After purchasing a mutual fund or investing money in a number of funds, many people wonder how they should judge whether or not their money manager is doing a good job. How do you evaluate a mutual fund and its manager? How do you know you're money's doing what it should and gaining as much as it can based on your investment needs? There are a few key points to look at when evaluating fund managers and their funds.

In general, a mutual fund is designed to beat the markets, otherwise, people would simply invest in an index fund. If you're going to pay a fund manager to invest your money, they should do better than the overall market, say the S&P 500 Index. This said, it's not that easy to achieve. An average actively managed stock mutual fund returns approximately 2% less per year than the stock market returns. Researching and comparing various mutual funds' returns to an appropriate index shows that it's rare that they beat the market consistently. If your fund consistently beats the market over time, then stick with it.

While experience isn't a 100% accurate predictor of future performance, it doesn't hurt to look to see how well or poorly a fund manager has done in the past, and where and how long they have managed money before their current fund. In general, fund managers who have been managing the same fund or same style for at least five years on their own tend to do win out. In general, the longer the tenure, the better the performance, and a consistency in results.

Does the fund manager invest in his or her own fund? If you want to know if your manager believes his fund is a good investment, find out how much he's investing. The information is available to the public via the Securities and Exchange Commission. http://www.sec.gov. Some funds also include this information in the fund's prospectus.

Does the fund manager stay true to the fund's investment objective? Read the prospectus and find out what it's buying and how in-line that is with the fund's goals. A good fun stays on target, despite what the general market is doing.

A lot of people utilize rankings to evaluate funds. Don't put too much rate in rankings. Many companies and websites make a business in ranking fund performance, telling which funds are at the top of their mark. The problem is that most funds have a very hard time staying on the top. In the past five years, only 13.2% of large-cap funds, 9.9% of mid-cap funds, and 10% of small-cap funds were able to remain among the top half of funds for the five years. The top 25 percent ranking proved even more daunting a challenge, with only 3% of large-cap and 2.5% of mid-cap funds staying in that zone for five straight years. No small-cap funds could maintain a top 25 percent ranking for the entire period. It's best not to chase the hot funds, because their performance usually slips.

While fund performance is an important evaluation tool, fund costs also affect returns. It's important to look at how much it costs to buy a fund and then how much it costs to run the fund.

A no-load fund is purchased directly from a mutual fund company, and no sales or redemption fee is charged, helping performance, relative to load funds.

Load funds require the buyer to pay a sales commission, which goes to the seller of the mutual fund shares. Typically, for most load funds, there exists a similar no-load or low-load mutual fund. The load usually eats into gains, hurting overall performance.

A fund's expense ratio is the percentage of total assets it spends on administrative costs such as marketing, accounting, recordkeeping, mailings, customer service line, and more. These expenses very from fund to fund: some managers run a tight ship, others spend lavishly. For actively managed funds, rather than an index fund, the average expense ratio is 1.5%. With index funds, where less is generally more, the expense ratio is typically around 0.25% and lower.

A fund's turnover ratio is the best indicator of how much buying and selling goes on within a fund. Turnover ratio is the percentage of a fund's assets that have changed over the course of a given time period, usually a year. The more a fund buys and sells stocks, the higher the turnover ratio. Turnover ratio for a mutual fund is calculated by dividing the average assets during the period by the lesser of the value of purchases and the value of sales during the same period. Mutual funds with higher turnover ratios tend to have higher expenses.

A few good places to research mutual fund types and their performance:

Morningstar

http://www.morningstar.com

Mutual Fund Investor's Center

http://www.mfea.com

Kiplinger

http://www.kiplinger.com

Lipper

http://www.lipper.com

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