Five Steps to Picking the Right Fund

The best way to combat tax inefficiency is to search for funds with low turnover. Turnover is a measure of trading activity during the previous year, expressed as a percentage of the average total assets of the fund. For example, a turnover rate of 25% means that the value of the stocks traded represents a quarter of the assets of the fund.

If a fund manager is an active trader, then you should consider putting that fund in a 401(k) or another type of tax-deferred account.

5. Monitor Manager Tenure

It's quick and easy to compare costs, performance and turnover. Those are quantitative guideposts. Judging the fund manager on a qualitative basis is harder, especially because few people ever actually meet the person handling their money.

Two facts that offer a bit of insight into a manager's nature are the length of his tenure with the fund and whether he has money invested in it -- facts that can be found in the fund's prospectus.

Schultz says, "I like little boutique firms where the managers have their own money in the fund alongside their investors. Having their name and money in the fund makes them more passionate."

Some investors might not like fund managers who hop around, but Bloom says that fund-hopping is more of a problem for smaller funds than big ones such as Fidelity and T. Rowe Price that boast very deep benches.

Of course, different advisers employ personal tests, too. Rikoon's final screen for fund managers? "I like gray hair on a manager," he says. "I have no use for young people who have made no mistakes."

To view Gregg Greenberg's video presentation of how to pick a fund, click here for TheStreet.com's StreetWatch.