With billions of dollars pouring into mutual funds over the last several months, it’s important to analyze what to look for when analyzing a mutual fund. Since there are over 10,000 mutual funds to choose from, how can the individual investor decide on what’s appropriate for him/her?

With the risk of sounding self-serving, professional advice should be sought.

In an abbreviated format, here is what Reedy Asset Management looks for when updating our list of approved mutual funds.

1. Manager Tenure

The mutual fund manager or managers is/are directly responsible for the performance of their funds. They make the buy and sell decisions, hear analyst research reports, and determine the turnover of the fund. If the manager is new to the fund, the investor does not have a proven track record to gauge the quality of the fund. A fund may have an outstanding five and ten year return but it isn’t relevant if the manager has only been there for three months.

2. Long Term Track Record

Always look for a fund that has at least a strong three-year track record compared to its established benchmark. Don’t invest in a fund because it beat its benchmark last month or even last year. It’s better to see how a fund performs over the course of a market cycle, preferably five years.

3. Expense Ratio

The expense ratio is the overall expenses of the fund that will include management fees and 12b-1 fees (marketing fees). A typical stock fund will have fees ranging from .8 to 1.5% annually. This means that if you were to invest $100,000 you could expect to be charged from $800 to $1500 a year. Proceed with caution here. The Kaufmann fund, on my approved list, has a relatively high expense ratio of 1.93%. However, this fund has outpaced the S&P 500 by an average of 7% a year for the last ten years net of fees. Sometimes the extra charge is more than worth the extra expense. I can say that Reedy Asset Management would have to find quite an exceptional fund to pay for a front or back end load fund. There are currently no load funds on my Recommended List.

4. Adherence to Investment Objective

Not all funds are geared to beat the S&P 500. Some funds are oriented towards investors who take a more conservative approach and will sacrifice price appreciation for income and/or conservation of principle. It is up to the mutual fund to set the rules and objectives for the fund and for the fund manager to follow them. Remember Jeff Vinik, the manager of the 50 billion dollar Fidelity Magellan fund. He was ousted by Fidelity for not sticking to the game plan (He was loaded up with bonds in a stock mutual fund). This becomes especially important with my clients who have their portfolio specifically tailored for their individual risk tolerances.

5. Portfolio Turnover

This is the percentage of the portfolio that is sold during the year. For example, if a fund had a turnover of 30%, and the number of positions in the portfolio stayed constant, 30% of the positions in the portfolio would have been sold during the year. Why does this matter? Because if the client has a taxable account (outside of an IRA, Keogh, 401k, etc) then the investor must pay taxes based on any capital gains of the portfolio that is created by turnover.

6. Risk-Adjusted Performance

This is a measure of a fund's volatility within its asset class stacked up against its performance. A fund may have a higher total return but it took more chances to attain the better return. This is also a measure of volatility. This is a measure put out by Morningstar; an objective stand-alone research company devoted to mutual fund reporting.

Although these are not all of the determinants of a good mutual fund, rest assured that all of these criteria have been researched before Reedy Asset Management approves a mutual fund.

Individual investors have overwhelmingly leaned toward mutual funds in recent years as their way of participating in the stock market. But in the wake of increasingly low online trading costs and lower capital gains tax rates, some experts are arguing that investors should seriously consider investing in individual stocks. Which is right for you? Or should you do both? As with any investing question, the answer depends on your individual circumstances. Here are some key points to consider.

Dollar amount of your portfolio. Regardless of the other factors, if you don't have much money with which to invest, mutual funds are the only practical way to construct a well-diversified portfolio. You may need to buy at least a dozen very different stocks (some experts advocate 50 stocks or more) to diversify adequately, but buying that many stocks takes some dollars. Diversified mutual funds often own 100 or more stocks and minimum investment amounts are reasonable low. Another option is to invest in the growing number of mutual funds that themselves concentrate on only 12 to 15 stocks.

Desire and time. Do you have the time and the interest to research all those individual stocks? The Internet makes it much easier for investors to dig up information on stocks than it once was, but it's still a lot of work. Although there are thousands of stock mutual funds, it's usually easier to narrow down funds than individual stocks.

Dollar cost averaging. If you invest regularly each month-particularly small amounts such as $25 or $100-mutual funds are probably the way to go. However, some companies allow you to buy their stock directly from them and to buy additional shares each month, along with reinvesting your dividends.

Performance and risk. There's no question that an individual stock can far outperform a mutual fund's return, simply because a fund brings its return down by owning so many stocks. Of course, that's one of the benefits of a fund compared with owning a stock-less volatility than individual stocks. One stinker in a small portfolio of individual stocks can really drag down overall performance.

Expenses. With online trading costs dropping to around $10 and trades through discount brokers around $20, the impact of the single most expensive aspect of trading individual stocks-transaction costs-is being dramatically lessened. At the same time, the expense ratios for some stock mutual funds-the portion of your investment that annually goes to transactions, marketing, and administration, etc.-have risen. Investment experts caution, however, not to let low online trading costs tempt you into trading too often. They feel you're better off over the long term if you buy and hold instead of trying to time the market.

Control. Lower capital gains rates (20 percent maximum if the investment is held at least 18 months) make it more advantageous to hold on to stocks longer, particularly the higher your income-tax bracket. With individual stocks, you can take your gains and losses when you want to. Short of simply selling your fund shares, you can't control when your mutual fund buys or sells stocks (a high portfolio turnover means more short-term capital gains subject to ordinary income taxes). Keep in mind that some mutual funds, especially index funds and value-oriented large cap funds, hold on to stocks longer, lowering the tax impact.

International investing. Many Certified Financial Planner professionals recommend that some portion of most portfolios (say, 5 to 25 percent) be invested overseas. However, picking and buying foreign stocks is much too difficult a task for most individual investors. It's far easier to buy into one or more foreign mutual funds.

Instead of choosing either/or, you may want to consider having part of your portfolio in mutual funds and part in individual stocks. The other point to keep in mind is your overall financial goals. For example, your mutual funds may already be returning enough for you to meet your various goals-college education, retirement, down payment on a home, etc. Why jump into stocks (and incur tax on the sale of any profitable fund shares) just so you might earn yet a higher return-but at a considerably higher risks?