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"Mutual Funds for the Utterly Confused" (McGraw-HIll, December 2008)

Simply, it is an investment vehicle whereby you, and thousands of others just like you, give your money to fund managers to invest as a group. These managers have rules to invest by and this information is contained in the prospectus. What you are doing is buying numerous companies (their stock) instead of trying to pick the one or two individual investments. This spreads the risk and creates diversity.

With over ten thousand Mutual Funds to pick from, how do you choose? It is not as difficult as it sounds - but neither is it easy. There are some basic criteria you should use in your search.

The BlueCollarDollar has always believed that the beginning investor ought to have the opportunity to get in on the action, so to speak but at a low cost. This low cost is something like an initiation fee, a price for joining the group. Although this minimum initial investment is necessary it should NOT be compromised in any way. In other words, some funds will charge what is known as a front end load fee. Basically, this is a tax of sorts for joining. If this "load" is 5%, the thousand dollars the fund may require to join in reality puts only $950 to work. In essence, you are already behind and the fund manager hasn't done a thing.

On the flip side of things, some funds are called "closed end". This means that after you decide to redeem your investment, the mutual fund will charge you a percentage fee based on your accumulated assets. If you have made a thousand dollars in the fund and it has a closed end fee of 5%, you will only get $950.

First lesson: Always buy a no-load fund

Because you have, as a group, hired professional help to invest your money, you will need to pay this individual or their team for their efforts. These are called fees. This is the cost of running the fund and can sap your earnings as fast as the load fees.

We believe that the best funds should never charge more than 1.5% in fees for running the fund. This fee is calculated against your balance. For instance, a balance of $1000 would have fees of about fifteen dollars at most per year. This is still high but can be used as a sort of shopping benchmark. Always remember. these fees will cut into your return so less is good.

Second lesson: Keep those fees under 1.5%

We also want to see respectable returns as well. After all, that's why you are investing. You want your money to grow and hopefully it will grow substantially. Use a three to five year performance chart to determine the ability of the manager of the fund to invest wisely and profitably. Using this time frame allows for market fluctuations. If the manager is new, then be cautious with your investment. Track records are extremely important and a very telling sign of competence.

Third lesson: Choose a manager or management team that has a record of successes spanning at least three years or longer.

Something else to consider is the funds performance relative to similar funds. If a mutual fund uses a standard index, such as the S & P 500, the fund itself should hold many of the same stocks. If the fund is a large-cap fund (invests in companies with a worth n excess of $10 billion) then compare the fund to other large cap funds. If the fund invests in small caps, then similar small cap funds should be used to compare performance. Never choose the number one performer, unless of course that spot has been occupied for over three years.

Fourth lesson: Compare performance of the fund against similar funds.