Remember the scenes in Forest Gump where Bubba is listing all of the ways you can prepare shrimp?  Sometimes I feel like that when I’m describing all the mutual fund options out there.  You have large-cap value, large-cap growth, small-cap, mid-cap, international, global, alternative, all-cap, balanced, intermediate bond, corporate bond, muni-bond, emerging markets… the list goes on and on.

We know that mutual funds offer many benefits providing us with diversification, an affordable means of investing and as an added benefit, professional management.  You may know, for example, that you’d like to invest in large-cap dividend paying stocks.  Purchasing a mutual fund can help you invest in a broader selection of these types of stocks and alleviates you from having to choose which ones specifically, as the management team makes these decisions for you.

So how do you choose which mutual funds to use?  With over 7,000 mutual funds to choose from the task can seem overwhelming.  At least for most of us, our choices are usually limited within the investment plan we’re in.  Especially, when we’re talking about employer-sponsored retirement plans.  Still you often are presented with several fund options within your plan to choose from.

Here are some resources and things to keep in consider when you evaluate a mutual fund.

Portfolio Understand what the fund is investing in.  Does it have stocks, bonds, or maybe even both in the case of an allocation fund?   Often times the name will indicate what it’s investing in.  For example, the T. Rowe Price Institutional Large-Cap Fund.   That’s not always the case, though, you may have to dig a little deeper.

Rating and Ranking What’s it’s rating.  Is it a 1 star or 5 star? (Hint, 5 star is better. I typically, wouldn’t recommend anything below a 3 star. ) Where did it rank in its category?  You want to pick a consistent leader among its peers.

Yield If the fund has income from either bonds or stock dividends it will have an average annual yield percent.

Performance How has the fund performed over 3, 5, and 10 years?   How volatile has it been?

Management – How long have the fund managers been with the team, what’s their experience?

News and Alerts – Have there been any trends of decreasing ratings or negative reviews?

There is quite a bit of other technical information you can use to evaluate a fund but I won’t bore you with those details.  If you pay for someone to help you build a portfolio it’s part of their job to look at all those other technical details for you.

Finally, it helps to know where to go to get information to evaluate a mutual fund.  Your statement most likely only provides limited information about the various fund options available.  There are several web resources you can turn to.  You can always access more information about a particular fund using the fund company’s website.  You can use Yahoo Finance, MSN Money, or MorningStar.

Personally, I’ve come to rely on Morningstar the most.  They are highly respected in the industry, providing unbiased research on thousands of mutual funds and stocks.   See my tutorial on navigating MorningStar here.