehicles. While you own one share of the mutual fund, the mutual fund owns multiple shares of multiple investments.

2. Select an investment company to invest with. Some of the largest investment companies include The Vanguard Group, Fidelity Investments and American Century Investments. Different investment companies have different minimum amounts required to open a mutual fund. Explore the options and decide which investment company is the best fit for you.

3. Determine what your financial goals are. This will help you choose which types of mutual funds are the best investment vehicles for you. Will you need to access the funds you invest within the next few years (such as to pay for college or to retire)? Or can you leave your investment money in mutual funds for a long period of time (over ten years)?

4. Explore which types of mutual funds best match your financial goals. If you need to access the funds in the next few years, you will want to invest in lower risk mutual funds, such as money markets or bonds. However, if you can invest the funds for longer periods of time, you can afford to invest in higher risk mutual funds, such as stock mutual funds that have the potential of generating a much higher return on your investment.

5. Read through a prospectus for each mutual fund you are considering. Investment companies have a brochure, called a prospectus, available for each mutual fund that explains where a mutual fund invests its money. The prospectus also explains the level of risk and provides information about the mutual fund's historical rate of return. While past performance is no guarantee of future performance, it can help you make an educated guess about the long-term health of a particular mutual fund.

6. Talk with a representative from the investment company you select. Most investment companies have toll-free numbers that are answered by representatives who have been trained to answer a potential investor's questions and will patiently explain everything that you need to know about investing.

7. Choose the mutual funds in which you want to invest. Once you have all of the information, all that is left to decide is which mutual funds to choose. Choose the mutual funds that best match your financial goals.

Tips & Warnings

• If you have any questions, call the investment company at its toll-free number and talk with a representative. Most investment company representatives are very knowledgeable about the investment process and the mutual funds that are available for investment.