How do I Choose Mutual Funds?

More than 68,000 mutual funds exist worldwide, as of October 2010, according to the Investment Company Institute. Stock funds, bond funds, money market funds. Funds that invest in America, Asia and Europe. Funds that invest anywhere in the world they please. Because the possibilities are nearly endless, choosing a mutual fund can be tougher than picking a mate. In finance, as in matrimony, your best bet is to know what you're getting into.

Step 1

Find a mutual fund screener online. Countless investing websites provide tools to search for mutual funds by certain criteria. As an alternative to, or in addition to, using a mutual fund screener, you can consult a financial advisor or request information from mutual fund companies about funds you might want to invest in. In terms of maximizing your time and resources, however, online mutual fund screeners provide the quickest and most convenient way to find adequate funds out of the universe of thousands.

Step 2

Search for funds that meet your investment preferences. For example, you can search for funds that invest in certain regions of the world exclusively, focus on certain business sectors, or mimic the returns of market indexes such as the Dow Jones Industrial Average or the S&P 500. Most mutual fund screeners also allow you to refine your search based on a fund's historical performance and risk.

Step 3

Evaluate mutual fund fees. As the U.S. Securities and Exchange Commission explains, mutual funds can charge several types of fees. Among the most popular are sales loads and redemption fees. All fees charge an additional expense ratio, which equals a portion of your account value, charged annually, to cover costs associated with running the fund.

Step 4

Consider minimum initial investments. Depending upon the amount of money you have to invest, some funds may be cost-prohibitive. Some funds require initial investments of $1,000 or much more. Others ask for minimum initial investments of less than $1,000. Many funds waive required minimums, or lower them substantially, if you agree to set up automatic monthly investments.

Tip

  • A sales load is a charge you pay upon investing in a mutual fund, or when you redeem shares that are equal to your investment amount or redemption. Sales loads cannot exceed 8.5 percent. A mutual fund can charge a redemption fee, which cannot surpass 2 percent, when you sell shares. The difference between the two fees is what the fund uses them to pay for. A sales load goes to brokers who offer the fund to their clients, while the redemption fee covers other costs incurred while operating the fund.

About the Author

As a writer since 2002, Rocco Pendola has published numerous academic and popular articles in addition to working as a freelance grant writer and researcher. His work has appeared on SFGate and Planetizen and in the journals "Environment & Behavior" and "Health and Place." Pendola has a Bachelor of Arts in urban studies from San Francisco State University.