Mutual funds have become a dominant and the most popular investment vehicle in the recent years, and there is a good reason why. Investing is something between art and science, and one has to spend significant time to learn enough information and skills to be able to make informed financial decisions and build a well performing portfolio. Mutual funds allow regular people to have their portfolios built and managed by the experts who spend their entire lives studying investments, earning advanced degrees and building models.

I may consider myself an intelligent investor who has spent some time learning about investments and earning a couple of designations, but I would rather have some PhD who manages money for living do it for me than take the risk by trying to do it myself, specially when this can be done at a very low cost. And this is exactly what mutual funds enable us to do.

Simply put, a mutual fund is a company that buys stocks, bonds, cash equivalents, derivatives and other types of assets and sells its own shares to regular individual investors who now can indirectly own a highly diversified portfolio, even if it’s only a few hundred dollars. People with low income and few extra dollars available can have access to asset classes which used to be available only to the affluent. A mutual fund manager makes sure that the investment allocation is consistent with the stated investment objectives of the fund by constantly monitoring the investment performance of different asset classes and re-balancing the mix whenever necessary. The individual investor doesn’t have to worry about it, and the cost is not too high.

A fund usually charges a fee for this service commonly referred to as a Management Expense Ratio (MER) which can be anywhere between 1.5% and 2.5%. Sounds easy so far. But it gets difficult when you try to choose a fund. There are more funds available on the market than brands of canned beans in a typical supermarket. So how do we choose the right one in this mind bugling variety? The first recommendation would be to seek professional advice. But investment advisors are often motivated by commissions and not always have your best interest in mind. Therefore, it is a good idea to gain some basic investment knowledge. At the very least, it will enable you to see if your advisor is looking after your best interest or his wallet.

Basically, all mutual funds can be divided into three categories – conservative, moderate and aggressive. Aggressive funds have larger stock components, while conservatives are heavy on cash equivalents and bonds. Aggressive funds provide the highest long term return, while conservative are safer and less volatile. Generally, you want to invest in more aggressive funds if you have longer time horizon – ten years or more. But stay on the conservative side if you are close to retirement or trying to save for a major purchase. And if you like to gamble, specialty mutual funds are for you. You can invest in gold, oil, high tech companies, and many other crazy things. Your personal risk tolerance and other circumstances should always be taken into consideration.

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.