Many find investing to be something of a mystery. Should you buy stocks, bonds, T-bills or real estate? It seems that for every person that gets rich investing in one spot a hundred others lose a fortune. In an age where you are constantly hearing about diversification and asset allocation the emergence of mutual funds seems to have hit an all time high. Promises abound of a fund that's right for everyone. But how do you know if it's right for you? Our office constantly fields the question: What is the best investment for my money? The only answer we give them is a definitive: it depends.

Many are already invested in mutual funds through their 401k, IRA's, brokerage accounts or variable annuities. But how do you know if you've chosen correctly? The first order of business is to look at their purpose and the different types available. The basic premise of a mutual fund is that a manager or management team oversees the buying and selling of equities. The idea is to spread capital, supplied by a pool of individual and/or institutional investors, among various equities and thus offer diversification within one investment.

There are literally thousands of funds that cover the spectrum of small, mid, large cap growth and value stock sectors. There are also a host of aggregate, income, short and long-term bond funds available. And then there are many offerings of both in what are considered blended funds. This is when a combination of stocks and bonds are combined in certain ratios to create a portfolio based to be conservative, moderate or aggressive. Choices are further complicated depending on the goal, asset size and management style of the each fund.

In the realm of equity funds lets take American Funds' flagship, the Growth Fund of America. It has a long-established track record of consistent performance as a large cap growth fund. Their largest holdings include: Google, Microsoft, Lowes and Target. Yet each stock constitutes no more than three percent of the overall portfolio. To put this in perspective the total asset holdings of the fund, as of 2005, are approximately $114.7 billion dollars. This means that investors who do not want to buy individual stock in these companies can purchase shares of this fund and still participate in the market. The main goal of these types of equity funds is to beat the respective index in which they participate. Investing in a quality fund that performs well often makes these suitable for those that are more comfortable with risk. This is an example of an actively managed fund whose performance helps to justify the expenses associated with the fund and others like it. The main appeal is management's track record of good returns relative to the index. For this reason, more aggressive investors may be willing to pay the related fees for the additional gains.

That being said there are index funds available. For example, stock index funds look only to mirror returns of a specified benchmark or index. The goal is to match it by buying representative amounts of each stock in the index. This avoids the expense of paying a manager to try to boost performance by choosing their own stocks or implementing their own strategies. Rather, index funds just seek to come as close as possible to equaling that market's index. Take the example of the first index fund, the Vanguard S&P 500 Index Fund. Since its inception it has nearly matched the Standard & Poor's 500 Index. It does actually out-perform many funds because of it's performance combined with lower expenses. Index funds generally carry lower fees and are not what many would consider actively managed. For these reasons index funds tend to appeal to more conservative investors.

Another choice available is that of the sector fund. These types of funds focus on one particular portion of the economy and invest within it. Let's take the Oak Associates Red Oak Technology Select Fund. The fund looks for long-term growth by investing primarily in companies which rely on technology in their products or operations. The expectation is that the companies will benefit from technological advances and improvements and thus be profitable. Its inception in 1998 was prompted by the expotential growth experienced by the technology sector at the time. Many funds with that focus outperformed the indexes and equity funds in the late 90's. Of course the last five years have shown the inherent risks associated with these types of investments. The growth potential can be great but, as illustrated by the rise and fall of technology the last ten years, it can also be the most risky. Many individual investors choose to avoid sector funds because of the volatility associated with them. However large institutional investors often use them to diversify their portfolios.

One of the most recent offerings to the mutual fund market are known as target maturity or target-date retirement funds. Although relatively new, the concept of these funds is based in the idea that one must be diversified and change their portfolio over time. Like blended funds, they possess both stock and bonds. The unique feature is that they are based around a particular retirement year. The further out the retirement year the higher the ratio of stocks is within that fund. As the time horizon for retirement nears the portfolio moves out of stocks and more into cash and bonds. As an example we can look at State Farm's LifePath 2040 fund which is managed by Barclay's. This fund currently has almost 87% of its portfolio in stocks with the balance in cash and bonds. As the fund approaches maturity the portfolio will move to have approximately 62% of its holdings in bonds and the rest of the balance in real estate, money markets and large cap stocks. The appeal of these funds is that an investor can put their money for retirement in one place and allow professional management to track the portfolio over time. The goal is to capitalize on the growth of the equity market early on in the fund's existence and then protect that growth by moving capital to the security of more stable investments.

Mutual funds offer several advantages regardless of the type you choose. The first is diversification, a variety of investments rather than putting money in one single entity. The second is liquidity, the ability to redeem your shares for cash fairly quickly. Keep in mind that there can be fees or penalties associated with this liquidation. The third advantage is to have someone manage your money, either actively or passively, without the investor having to watch it every day. In the next installment we will be taking a look at the moving parts of a mutual fund to help you see how they work.

Please note: This article is in no way an endorsement or detraction of any company or fund mentioned above. Examples are for illustrative purposes only and do not constitute whether or not you should invest in any vehicle mentioned. Always consult with your financial professional or advisor before investing and always carefully read any prospectus before making any decisions