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Many find investing to be something of a mystery. Should you buy stocks, bonds, T-bills or real estate? It seems that for every person that gets rich investing in one spot a hundred others lose a fortune. In an age where you are constantly hearing about diversification and asset allocation the emergence of mutual funds seems to have hit an all time high. Promises abound of a fund that’s right for everyone. But how do you know if it’s right for you? Our office constantly fields the question: What is the best investment for my money? The only answer we give them is a definitive: it depends.

Many are already invested in mutual funds through their 401k, IRA’s, brokerage accounts or variable annuities. But how do you know if you’ve chosen correctly? The first order of business is to look at their purpose and the different types available. The basic premise of a mutual fund is that a manager or management team oversees the buying and selling of equities. The idea is to spread capital, supplied by a pool of individual and/or institutional investors, among various equities and thus offer diversification within one investment.

There are literally thousands of funds that cover the spectrum of small, mid, large cap growth and value stock sectors. There are also a host of aggregate, income, short and long-term bond funds available. And then there are many offerings of both in what are considered blended funds. This is when a combination of stocks and bonds are combined in certain ratios to create a portfolio based to be conservative, moderate or aggressive. Choices are further complicated depending on the goal, asset size and management style of the each fund.

In the realm of equity funds lets take American Funds’ flagship, the Growth Fund of America. It has a long-established track record of consistent performance as a large cap growth fund. Their largest holdings include: Google, Microsoft, Lowes and Target. Yet each stock constitutes no more than three percent of the overall portfolio. To put this in perspective the total asset holdings of the fund, as of 2005, are approximately $114.7 billion dollars. This means that investors who do not want to buy individual stock in these companies can purchase shares of this fund and still participate in the market. The main goal of these types of equity funds is to beat the respective index in which they participate. Investing in a quality fund that performs well often makes these suitable for those that are more comfortable with risk. This is an example of an actively managed fund whose performance helps to justify the expenses associated with the fund and others like it. The main appeal is management’s track record of good returns relative to the index. For this reason, more aggressive investors may be willing to pay the related fees for the additional gains.

That being said there are index funds available. For example, stock index funds look only to mirror returns of a specified benchmark or index. The goal is to match it by buying representative amounts of each stock in the index. This avoids the expense of paying a manager to try to boost performance by choosing their own stocks or implementing their own strategies. Rather, index funds just seek to come as close as possible to equaling that market’s index. Take the example of the first index fund, the Vanguard S