Over the years, the stock market has outperformed any other investment. Unlike a mutual fund, however, individual investors frequently can’t purchase a large number of different securities to diversify their investment risk. Buying shares in a mutual fund solves this problem. When you invest in a mutual fund, the diversity of the portfolio reduces the risk of losing your total investment. Selecting the right fund may be difficult, but you can find plenty of online help. Assume that you have $1,000 to invest in a mutual fund. With your investment, you purchase a share of the total assets in the fund. If the share price of the fund is $10 per share, you can purchase 100 shares. The price of each share is the net asset value (NAV). The fund manager calculates the NAV of the mutual fund by adding up the value of the securities in the fund and dividing by the number of outstanding shares.

The NAV increases and decreases as the market fluctuates. The SEC requires that the NAV of each mutual fund be calculated and published for investors at the end of each business day. Here are a few examples of online quote servers that provide mutual fund NAV information:

Lipper (www.lipperweb.com), a wholly owned subsidiary of Reuters, is a global provider of mutual fund information and analysis to fund companies, financial intermediaries, and media organizations. Lipper clients manage more than 95 percent of U.S. fund assets. Lipper tracks 125,000 funds worldwide through its offices in major financial capitals in North America, Europe, and Asia. Research mutual funds and check out the 2004 Lipper Fund Awards for investment ideas.

CNN/Money (money.cnn.com) is affiliated with Cable News Network (CNN) and provides links to financial sites, investment articles, market information, and online research sources. Market information shows the current level, amount of change, and time of the last update for the Dow Jones Industrial Averages, NASDAQ composite, S&P 500, Russell 2000, NYSE Composite, Dow Transports, Dow Utilities, Amex Composite, and S&P Futures. For mutual fund data, click “Get a Quote” and then enter the ticker symbol for your mutual fund or stock. CNNfn provides charts and company snapshots of selected firms.

With more than 80,000 funds worldwide to choose from, selecting a mutual fund has become a complex process — meaning that online screening tools are more important than ever before. When you select your investment criteria, you need to consider several factors:

How long do you plan to own the mutual fund?

How much risk to your principal can you tolerate?

Which mutual fund category meets your personal financial objectives?

Which funds you select depends on your answers to these questions. If you need your money in a year and can’t afford much risk because, for example, you plan to use the money to purchase a house, you want to consider a safe, short-term bond fund. On the other hand, if this money is your retirement fund that you don’t plan to tap into for ten years and you can stomach some ups and downs, you should consider a growth stock fund. Mutual funds basically come in five flavors. Within these five categories are many different types of funds, so you can find a mutual fund that is tailored to your individual needs. Here’s a brief description of the major types of mutual funds:

Equity funds: Mutual funds that primarily include stocks of publicly traded companies. Investing in an equity mutual fund allows investors to quickly create a stock portfolio that matches all their financial objectives. However, a fund can specialize in many different types of companies, which can make selecting the right equity fund (or equity funds) more difficult. Equity funds have a higher risk than money market or bond funds, but they also can offer the highest returns. A stock fund’s net asset value (NAV) can rise and fall quickly over the short term, but, historically, stocks have performed better over the long term than other types of investments. Not all equity (stock) funds are the same. For example, some equity funds specialize in growth or technology stocks.

Bond funds: Mutual funds that usually invest in the debt instruments of corporations and governments. Investors in bond funds are primarily seeking income with some protection of principal. Frequently, the only way an average investor has access to an expensive bond is through a bond mutual fund. Usually, bond funds are conservative and target the payment of dividends. Investors can choose among several types of bond funds. Investmentgrade bond funds usually have less risk than funds with stocks, but they aren’t risk-free. These types of bond funds are usually good investment choices for short-, medium-, and long-term investors who desire low risk. Investment-grade bond funds focus on current income.

Municipal bond funds: Mutual funds that invest in local and state governments. The dividends of municipal bond funds are usually free from federal taxes.

Hybrid funds: Mutual funds that invest in both stocks and bonds. Hybrid funds are structured to achieve predetermined objectives such as rapid growth, matching a market benchmark, or investing in one industry. To sum up, hybrid funds use combinations of securities to meet their investment objectives.

Money market funds: Mutual funds that invest in the short-term debts of corporations and the federal government. Money market funds often invest in Treasury bills, commercial paper, banker’s acceptances, negotiable certificates of deposit (CDs), and short-term debts of U.S. government agencies such as Ginnie Mae (www.ginniemae.gov). Money market funds provide less return and less risk than other types of mutual funds and are good investments for short-term investors. The principal advantage of these funds is their safety. Also, if you ever need to get to your money fast, money market funds may be the type of fund for you. Before you start screening mutual fund candidates, you need to understand some general information: the types of funds you can choose, the fees that mutual fund companies charge, the types of risks associated with mutual funds, and how to read a prospectus.