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Diversification: This is one of the best aspects of mutual funds, they are designed to be diversified. Instead of investing your money into one large company you are automatically invested into a large number of companies that the manager has chosen for you. This also takes the hard work out of your hands of actually choosing the stocks.
The right amount of diversification is between 3 and 12 funds split between the 3 major classifications of large-company, small-company and international-company funds.
No Load: Load is a one-time fee for the right to buy the fund. Although there are certainly good funds that charge loads, there is almost always a similar fund that has no load. At least one firm that has tracked load and no load funds has found that load funds have underperformed no load funds historically. Although past performance is not indicative of future performance, it is something to keep in mind.
Weigh a Fund's Expenses: The expense ratio is an important factor in buying a mutual fund. If you find two funds that are similar and fund A has an expense ratio of 1% and fund B has an expense ratio of 3%, fund B would have to outperform fund A by at least 2% a year in order to make it worth it.
Tax efficiency: Check the prospectus for a funds tax efficiency. There is often a big difference in what you earn before taxes and what you actually get to use.
Manager's Track Record: Check the manager's background. If the
fund has been doing great for the past 5 years with the same manager you
will want to stay with him. If he has left the company you might want
to go to the new fund he is managing.
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