Many novice investors undoubtedly feel overwhelmed by the vast number of mutual funds available--more than 6,000. But hundreds of these selections--probably thousands--may be inappropriate for you and can quickly be disregarded.

Once you assess your risk tolerance, it's fairly easy to draw up a suitable target portfolio. Essentially, this means earmarking a certain percentage of your investment dollars into stock funds, bond funds and "cash" ("cash" refers to fairly liquid but safe investments in places such as savings accounts, bank certificates of deposit and money market funds). This is known as asset allocation.

Mutual funds work superbly as asset allocation building blocks because they provide diversified exposure to specific investment categories even for people on a shoestring budget.

Next, evaluate a fund's performance, both in absolute and relative terms. How has the fund fared against similar types of funds and against the market overall? Has its performance, or "total return," improved or gotten worse?

One key advantage of mutual funds is that all performance numbers are calculated in a standardized fashion, making for easy and reliable comparisons. In all cases, a fund's published performance figures have already been reduced by applicable operating expenses--things such as management fees, shareholder servicing costs and certain marketing outlays.

No discussion of performance would be complete without a concurrent look at risk. The two are virtually inseparable. "While people focus on the return, risk is just as important," says Duran.

Fund size, portfolio turnover and shareholder services.

Even after you've selected suitable mutual funds, you're only halfway through the process. You still have to keep a watch over your holdings, with an eye on eventually redeeming shares. Selling can be more difficult than buying, for the simple reason that you have not only a monetary commitment to a certain fund, but may have an emotional attachment as well.