I have a basket of about 20 stocks I'm interested in investing in. I would like to find a fund that most closely mimics my basket of stocks. Of course, I am assuming the most effective way to invest in all of these companies would be to buy into a mutual fund, rather than buying individual allotments. That may not be the case. -- Kat Reilly

Kat,

Buying a single mutual fund may sound easy, but it may not be your best choice.

I don't know the stocks you want to buy or the details of your personal situation, but you should consider the following issues in making your decision.

Finding a Compatible Fund

Trying to locate a fund that owns all the stocks you want to buy may be your biggest hurdle. If your 20 must-haves all are large-cap growth names, the search may not be as hard. But it will be virtually impossible to find a fund that owns all of these stocks at the same weights in which you want to own them, says Robert Levitt, a financial adviser with

Levitt Novakoff & Co.

in Boca Raton, Fla. Almost any mutual fund will likely own more than just these few names. You might be able to locate a fund that owns them but it may also hold 50 others.

Most investors will buy an actively managed fund to let the manager make the investment decisions. You've already decided what you want. Why pay for the manager's expertise? Even if you do find a fund that owns your stock picks, you have no way of knowing if or when the manager is going to sell them.

Cost

You should consider how much buying these 20 stocks will cost you compared with purchasing an individual fund. By buying the stocks individually, can you get enough diversification at a reasonable price? Do you have enough money to invest that the transaction costs won't dramatically deplete your assets?

Just a few years ago, buying a small basket of stocks might have been prohibitively expensive if you didn't have a big block of money to invest. But that barrier has fallen with the birth and rapid growth of online trading. "Three years ago I would have said, 'Yeah, absolutely buy a mutual fund.' But things are changing so dramatically with online trading," says David Foster, a financial planner with

Foster & Motley

in Cincinnati. Still, if you are trying to buy from a full-service broker, that firm's commissions might consume your assets.

"If your portfolio is large enough, mutual funds are expensive relative to buying individual stocks," says Bruce White, an investment counselor with

Clifford Associates

in Pasadena, Calif. When buying individual stocks, you pay the up-front purchase price but there are no other direct carrying costs. In a mutual fund, you are paying an annual fee to own shares of that portfolio, plus the fund's trading costs come right out of the net asset value, or NAV.

Here is an example: Paying $20 to buy $20,000 worth of one stock is nothing. That is 0.1%. But if you are only investing $200 in one stock and the commission is the same, you are spending 10% up-front in commissions.

Simply, the size of your portfolio drives your choice. It is more efficient to own individual stocks in an larger account, says White. If you have a small portfolio, however, you may be able to own a broader array of stocks and achieve greater diversification via a mutual fund.

A Manager of Your Ilk

You may want to sit back and take a look at the stocks you want to buy to see what they have in common. Try to discern the style of your basket. Do all of these stocks fall into a particular investment approach, such as small-cap growth or large-cap value? Perhaps you are looking for a manager who has your same investment philosophy. That way you wouldn't have to comb through the holdings of dozens of funds, and it would make your search for a fund easier to conduct.

If your 20 favorites all fall within the same industry, say, Internet stocks for example, then a mutual fund may be better for that, says Bruce White. In that situation, "you are really betting on the sector rather than those individual companies. That kind of bet is difficult on your own."

Your Goals and Risk Tolerance

When you are making any investment decision, you should assess your goals, your risk tolerance and how that investment fits into the rest of your plan. Can you afford to put your money into equities?

How many years is the money going to be invested? "If it is less than five years, it does not go in the equity market," says Ron Roge,

R.W. Roge & Co.

in Bohemia, N.Y.

If you have a lower tolerance for risk, you may want to think about a diversified mutual fund. "What is your goal in terms of selecting 20 stocks?" he asks. "You might want to take a look at some of the focused funds out there," which invest in relatively small baskets of stocks.

The Tax Man

Tax concerns inevitably walk a few steps behind any investment decision. With individual stocks, you will likely have more control over your realized capital gains and losses. If you have any specific tax questions, email Tracy Byrnes, our tax columnist, at

taxforum@thestreet.com.

For more on advice on how to choose funds, start by reading Brenda Buttner's

series in our Basics section.

Send your questions and comments to

fundforum@thestreet.com and please include your full name.