If you don’t want to worry about buying individual stocks to build a diversified portfolio, mutual funds can be an easy way to diversify. However, not all mutual funds are diversified. Just because your employer includes a mutual fund on your list of available investments in your 401(k), for example, doesn’t mean that it’s a good place to put your retirement money. In fact, I heard an interview on NPR once with a financial planner who said one company’s retirement plan that she had looked at had 10 funds listed. Of those 10, 3 were very high-risk funds, so an employee who just picked a fund at random might end up with their money in a more risky investment than they bargained for. (I couldn’t find the interview online, or I’d give you the link).

Don’t make the mistake of picking a fund at random! It’s not hard to do a little research, and it won’t take you much time either.

Before deciding on any mutual fund, take a quick look at its prospectus. At the very least, read the fund’s objective to determine if the fund manager’s goals sound similar to yours. For example, T. Rowe Price offers a Global Technology Fund, which invests in firms that “are expected to generate a majority of their revenues from the development, advancement, and use of technology”. This is great if you’re hoping for big returns, but it’s a very risky place to keep your retirement fund.

On the other hand, T. Rowe Price offers retirement funds specific to the year in which you are planning to retire. I think that this is pretty cool, because presumably the fund manager will change their investment strategy appropriately as it gets closer the the retirement year, so you won’t have to worry about moving your money to different accounts.

Of course, there are many other factors to consider when choosing a mutual fund, but reading the prospectus is a good place to start!

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