by Arlene Hauben

Created on: December 04, 2009   Last Updated: December 06, 2009

Before you jump into more mutual funds, here are some things you should know for 2010.

If history is a guide, then 2010 will be a better year for mutual funds. When the economy goes through a deep slide, it is often followed by an impressive upturn. No one knows for sure what will happen, but consumers are spending more money, the stock market is rising, and optimism is beginning to surface. Treasury Secretary Timothy Geithner says that the economy is healing and growing.

Will mutual funds be a safe place to invest in 2010? Mutual funds are baskets of stocks (equities) or bonds or a combination, in which investors can buy shares. The shares are traded at Net Asset Value (NAV) and fluctuate, depending on the financial markets. Mutual funds are a popular investment vehicle because they offer an opportunity to own a variety of different stocks and bonds. But not all funds are created equal and historical returns do not guarantee future performance.

To determine the safety of mutual funds going forward, there are several issues that any investor should consider.

First, what is your time horizon or length of time you plan to hold the funds? Are you investing for one year, five years, or long term? If the value of a fund falls, do you have time to let it catch up?

Investing and timing go hand in hand. Nobody knows for sure if the value of a fund will go straight up or rise steadily. For example, EWZ, the Brazil exchange traded fund, had an NAV in the $30 range in July 2006. By January 2008, the NAV had risen to the $80 range, before plummeting back to the $30 range in December 2008, when the recession took hold. As of December 3, 2009, EWZ was again trading in the $78-$80 range. It's had a see-saw ride.

Second, what is your risk tolerance? The greater the risk, the greater the reward, is how it theoretically works, but not always. If you want to minimize risk, invest in a short-term government bond fund. If you can tolerate more risk, for potential higher rewards, a commodities or equities fund might be the choice. These are only examples.

Third, investing in mutual funds is a good idea, but which one? There are thousands of mutual funds, including asset allocation, sector funds, such as industrials, materials, and consumer discretionary, technology, energy and so on down the line. Then there are many types of mutual funds that are comprised of bonds, including corporate, government, TIP, or municipal bonds.

The decline of the U.S. dollar argues for keeping a portion

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