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There are many types of mutual funds available. Just looking at the list can be staggering. How does one filter out the best funds? Well some of it is luck, however, you can increase your odds of picking winners by looking into the points listed below.
First, for those people who know nothing about picking a mutual fund, don't have the interest to research them or want to invest in only 1 fund, my advice is as follows: Invest in an Index Fund. An index fund is a fund that invests only in the top S & P 500 funds in the market. These tend to be very large and financially stabile companies, mostly in the NY Stock exchange. An S & P 500 fund example would be Exxon. The advantages of having this type of fund are many. There hardly is any research because the funds in the S & P 500 are fixed. So the fund manager needs not to do much research. This reduces costly investment mistakes and keeps the fees of the fund low. More importantly, statistically S & P 500 funds beat 75% of all other funds in all of the different categories. In other words, you'll do better than 75% of other people invested elsewhere. This fact alone makes it very desirable to park funds here.

If, however, you want to look into various other options, the advice would be as follows: 1)Diversify into different areas. Invest in a large, small, foreign and maybe a bond fund. Large funds, as the name implies, invests in large companies mostly. These may be growth related or value related. It would be best, to try to find a fund that blends both growth and value together. Very simply value refers to stocks that aren't in favor currently and can be picked up cheaply. The potential is for these stocks to become popular and therefore rise in value. Growth stocks are relatively expensive stocks, but are stocks of companies that are currently growing and pacing themselves in the marketplace by leaps and bounds. Similarly small company mutual funds do the same, but with small companies only, foreign refers to stocks that are of non US companies, while bond funds give you current income from the bond sector. Small companies have tremendous growth potential so you'll want to have a some money invested here. Foreign stocks give you the advantage of investing worldwide in areas that may be experiencing tremendous growth. Remember that the we live in a worldwide economy these days. The bond fund will keep some money out of the stock market and will allow you to make gains when bonds rise. You can invest in more that 4 funds if you wish, but I find it unnecessary. Also stay away from mutual funds that specialize only in 1 area like gold or technology. You can lose a lot if that sector collapses.
2)Look at the funds performance and rankings for the last 3 to 5 years. Make sure it hasn't underperformed
3) While looking at that, see how long the current fund manager has been in place. If a new manager has been appointed, old fund rankings and results may not be applicable. He has no track record to speak of.
4) Read Morningstar Reports to read in depth about the funds you're interested in and subscribe to a financial newspaper to keep abreast of the market.
5) Once you choose your fund, periodically review if the investment strategies of the fund remain the same. Some funds will invest in other areas if the main section of the fund is under performing. Yyou will not want to have 2 funds that could be investing in the same companies.
6) Finally, seek professional advice if confused, or read books on the subject. Wall street publications usually are simple, yet thorough on this subject

Learn more about this author, Cyrus Dehkan.
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