Mutual Funds | Mutual Funds: Tips For Choosing The Right Funds For You

So how do you choose one that's right for you? As with choosing stocks, you have to take a look at your personal investment goals and your risk tolerance.

Many people think that buying shares in a mutual funds is automatically less risky than buying shares of individual stocks. But that is not necessarily true. Buying any security poses some amount of risk, which is why there are such lengthy written disclosures given to you before you spend your money.

Analyzing you investment goals involves knowing whether you want long term or short term growth, or ongoing dividend income. And you need to be able to accurately assess your risk tolerance. This is another way of asking how much you could afford to lose and how well could you handle the loss (if it happened) both financially and emotionally.

Once you have answered those questions, you need to do some research to find a mutual fund that makes it investments in the types of financial instruments that fits your investment goals and risk tolerance.

Stocks are not necessarily riskier than bonds. For example, a fund that invests in blue chip stocks with solid financial statements and long term performance would be more stable than a fund that invests heavily in C-grade bonds that have a high risk for default. So buying shares in a mutual fund doesn't let you off the hook when it comes to doing some research to make a smart decision.

Once you have decided on the type of securities you want in your fund, you will need to take a look at the fund managers. Think of it as if you were hiring an employee. (In fact, you are. But you don't have to pay the FICA taxes or health insurance!)

In fact, smart investors go one step further. They actually research to find the funds that the fund managers themselves are investing in. When the fund manager has a personal stake in the fund, there's a higher probability that he or she is watching it very carefully. A good example is Warren Buffet and his Berkshire Fund. Both Warren and his Fund have done extremely well over the years.