Overwhelmed by fund choices? Relax, help is here

For individual investors who do not use a financial advisor, selecting the right funds to invest in can be a major source of frustration. With upwards of 9,000 open-end mutual funds, almost 600 closed-end funds and more than 1,400 exchange-traded funds, according to data from the Investment Company Institute, the sheer volume of choices now available in the marketplace is intimidating.

It doesn't have to be.

Before you start looking at all the products on the shelf, take a good look at yourself and figure out what your goals are with the money you're investing, what your expectations for returns and your tolerances for risk are, and how involved you want to be in managing the assets.

If you don't have answers to those questions, the funds you choose likely won't fulfill your expectations.

"The first step [to fund selection] is to understand your goals with investing," said Russel Kinnel, director of fund research at Morningstar. "You need to start with a plan for building a diversified portfolio."

Specific questions to consider before looking for solutions include the following:

1. How long is the money available to stay invested before you need to access it? If you anticipate needing the money for your kids' education in 10 years or to buy a house at some future date, your tolerance for losses may be lower.
2. Do you need income from the assets? If you're relying on the investments for income, fixed-income funds or equity funds that invest in high dividend–paying stocks may be the best option.
3. Are the funds in a taxable or non-taxable account? If income generated from the funds is taxable, the relative value of capital gains increases versus interest and dividend income that is taxed at a higher rate. Exchange-traded funds are also more tax-efficient than mutual funds, as capital gains taxes on an ETF are only due when the investment is sold, as opposed to mutual funds, which must distribute capital gains and losses on the investments they sell during the year.

Once you have a clear idea of what your objectives and financial constraints are with the investment, you can address more fund-specific factors to winnow down the universe of fund options.

Diversification is the main reason to invest in a fund in the first place, but investors also need to diversify across asset classes. Although owning a fund that invests in large-cap U.S. stocks is less risky than owning the individual stocks in the portfolio, the fund carries the risk of the asset class as a whole.

Most financial advisors suggest that, in order to reduce the volatility of returns, investors need to have exposure to several asset classes that typically won't move in tandem.

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"If you get a mix of asset classes, your ride will be smoother," said Heather Pelant, head of personal investing in BlackRock's U.S. Wealth Advisory Business. "You want some investments that zig while others zag."

She added, "You should always not like some part of your portfolio."

Understanding your tolerance for volatility and short-term losses is key to establishing the right mix of assets. Target-date funds are a simple and increasingly popular option. They invest in a mix of stocks and bonds, with the proportion of each depending on a "target" date for retirement.

As the retirement target date approaches, the portfolio tilts further toward more conservative bond investments. If you want more flexibility with your funds, the stock/bond proportions of targetdate funds that match your age are at least a rough indicator of the asset mix you might consider.

Read MoreIns, outs of target-date funds

For investors who want exposure to a broader range of assets without having to actively manage the positions, there are all-in-one funds available. BlackRock, for example, offers four core "all asset class" ETFs that invest in a wide range of asset classes across different markets and countries.

"They are a one-stop shop for people who don't want to put the pieces together," Pelant said.

Costs are arguably the most important consideration for investors in choosing investment funds.

"In the short term, the impact of costs may appear modest, but over the long run, investment costs become immensely damaging to an investor's standard of living," wrote John "Jack" Bogle, founder of Vanguard Group and a pioneer of low-cost passively managed index funds, in a Financial Analysts Journal article last year (to view the article, click here).

Read MoreHow much is that mutual fund costing?

The compounding of costs from annual fund management fees, as well as distribution and trading costs passed on to investors, has a very big effect on the total returns that investors experience.

"The good part of the huge universe of fund options is that investors can use screens and be very picky with their selections," said Kinnel at Morningstar, who noted that fund costs are the first criteria he considers in developing Morningstar fund ratings.

Information on fund costs is readily available from sources such as Morningstar, as well as the websites of most large investment companies.

Another key consideration for individual investors is whether to invest in actively managed funds—typically, mutual funds—or passively managed funds that seek to track the return of a market index.

Since the financial crisis, passive investing strategies have significantly outperformed the average active-management strategy. And given that the costs of index mutual funds and particularly ETFs that now track an amazingly diverse range of indices are significantly lower than actively managed funds, assets continue to flow to passive funds. Total assets in ETFs passed $2 trillion this year.

Read MoreIs active or passive investing good for you?

The actively managed funds, nevertheless, still represent a much larger share of the market, and active strategies may arguably add more value in a more volatile investment environment. If you have confidence in a manager and his or her investing strategy, the higher cost may be worth it.

"Both active and passive strategies can get you to the goals you have," Kinnel said.

For large and liquid markets such as U.S. large-cap stocks, low-cost index funds are increasingly popular with investors. For other asset classes, active management may make more sense, suggested Kinnel.

"Areas like high-yield bonds, municipal bonds and emerging markets are tougher to index, and investors may be better off with active managers," he said.

Either way, it's key that investors use the ample resources now available to them to track the fortunes and returns of their funds.

—By Andrew Osterland, special to CNBC.com