First off, why should you invest in mutual funds? Mutual funds are helpful for those who have limited time and resources, and would prefer to leave the management of their money to someone else. Mutual fund managers offer the expertise to invest in highly specialized areas such as international equities, and may thus be attractive if you would like to gain exposure to these markets without having to do the legwork yourself.

With such a wide array of mutual funds, choosing among them can be difficult. Nonetheless, there are three major criteria you should use to evaluate any mutual fund: the mutual fund's investment objectives, investment track record, and the mutual fund's expenses.

Mutual Fund Objectives

Choose mutual funds based on whether you are comfortable with their investment objectives. Different mutual funds have different investment objectives: growth, value, income, international exposure, contrarian investing. These will dictate the type of strategies followed by the fund - are the fund managers value investors? Or do they invest primarily for growth? Other funds adopt a strictly contrarian approach.

Extreme investment objectives naturally lead to more risky investment strategies - these are specifically the type of mutual funds you should be careful about investing in.

One indicator you should become familiar with is the Sharpe ratio. The Sharpe Ratio compares performance to fund volatility and is a good measure of risk. The lower the ratio, the better. The Sharpe Ratio is a very important measure of the level of risk you would expose yourself to.

Mutual Fund Performance

While past performance does not necessarily imply future success, it is nonetheless an important indicator. Compare the mutual fund's performance to the overall market and sector performance. Note that more than 70 percent of all mutual funds underperform, so scrutinize the performance figures carefully. What is the time span, what did the fund compare itself against, and what is the mode of comparison?

Mutual Fund Expenses
The third major factor you should carefully evaluate is the mutual fund's expenses. Look at the expense ratio. This ratio sums up all the costs of investing in the fund, which typically include the management costs, 12-b-1-, operating costs, loads and other miscellaneous costs.

For specific information on each mutual fund and to retrieve the different ratios mentioned above, Yahoo Finance and Morningstar are my personal favorites.

Yuen is a financial expert, personal finance specialist and motivational speaker who writes for the Financial Freedom Guide and other major financial blogs. His writing emphasizes financial independence and the creation of long term residual income streams. Learn how to emulate his success at Site Build It Reviews.

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