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Archive for Monday, March 27, 2006

How to invest in mutual funds

March 27, 2006

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The universe of mutual funds is big and getting bigger all the time, so much so that there are almost too many choices. It's enough to make the average investor put off selecting a stock fund indefinitely, so here are some ways to simplify your choices if you don't know where to start.

First, for the small or lazy investor, buy mutual funds instead of individual stocks. It's the cheap way to diversify.

Next, know what you're looking for. Kiplinger's magazine recommends investing half your stock money in large-cap funds, split evenly between growth and value. Put another 25 percent in a foreign fund and the last 25 percent in a small-cap fund.

If that sounds like a lot of funds to pick for someone without a lot of money for each, consider that the minimum investment at many funds is only $2,000.

Now it's time to actually find a fund. Why not start with some dependable names like Vanguard, Fidelity, T. Rowe Price, American or Legg Mason? No one fund family does everything well, but these families are fairly consistent across the spectrum.

Measure long-term performance against both a stock index and the average of their peer funds in that asset class. Keep costs low by buying no-load funds (there's no upfront commission) and those with low expense ratios.

Morningstar.com provides a wealth of information. You can buy Morningstar's annual Funds 500, with detailed analysis of 500 funds, for $40 retail or look for it at your library.

If you really want to simplify, MarketWatch columnist Paul B. Farrell's 2004 book "The Lazy Person's Guide To Investing" tells you to stick to index funds.

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