Before you can pick which funds you will invest in, you must understand the process of picking good mutual funds. The process for picking good mutual funds is:

1. Determine the asset classes that are appropriate for your plan.
2. Determine the appropriate benchmarks.
3. Determine key parameters for each asset class (e.g., costs, fees, diversification, etc.) to identify potential funds.
4. Use a database program to set your chosen parameters and evaluate each potential candidate.
5. Evaluate each candidate and select the best funds.
6. Purchase the funds and monitor performance carefully.

Be careful in purchasing funds that you do not purchase funds before distributions are made, generally in December. Distributions result in taxes. Try to purchase your mutual funds after their distributions are made.

You determined the asset classes your portfolio should contain and the appropriate benchmarks for these asset classes in Investments 2: Your Investment Plan. Therefore, you have already completed steps one and two. This section will discuss steps three and four; you will learn how to determine key parameters for evaluating mutual funds of specific asset classes, and you will learn how to use a database program to set those parameters and evaluate potential candidates.

There are a number of factors that you should consider when selecting mutual funds. Six of the major factors include diversification, costs, tax efficiency, turnover, levels of uninvested cash, manager style drift, and amount of tracking error.