Choosing the Right Fund

One of the key ways to choose a fund is to evaluate its past performance. This is one of the integral characteristics of the successful investor that was described at the beginning of this section. By tracking how profitable a fund has been, you will ga in a feel for the fund. Like stocks, mutual funds have their own "personality." Knowing this personality will help even the novice investor make decisions that are more intuitive and well-informed.

There is the commonly held belief by many investors that certain funds do better or worse than others because they briefly outperform or underperform the averages. This is thought to be only temporary. In the end, funds are supposed to revert back to th e normal middle ground. If one looks at the performance of funds over time, it is true that most funds do become average performers. Nevertheless, look for the some of the following indications when choosing a fund:

The fund has outperformed similar funds.
Over the years, despite occasionally "off-years," the fund has made huge profits.
The fund consistently has made a profit.
The fund has outperformed some of the major indexes (i.e. Dow Jones, S&P 500, etc.)

Granted, some of these criteria may appear to be common sense, but you would be surprised how many advisers do not follow this. Often times, people plunge into a mutual fund, stock or some investment based on a "hot tip" or a "hunch." It is imperative that you know a fund well and can provide reasons for investing in it before you actually do so.