By BankingMyWay.com Staff
With the economic outlook shaky at best, many investors are shying away from stock investing. With so much volatility in the market, choosing to invest in relatively simpler mutual funds is appealing for many. Finding a good mutual fund for your investment portfolio, however, can be difficult given the current market conditions.

If the trouble in the stock market has taught investors anything, it is that assessing risk tolerance is crucial. When the market is going up, it’s easy for investors to confuse risky investments with lucrative ones. Of course, risky investments are potentially lucrative, but sometimes they’re disastrous as well. When choosing a mutual fund to invest in, it’s wise to know your own appetite for risk.

The same tried and true strategies to find a good mutual fund still apply in today’s market, but better credence should be paid to investing according to risk tolerance. Here are some things to consider:

Choose a mutual fund that fits into your asset allocation plan. Diversification is always key in allocating you assets. If you are just starting out and looking for your first mutual fund, consider a low-cost index fund like an S&P 500 Index fund. These funds allow you to easily diversify by investing in the top 500 companies according to the market capitalization of the company. That means larger companies get a large portion of your investment than smaller companies.

Alternatively, you can look into target retirement funds through your retirement plan. These funds own a mix of other mutual funds including domestic and foreign stock and bond funds. Target retirement funds also make diversification simple and adjust asset allocation as you get closer to retirement. If you want more control over your investment portfolio, consider funds invested in a specific industry, sector or geographical region. Many mutual funds have taken a beating in this bear market, but some are performing higher than others.

Look at the long-term performance of the mutual fund to find those that offer the best prospects for future returns. Don’t let recent highs fool you though. Many mutual funds have aberrant high returns only to rapidly plummet soon after. Long-term performance is a better indicator of stability and good management than current returns. That doesn’t mean that you shouldn’t invest in some of the newer mutual funds, however. Some new funds have cropped up in the last year and are performing well. For those, it’s best to research the managers and long-term performance tracks of other funds from the management company. New mutual funds offer the opportunity to get in on the ground floor and take advantage of some of the incredible bargains on the market.

If you are willing to take on a fair amount of risk, now may be the time to experiment in funds. With stock prices low, individual investors have the opportunity to dabble in the market using narrowly focused mutual funds.  For example, investing in mutual funds that focus on future trends like alternative energy could be profitable in the future, while growth funds are uncharacteristically outperforming value funds and may deserve a second look.

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