Before choosing a mutual fund you first must decide on as asset allocation. Asset allocation in a nutshell is how you are going to spread your money over the various asset classes. There is a lot of information on asset allocation and I would spend some time getting one that is right for you

There are two schools of thought selecting the best mutual fund. In one school the best mutual fund is the one with the best manager. The other school believes index funds are the best choice. Research shows that index funds outperform 80% of domestic stock funds. This percentage goes down as you get into international funds sector funds, and particularly emerging market funds. In the case of many 401K’s, or 403B’s your choices are very limited. In those cases an index fund is the best choice. If you have a self directed IRA, a lot of choices in your 401K, or investing outside of a retirement plan then I don’t think and index fund is the best choice.

To select the best mutual fund there are several places on the web including but not limited to fund picks from Fidelity or Morningstar. I am particularly fond of the fund picks from Fidelity that are not from the Fidelity family. Not to say that Fidelity does not have some wonderful funds (I own a number of them) but they tend to bias towards their funds.

Watch for a fund manager that has a good track record over at least 5 years. Not that someone with less than 5 years is not going to do an outstanding job they often do. If you find a manager who has managed a fund for 20 years and beaten the market for the last 20 then chances are they will do it this year too.

Investigate to see how the fund has performed in bad markets as well as good. The internet has a number of tools to perform this check. A word of caution here sometimes the funds pay dividends and the chart or data table you may be using may not take that into account. I personally like Yahoo historical data for this function. In the data it will tell you when the fund paid a distribution and how much.

Checking for specific dates can give you a better idea how the fund performs. March 9, 2009 was a recent low in the market. Check to see how the fund did over a time period on the way down against the market before this date. Do the same on the way up after the low.

After seeing how the fund has performed in both bad and good markets you can better make a choice. I can accept a fund that underperforms the market on the way down and over performs the market on the way up. Likewise I can accept lower performance on the way up if the fund lost mush less on the down.

I would not invest in funds that have screens. These are often called social funds. These funds cover the religious and political spectrum. I respect people who invest in accordance with their beliefs but often the performances of these funds suffer.

Sector and specialty funds should be limited to 10% or less of your assets.