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Van Ginkle suggested you select a mutual fund whose investing objectives and risk level match your own. For example, an investor with the goal of providing retirement income that is many years in the future may select an aggressive growth or growth fund depending on the investor’s risk tolerance. An individual already retired may want a growth and income fund or a fixed-income fund.

“When you invest in a mutual fund you pay for someone else’s expertise and along with this comes annual management fees,” Van Ginkle added. In addition there may be other fees. “Avoid load funds that either charge an up-front sales fee or a redemption fee when you redeem your shares within a certain number of years. Also avoid funds that charge 12b-1 marketing fees.”

The return to you is significantly affected by these fees and expenses so shop for funds with a low expense ratio, Van Ginkle said. “This is the percentage of the fund’s net assets that go to annual operating expenses. To evaluate these various charges you can use a mutual fund calculator such as one provided by the Securities and Exchange Commission at www.sec.gov/investor/tools.shtml. Compare the costs of owning different funds before you buy.”

Van Ginkle says there are tax consequences of owning mutual funds you also should be aware of. A mutual fund company earns dividends and interest. A mutual fund also has capital gains when it sells securities. After deducting its expenses the remainder must be distributed to its investors. The distribution may be received in cash or reinvested to buy additional shares. The distributions must be reported by the investor as income annually unless the mutual fund is part of a tax-deferred account – e.g., 401(k) or an IRA. “Some of the income will be reported as dividends on your income tax return and taxed at your ordinary tax rate and some will be reported as capital gains and taxed at your capital gains rate.”

In addition to the tax on income made by the mutual fund while you own it, when you sell mutual fund shares you may have a capital gain or loss. “It is important to keep cost basis records of your mutual fund purchases (original cost and transaction costs plus reinvestment dividends and capital gains or losses) because you will need this to calculate your taxes,” Van Ginkle concluded.