Before you start looking at which funds to invest in it is imperative to assess your own investment goals and risk tolerance. Start with a clear objective and understand how you will react if your investment depreciates, by doing this you are less likely to purchase a fund that does not meet your needs.

One has to keep in mind that the funds that have the potential to give the highest returns have the greatest potential for losses. Hence, it is important to look for funds that are appropriate for both your goals and your investment temperament. Don't be taken in by returns alone —there's nothing wrong with taking a conservative investment approach.

You probably won't make as much money as investors who take a more aggressive stance, but to reap the benefits of such an approach, you must be willing to hang tough through some shaky times. The risk/return spectrum of mutual funds starts with the money market funds and tops out with sector specific funds. We have put together the top performing funds based on the risk and return in Top Funds.

Once you have identified the segment you are comfortable with the next step is to look for performance. See how a fund has performed over a period of time. Don’t buy a fund just because it has had a good run up recently, which mat not be sustainable. Evaluating performance over a period of time will give you a sense of how a fund performs under varying economic and market conditions and whether its performance has been consistent.

You can pay attention to the performance in certain period or quarters in which the fund suffered losses. Then think about how you'd react if that performance were repeated. If such losses would cause you to sell the investment, it's probably not the fund for you.