A mutual fund is a pool of stocks, bonds or other funds from which an investor can purchase shares. Whether the mutual fund is actively managed or passive, like an index fund, it offers you an efficient way to diversify your portfolio. Some mutual funds, like asset allocation funds, offer a well-diversified investment in just one product. As with any investment, evaluating a mutual fund's performance and choosing one or several that meet your investment goals and risk tolerance involves thorough research. Use these steps to review a mutual fund and decide if it is the right choice for your portfolio.

First, classify the mutual fund to determine if it fits within your scope. For example, if you are seeking a mutual fund that provides steady income, a mid-cap value fund will leave you very disappointed. To find out the style of mutual fund, look up the fund on a financial website such as Morningstar. You can find all the basic facts about a mutual fund and have access to tools that further help you evaluate the fund. In your categorization of the mutual fund, also identify a few peers, or comparable funds from other fund companies, to compare your chosen fund. Using a mutual fund screener tool, such as the one provided by Morningstar, can help you with this task.

Next, review the historical performance data and compare your chosen mutual fund with a few of its peers. Look at the risk-return trade-off for each fund and determine whether it meets your risk tolerance. Morningstar ranks each fund's risk and historical returns against other funds within its universe so you can easily determine if a fund assumes a greater risk than average. Ideally, select a fund that assumes low risk but still produces good returns. The balance between the two depends, again, on your risk tolerance and investment objectives.

Dig deeper into the historical performance numbers to determine the consistency of the fund's returns. Do the five-year average returns look great because of one phenomenal year that could have just been contributed to luck? Try to select a fund that consistently outperforms its benchmark and one that has withstood a few market downturns and mitigated downside risks. These numbers illustrate the ability of the mutual fund managers. Sometimes, however, when the market crashes, not even the best managers can save a portfolio from a loss. For this reason, also compare the fund's upside and downside capture data against comparable funds.

Finally, take a look into the fund's expenses and fee structure. Tactical mutual funds that have heavy trading or are very actively managed have higher annual expenses. Factor in these costs as they directly affect your performance. While a fund that charges higher management fees is not necessarily better or worse because of the fees, still be cognizant of reasonable fees for the type of fund you choose. Again, comparing the fund with its peers can reveal whether the fees are reasonable.

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