MUTUAL FUNDS have become the most popular way for investors these days to invest their money. Funds have become a huge business, with high-powered marketing and convenience features designed to make investing seem easy, painless and safe.

But too many investors are much too casual about choosing the funds that they rely on for the financial security of themselves and their families. If it’s true that knowledge is power, the following steps will help you become a more effective investor, and certainly a more knowledgeable one.

All investment recommendations involve mutual funds, and investors will get the most from their funds if they maintain a strictly disciplined approach to creating and managing a fund portfolio in order to accomplish some clearly defined goals. Many investors short-change themselves by choosing funds on the basis of too little information. Sometimes they discover crucial information only after it is too late to be of value to them. If you’re going to invest in actively managed mutual funds, the following list will help you do so in an educated manner. If you gather the information that’s listed here, you’ll be far, far ahead of most investors. And when you put it all together, you’ll have a pretty good idea of where a particular fund fits into the investing universe and what, if anything, makes it stand out from the crowd.

An essential preliminary topic is asset allocation, your choices among the various types of assets you can put in a portfolio. Far too important to be on any list, asset allocation is the most important decision, or set of decisions, that you as an investor will make.

* In general I believe most investors should have some fixed income funds and some equity funds. Equity funds (ones that own stocks) provide growth and a chance to beat inflation. Fixed income funds (ones that own bonds) provide stability to guard a portfolio during times when equities are falling. (Of course, they also are an excellent way to produce income for retirees.)

* By owning more equities, you increase your level of risk and your expected returns. By owning more fixed-income funds, you decrease your risk but also decrease your expected returns.

* How you allocate the fixed-income part of your portfolio matters just as much as how you handle the equity part. You’ll get the best balance of yield and stability if you put your fixed-income rupees in short-term bond funds.

* For a well balanced portfolio, I advocate having some big stocks and some small stocks. Within each of those categories, I also recommend including some value stocks and some growth stocks.

In real life, most investors use actively managed funds. If you’re one of them, the following guidelines will help you make sure those funds do the most for you:

1. Know the fund’s stated objective and how the fund plans to achieve it. Every fund’s prospectus and marketing literature includes a written objective. This is an essential place to start. Regardless of everything else, there is an important difference between a fund that says it’s after maximum growth and one that says its objective is growth and income. However, the stated objective is not always very useful. Most funds state their objectives in very broad terms, such as “achieving a reasonable balance of growth and income for long-term investors.” That may sound good, but it’s too vague to tell you much. It’s sort of like describing a political candidate as a good person. More important is how the fund attempts to achieve its objective. Primarily, that means: What is in the portfolio? How are those assets managed? If you go through the following checklist of information, you’ll be able to answer those questions pretty well.

2.The fund’s “style” of investing as it is independently measured, not just as it is described in the fund’s literature.

3. Whether the fund fits - or doesn’t fit - into your overall plan. That’s primarily going to be a function of the fund’s investment style. If you base your search for funds on recent performance, the chances are good that most or all of the funds you investigate will start to look alike, because they’ll be investing in the same type of assets. That’s a trap that could leave you without the diversification you need. The best approach is to start with an asset allocation plan and then look for funds that fit into it.

4. If the fund charges a front-end load. If you are savvy enough to read this, you should be savvy enough to avoid paying a sales charge (that’s what a load is). The load may not seem very expensive, but a charge of Rs400 on Rs 10,000 investment means that only Rs9,600 of your money goes to work for you (instead of your full Rs10,000 in a no-load fund). That difference is much larger than you probably think. It may end up with thousands figure if you cumulatively compound the Rs400 figure over a several years period.It’s a rare case when a load fund doesn’t have a no-load equivalent.

5. If the fund charges a back-end load. This too is a sales charge which the fund has tried to disguise by imposing it when shareholders sell instead of when they buy. A typical back-end load is calculated as a percentage of any withdrawal, with the percentage declining gradually to discourage short-term investments. On the surface, it appears that the back-end load doesn’t affect you unless you sell your shares early.

6. The fund’s expense ratio. It’s usually calculated as a percentage of assets on an annual basis. If everything else about two funds equal, the one with the lower expense ratio is preferable. However, that holds true only among comparable funds. Stock funds will have higher expenses than bond funds; bond funds will have higher expenses than money market funds.

7. The turnover ratio for the fund’s portfolio. This is a measure of how actively a fund manages its investments and how much buying and selling goes on. A ratio of 150 per cent means that a fund with Rs80 million of assets sold Rs120 million worth of investments in 12 months. Turnover ratios span a very wide range, from the single digits in some funds to ratios over 500 per cent for aggressive growth funds. A high or low turnover ratio isn’t good or bad in itself. Some funds’ styles call for frequent selling, others for very low activity. But when other things are equal, a low turnover ratio means lower expenses for trading.

8.How long the fund has been in the hands of its current manager. You have undoubtedly examined the fund’s track record and believe it has something to offer you. But was the current manager the one who compiled that record? Has the fund been in the same hands for a long time (a comforting sign of stability), or has it gone through half a dozen managers in the last decade (a possible sign the fund is adrift)?

9. How much of the fund’s portfolio is concentrated in the asset type you are looking for. If your investing plan calls for putting a specific part of your portfolio in stocks, you don’t want it in a fund that’s 20 percent invested in bonds.

10. How the fund treats its investors. Is the literature clear and comprehensible? How are you treated when you phone with questions or to make a change in your account information? Are the phone representatives knowledgeable, courteous and available without a long wait on hold? Do you get your questions answered the first time, or does it take several tries to get something right? The more comfortable you are with the organization, the more likely you’ll be to stick with your investment even when it gets uncomfortable.

11. What conveniences you need and make sure the fund offers them. These might include telephone exchange privileges, automatic investments via electronic withdrawals from your bank account and automatic payments made to you or somebody else from your fund.

12. What other funds are available in the same mutual fund family. If you find a superb fund that meets your needs exactly, you shouldn’t pass it up just because you don’t like the other funds in its family. But moving money among your funds, for instance for annual rebalancing or market timing, is certainly more convenient within a single family of funds.

13. How diversified the fund’s portfolio is. Because it reduces risk, diversification is one of the major benefits of mutual fund investing. You’ll find the greatest diversification in funds that include several tens of stocks. On the other end of the scale, some actively managed funds focus on relatively few stocks, counting on a combination of their managers’ stock-picking skills and luck to beat the market. But focused funds are much riskier than widely diversified funds.

14.The fund’s top 10 portfolio holdings. You can get these from the fund’s own periodic reports and sometimes by calling the fund company to request the information. Are these companies that you would own in your personal portfolio? Do they seem consistent with the fund’s stated philosophy and style? (For instance, a small-cap fund should not generally be loaded up with Lever Brothers, PSO and Shell shares.) If you have other mutual funds, compare the top 10 portfolio holdings for each fund. You may find out that you are getting less diversification than you thought, if a handful of the same stocks wind up on just about every fund’s list of top holdings.

15.The size of the fund, in total assets. You can’t judge a fund just by its size, but you can be wary of very large funds and of those that are growing very rapidly. When a fund has outstanding performance for a year or so, it often gets so much attention that new money starts to pour in at a frantic pace. The fund manager then must put all that cash to work by buying more stocks - whether or not the manager thinks the timing is right. There are few hard-and-fast rules about fund size. But the problems are particularly easy to notice in small-cap stock funds. By definition, such a fund buys companies that are relatively small. No investor, including a mutual fund, can buy billions of rupees of stock in those companies without driving up the prices to the point where they could cease to be bargains. That means the manager of a small-cap fund that’s growing fast must look farther and farther for bargains. At some point, rapid growth and large size become counter-productive.

16. How the fund performed in the worst market periods lasting one, three and five years. Look for funds that did the best job of preserving their capital during the bad times.

17. Whether the fund manager has a defensive strategy to protect shareholders in case of a market downturn. If so, know what that strategy is. Will the manager sell equities (or bonds, in the case of a bond fund) in order to retreat to the safety of cash? Just because the prospectus says a fund may deviate from its primary asset class, it won’t necessarily happen. Many, perhaps most, funds have no formal defensive strategy, intending to remain fully committed to the asset classes in which they specialize regardless of what happens in the market.