Mutual funds can be compared with each other in a variety of ways - based on capitalization of the stocks they invest in (small-cap, large-cap, mid-cap), on their investment styles (growth, value, income), based on sectors (High-Tech, Retail, Banking), or region (Euro, US, International) and so on. You can slice and dice this large industry in a variety of ways and attempt to glean some useful data by each form of classification. The best way to compare mutual funds makes use of these classifications, and yet needs to follow a definite methodology to leverage the information in a fashion that is profitable to you.

To start at the basics, the only thing you essentially care about is the growth of your nest egg - in other words, performance of the mutual fund. But performance is the most difficult parameter to judge - since none of us can actually predict the future. We can aim to predict, hopefully with some accuracy, based on a variety of factors - management experience, past performance, associated fees, market conditions and so on - whether the performance of the mutual fund will be as you predicted and expected. As a general rule of thumb, when comparing mutual funds, look at performance over the same time period in the past, factor in longevity of management, associated fees and ensure that you are comparing mutual funds with the same investing styles.

An equally important factor when considering performance is volatility. In general, a mutual fund with heavy losses in one year and gains in other years may show a great average but show poor cumulative aggregate gains. In other words, your portfolio will be poorer overall compared with one that shows a steady gain over time with few, if any, deep losses in any given year.

A third essential factor is the size of the mutual funds being compared. While longevity of the fund and its management are essential factors in predicting mutual fund success, if a mutual fund is too large - say in excess of $20 billion in funds under management - its future returns are necessarily constrained because of the number of winning stock ideas the fund needs in order to provide you with market-beating returns. All things being equal, it is safer to go with the smaller fund.

We have already mentioned longevity of management as a factor to be considered in performance. However, also know your manager(s) - and determine if they have a good feel for the market based on their shareholder letters, other public statements or publications - and go with the one who seems to understand the markets the best, and knows when to go for the kill and when to hold back. Your fund manager(s) is your proxy, so it is best to know him or her like you know your best friend.

With all the above basics covered, you should still not get married to a fund forever. Understand the larger market forces and be with a given fund when the wind is behind your back. This will avoid your having to suffer through long bear markets, and instead have you move from one bull market to the next, choosing the appropriate mutual funds at all times.