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Factors to Consider when Choosing Funds

Now that you’ve chosen a product, it’s time to pick funds (also known as underlying investment options).

So, how do funds work within the product you bought? If you imagine that the financial product you’ve chosen is a vehicle, then the funds you select are the engine. The funds drive investment performance. And the engine, like a car, should fit your lifestyle. For example, if you buy a sedan you don’t expect sports car performance.

The underlying investment options mentioned above are only available as investment options in variable annuity contracts and variable life insurance policies issued by life insurance companies. They are not offered or made available directly to the general public. These portfolios contain different investments than similarly named mutual funds offered by the money manager. Investment results may result in higher or lower returns.

How to get started

Before you choose funds (or make investment decisions in general), you need to prioritize your goals, understand how much risk you’re willing to take with your money and anticipate how much time your money has to grow.

Know your goals

This is the fun part. Sit back, close your eyes and imagine your retirement dream. Does it involve exotic vacations or indulging in a new hobby closer to home? What about other goals, like funding a child’s education?

Risk tolerance

So what kind of investor are you − conservative, moderate or aggressive? Your risk tolerance reflects your willingness to accept some volatility in the rate of return of your investments in exchange for a chance for greater potential growth. As a general rule, if you expect a higher rate of return, you should be willing to accept a higher degree of risk. If you pick less risky investments, the trade off may be less growth potential.

Academic and industry studies support this relationship. For examples, stocks (a riskier investment) historically offer greater potential rewards than bonds (a safer investment). Many factors go into determining your risk tolerance, including your investment time horizon.

Evaluate your time horizon

How much time do you have between when you invest and when you plan to retire? When it comes to investing, time is on your side for a couple reasons. For one thing, many investments offer tax-deferred growth. That means you don’t have to pay taxes until you make a withdrawal. So, not only does your investment have the chance to grow, but so does the money you would have paid in taxes along the way. Keep in mind that are taxed as ordinary income when withdrawn and there is a 10% federal tax penalty on withdrawals before age 591/2.

Over the course of time, long-term investors can take advantage of potential positive market growth (or fixed-interest growth, for that matter) and wait for rebounds after losses. Besides, historically, long-term investors typically have been rewarded with positive growth over time. Keep in mind that investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved.

Consider fund characteristics

Morningstar styleboxes give a quick view of the characteristics of each fund. The fund’s prospectus, information from the fund company’s website or your investment professional can also help you evaluate how a fund lines up with your investment style.

Data is provided by Morningstar^® unless otherwise noted. © 2007 Morningstar, Inc. All rights reserved. The Morningstar information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

An important part of investing is to select a well balanced spectrum of funds that represent your investment strategy and retirement objective. Ask your investment professional for information about the funds you are considering. And don’t ignore these factors as you evaluate funds:

Evaluate the funds

An important part of investing is to select a well balanced spectrum of funds that represent your investment strategy and retirement objective. Ask your investment professional for information about the funds you are considering. And don’t ignore these factors as you evaluate funds:

1. Past performance

Just because a fund behaved a certain way in the past doesn’t necessarily mean it will continue to act the same way forever. It can, however, give you an idea of how consistent the fund has been in the past. By comparing its long-term performance − over the course of five to 10 years, for example, can indicate how true a fund stays true to its investment objective.

2. Cost

As with all things in life, you don’t want to pay too much. The same goes for your funds. All other things being equal, funds that cost more may return less. Ask your investment professional to tell you about all of the fees and expenses that may be charged for each fund, including sales charges, the expenses ratio, 12b-1 fees and taxes.

3. Diversity of investments

Fund managers select companies that they believe will provide a good return. But no one fund manager has all the answers. They may specialize in a particular market or take a different approach. Some invest in more stable companies, for example, while others seek out smaller, faster-growing companies.

Always check the objective of the mutual fund and read the fund's prospectus to make sure it’s consistent with your goals. A good place to get independent information on a mutual fund, including its performance history is through Morningstar, an independent fund rating service. Morningstar materials can be found on the internet and at your local library.