1. Define your goals
Are you trying to aggressively make money? Or do you want steady growth? How soon will you be pulling your money out? Generally, if you will not be touching the money for a long time, you can afford to invest in relatively aggressive funds. If, on the other hand, you will be retiring in 5 years, a conservative fund may make more sense. So it’s crucial to understand your investment goals before selecting a fund.

2. Analyze past performance and mutual fund manager
By going to Yahoo mutual fund center, you can easily look at the performance record of any fund you are considering investing in. Only the best mutual funds will beat the S&P 500 index on a consistent basis. Most do not. This means that unless you can find a fund that outperforms the S&P 500 consistently, you are better off just putting your money in an Index fund or ETF (more on this later). The exception to this would be if you are looking for a really steady investment that offers less in returns but more safety.

When searching for the best mutual funds, make sure the past performance in question is connected to the current mutual fund manager. Even if a fund has done great in the past, if they have a new manager, then you should not assume the fund will be managed similarly in the future or attain similar returns.

One final thing you should be aware of is that mutual funds are tracked and rated by many organizations. The most well-known organization rating mutual funds is Morning Star, which rates funds using a star system, with 5-stars reserved for the best mutual funds. Yahoo Mutual Fund Center shows you the Morning Star ratings of all funds. Only select 5-star funds.

3. Don’t overlook ETFs or Index Funds
An Index fund is a fund that simply mirrors the performance of a major index such as the S&P 500. Why would you want to consider such a fund? Quite simply, because it has been shown historically that very few mutual funds consistently beat the market index. This had lead some investors to simplify their investments and just buy index funds instead of constantly hunting for the best mutual funds. Buying index funds may be a boring strategy, but it’s pretty safe and the returns are decent.

Another option is something called an exchange traded fund (ETF) which trades exactly like a stock. ETFs also track indexes like the S&P 500 as well as numerous other indexes such as the Russel 2000, Nasdaq, Dow Jones, as well as sector-specific indexes. ETFs also have much lower fees than mutual funds, and have quite a few built-in tax advantages that you won’t get even with the best mutual funds. This won’t matter if you are investing with IRA money, but otherwise, ETFs are definitely worth a look.

For more on finding the best mutual funds, check out my full article on mutual fund investing.

Tom Oki is editor of business-reviews.com, which provides reviews of investment opportunities and other business resources.