How to Take Control of Your Mutual Fund During the Recession

Mutual funds offer a simple way to invest in a professionally managed, broadly diversified portfolio of investments.

As a shareholder, you needn't worry about which stocks or bonds to buy or sell. Instead, you can leave that decision to the pro who runs the fund.

Trouble is, you still have to choose the right fund from among the more than 7,000 entries available.

The first step: Decide on your goal.

Funds are defined in large part by the investment objective they pursue. For example, growth funds attempt to achieve capital growth by investing mainly in stocks. They're appropriate as a long-term investment.

Money market funds are ultra-conservative income investments appropriate only for savings you may need to draw upon for short-term expenses.

Other categories include aggressive growth funds (maximum capital growth), growth-and-income funds (capital growth and current income) and income funds (current income and capital preservation).

Once you've decided on your objective, you can narrow your search to include only funds that pursue it. To trim your options further, you'll need a copy of Morningstar Mutual Funds (or the similar Value Line Mutual Fund Survey), available at

MORNINGSTAR.COM. Morningstar covers over 1,500 funds, including most of your best bets. Chances are, there will be roughly 100 to 200 funds in any category you're considering.

Next, flip through the relevant section of Morningstar and make note of the most promising funds. Begin with those that Morningstar has awarded high rankings of four or five stars. Such funds have provided high returns for their levels of risk.

In any case, don't just choose the fund with the highest Morningstar ranking. For one thing, funds within a single investment objective may take different approaches.

For example, Morningstar's growth fund objective includes offerings as diverse as Janus Fund (blue chip), Wasatch Mid-Cap (medium-sized growth companies) and Merger Fund (shares of acquisition candidates and the like). All are fine funds, but expect them to provide widely different returns in a given market environment.

Morningstar's year-by-year risk and return scores also can help you zero in on a good fund. But when you evaluate a fund's performance, take a close look at its investments in different industries or financial markets.

For example, if a fund scored a big gain last year by overweighting high-flying technology stocks, it could be a riskier holding than a more diversified offering.

Also check Morningstar for these criteria:

Long-Term Record - Conservative investors should probably stick with funds that have track records of at least five years. For example, Robertson Stephens Value + Growth has a excellent rating. But that showing is based on a relatively short three-year track record. The fund has yet to endure a market downturn, so its true risk is still in question.

Recent management change - If you invest in a fund based on its long-term record, be sure the manager or team who produced that record is still at the helm.

Load - A load is a brokerage commission some fund sponsors levy on investments. If you invest in a fund with a 5 percent front-end load, you're actually only getting 95 percent of securities for every dollar you invest. No-load is probably the way to go if you're choosing the fund yourself.

Expense ratio - This is the amount a mutual fund sponsor charges each year to run a fund, and it can vary significantly from fund to fund. As a rule of thumb, avoid equity funds that charge more than 1.2 percent a year, and income funds asking over 0.7. Those numbers are a bit higher for international offerings.

Minimum initial investments are also a factor for most investors.

Once you've identified three or four promising funds, call each fund sponsors' toll-free number and request a copy of the fund's prospectus. The prospectus will explain the philosophy and rules governing the fund's operation.

A phone representative also should be able to answer other questions you have about the fund.

Finally, remember that the need for research doesn't end when you select a mutual fund and invest your money. Monitor its performance and keep an eye out for potential problems.

Ideally you should be able to hold on to your fund shares for a long time - but be ready to get out if the fund changes its fundamental character.