The shrewd investor balances cost, risk and performance when choosing a mutual fund.

First, determine your financial goals. That will point the way to the type of fund that’s right for you. Each comes with tradeoffs.

For capital growth, consider a fund that invests heavily in stocks. But keep in mind that the stock market goes up and down–and so will the value of your fund. The prospect of high returns comes wrapped in risk.

A bond fund will provide a steady stream of income. There can be fluctuations, but fixed-income investments are generally steadier than stocks and returns are often lower.

Investors seeking to preserve their principal should take a long look at money market funds. Such funds are stable but typically generate less income than bond or growth funds. However, a short-term bond fund may generate more income without greatly increasing the risk.

Look for a fund that offers dividend distributions if you’re after growth and income. Such funds typically invest in both stocks and bonds. In general, higher short-term income means lower long-term growth.

Second, take a look at the fund companies. Many will ballyhoo past performance, but keep in mind that history isn’t necessarily indicative of future returns. The reason is simple: Hot funds, especially those investing in narrow sectors, can quickly go cold, the market can turn, a money manager can move on or have just a bad quarter.

Read the prospectus and make sure the fund company is disciplined and sticks to its stated strategy for each fund. Chasing The Next Big Thing may produce a short-term pop, but won’t generate steady, long-term returns.

If your fund will be actively managed, check the experience and performance of the managers. You don’t want to turn your money over to a kid or a proven loser. Some companies use their smaller funds as a training ground for up-and-comers. If so, wish ‘em well but say, “Not with my money.”

Third, check the fund’s costs. The manager will control the fund’s performance, but investors can control the costs by selecting a fund with low costs or an index fund with even lower costs. The fees come out of your pocket so shop around.

Give index funds a long look. These funds track major indexes such as the S&P 500 and aren’t actively managed. This means lower fees.

Check the expense ratio, sales fees, trading costs. Also check 12b-1 fees, or a fee charged to cover the fund’s marketing, distribution and sales costs. Yup, all that comes out of your pocket. Use our Fund Expense Calculator to see how big a hole it can leave.

And if you are not sure what those terms mean, see our Plain-English Primer for definitions.

Review the fund’s volatility quarterly or annually. The net asset value of a stock or bond fund routinely fluctuates with the market, but most investors want to avoid manic swings. To avoid a stomach-churning roller-coaster ride, compare the fund’s best years with its worst. If the ride is too wild, consider other funds.

Compare the fund’s performance to market benchmarks such as the S&P 500 Index to determine volatility. In the trade, this is called the beta–a statistical measure of volatility. Keep in mind that a volatile fund can have a low beta score if the benchmark is highly volatile.

Also check the R-squared, a measure of how the fund’s returns track its benchmark index. If the fund precisely tracks an index, its R-squared would be 1.00, or 100%. A fund that has no relationship to the index would be 0. A high R-squared rating means the fund’s performance can be explained by the index’s performance. If the R-squared score is low, the returns can be explained by the fund manager’s market insight and trading decisions.

After you’ve determined the type of fund, take a look at several funds in that sector. Compare total returns, annual and quarterly returns. Check the fund’s stated goal to see if it measured up.

Then check the fund against its benchmark index. For all stocks, check the Wilshire 5000 Total Market Index; large-cap U.S. equities, S&P 500 Index; small- and mid-cap domestic equities, Wilshire 4500 Completion Index; small-cap, Russell 2000 Index; U.S. bonds, Lehman Brothers Aggregate Bond Index. Lehman also indexes for short, intermediate, long-term and high-yield bonds.

Be sure to check after-tax returns because what counts is the money in your pocket after fees and taxes.

Remember that diversification is a key to long-term success. For example, consider diversifying by including value and growth stocks, large- and mid-cap stocks. Diversification should smooth out the bumps in the market and will reduce the urge to chase hot funds. But don’t dilute your opportunity for solid gains by putting a little money in a large number of funds across a broad range of sectors.

You can’t put your investments on automatic pilot. Keep a record of your fund’s performance and costs. You don’t want to bounce from one fund to another on a whim, but if a fund underperforms or if its costs get out of line, dump it for a better candidate with more reasonable fees.

And time and market movements may change the balance of your fund portfolio between different sorts of funds. Review it at least once a year to make sure it still matches your goals.

Forbes.com’s tear sheets covering thousands of funds have most of the information you will need, from the basics like the manager’s name, the fund’s main holdings and performance record to our propriety ratings for a fund’s tax efficiency, cost efficiency, and riskiness, as well as our A through F grade of its performance in both up and down markets. Type a fund’s ticker symbol into the Quotes & Research box on most any page of the site to go directly to the fund’s tear sheet. (Try VFINX to see an example.)

Never lose sight of this simple fact: This is your money and your future, so get it right.