Market Watch : Picking a Mutual Fund Can Be a Daunting Task : Investment: With more than 2,000 choices, investors can’t be blamed for feeling confused.

There are almost as many ways of investing in mutual funds as there are mutual funds, and there are an awful lot of mutual funds.

Experts say more than 2,000 funds are on the market now, running from the very specialized to the very broad.

One new fund, for example, invests only in stocks of foreign utility companies, while asset allocation funds invest in stocks, bonds, gold and real estate.

Some funds are heavily managed; they exist only to actively trade shares of other mutual funds. And others are hardly managed at all, such as the index funds that only try to mirror, not better, the Standard & Poor’s index of 500 stocks.

The runaway growth of mutual funds during the past few years can be laid to the “if you can’t beat them, join them” philosophy of investing, according to Michael Hirsch, senior vice president of Republic National Bank of New York and a mutual fund expert.

Hirsch says people who in the past might have bought and sold individual stocks have been frightened out of direct participation by the large institutional investors. Instead, these individuals are joining institutions themselves by investing through large pools of cash that mutual funds represent.

Hirsch believes that individual investors have “no business” buying and selling individual stocks.

He warns that it is like “sitting down at a poker game with a $50 stake when everybody else has $10,000. You can be the best player in the world, (but) it’s only a matter of time before you’re wiped out.”

Unfortunately, the wide array of mutual fund choices has become as daunting for many as the stock market. An individual investor looking for a solid fund or two in which to sock away money for retirement can become paralyzed from the profusion of choices. How should the small investor start in funds?

Every expert has his or her own strategy, but they all agree on one point: The better mutual funds have performed well in the past. Although financial markets change, the solid funds remain solid.

“It’s amazing to me,” said Wesley Johnson, an independent broker in Colorado Springs, Colo. “I’ve been tracking 1,500 funds for five years, and the good funds are always good, the mediocre funds are always mediocre and the poor funds are always poor.”

A good starting point, then, is to check rankings in magazines and newspapers to see which funds have consistently performed well.

The emphasis is on consistency.

“I’m not talking about the supernovas, the one-year hotshots,” said Hirsch, of Republic National Bank. Look for funds that have performed strongly over many years, he says.

How many funds should you invest in?

That’s a good question to arouse the experts. Hirsch, whose views are controversial in some financial circles, believes that no one should invest in fewer than five funds and that there’s no maximum. Fifty funds or more are fine with him.

Hirsch recommends that investors diversify to the maximum, putting only the minimum investment of $1,000 to $2,000 in each fund before moving on to the next. Instead of owning one growth stock fund with $10,000 in it, Hirsch says, the wise investor should own five with $2,000 in each. Diversify by type of investment, fund family and fund manager, Hirsch says.

Johnson is at the other extreme. Diversification merely waters down the gain, he believes. He tells his clients to pick a small handful of the most promising funds and put all their eggs in one, two or three baskets. His approach can generate big gains, and big risks, for clients.

More typical is the view espoused by Ron Rough, the research director for Schabacker Investment Management, a Potomac, Md., money management and newsletter publishing firm. Rough believes that investors with portfolios of about $20,000 should aim for about five funds, diversifying not by management firm but by type of investment.

For instance, Rough recommends a core investment of a growth stock fund, with added money in bond, money market, gold and perhaps international stock mutual funds. He believes the beginning mutual fund investor should find one mutual fund family to stick with.

That brings up the issue of whether it’s worth paying fees to buy mutual funds. The research is clear that, as a group, funds that charge fees do not provide higher returns. Investors who are willing to do their own research should stick primarily to the no-load and low-load list. Investors who want a broker to do the research will need to buy funds with sales charges in the 6% to 8% range.