Risk

• Different mutual funds have different levels of risk. The level of risk is determined by the types of assets a mutual fund invests in. An investment objective and the types of risk associated with a fund will be clearly outlined in a mutual fund prospectus. Planning for a mutual fund should include making sure its risk profile matches what you want out of your investments. Mutual funds that have greater price fluctuations are riskier than those that don't, and should be used for savings goals that will not be realized until several years in the future.
  
  

Assets

• Every mutual fund has a distinct asset class that it invests in. These can include stocks, bonds, commodities or real estate investment trusts. These categories can be further split up by geography, industry or company size. A mutual fund will list what its invested assets are in its prospectus. When researching a mutual fund it's wise to make sure that these asset holdings are inline with your own agenda. It's also a good idea to make sure that the asset holdings of your mutual funds do not overlap to maximize the benefits of diversification.
  
  

Active and Passive

• Mutual funds can be actively and passively managed. Every mutual fund is measured against an investment index that measures the performance of a particular asset class. The Dow Jones, S&P 500 and Russell 2000 are examples of different U.S. stock indexes. An actively managed fund deliberately tries to pick stocks from an asset class that will allow it to beat the index it's being measured against. Conversely, a passive index fund looks to buy stocks in the same proportion that they're represented in an index, and hence have its performance mirror that of an index, but not beat it.
  
  

Expenses

• Every mutual fund charges expenses to cover its administrative costs. The most common expense is the expense ratio. The expense ratio is a percentage of your investment that a mutual fund company charges. Passively managed funds have lower expense ratios than actively managed funds because they have no need for fund managers. Instead, they're managed by a computer. Other fees include "loads," which are sales charges for buying a fund, and a 12b-1 distribution fee, which pays broker commission fees. All applicable fees are listed in the fund prospectus. Over many years fees can have a very large impact on fund performance, so it is important to be very clear on what fees you will pay from year to year for your mutual funds.