Mutual funds continue to attract small investors, as well they should. In a faltering economy and a soft stock market, you may become unnerved. Yet, whatever the economic outlook, buying these mutual funds still is one of the best ways to preserve and enhance your assets.
Mutual funds offer you a diversified portfolio, professionally managed, something that otherwise would not be available to those of you who invest a relatively modest amount.
Assets of all mutual funds were more than a trillion dollars in September, the latest month for which statistics are available, down slightly because of falling stock prices, says the Investment Company Institute. Mutual fund sales in September were almost $10 billion -- again down slightly, but nevertheless a strong show of confidence by investors.
But mutual funds are not alike. One size definitely does not fit all. It requires some discrimination on your part to choose the funds that are right for you.
The first criterion is simply the fund's performance. How well has it done over the last five years? Has it shown steady growth, with good dividends paid to investors? Is the balance sheet sound and the cash flow strong?
Now is a good time to look at mutual fund performance. During the huge bull market of the last several years, it was difficult for a fund manager not to make money. But in recent months, things have been shakier. The market has taken a big hit.
This, of course, is a setback for you if you bought at the top of the market. It is an excellent opportunity, though, for you to evaluate the management of your mutual funds.
Your second criterion: What is the fund's investment policy? When you shop for a mutual fund you want to know how the fund's managers dealt with the downturn. Were they in a position to capitalize on it?
The aggressive growth mutual funds, for example, did very well when the market was in a buying frenzy. These funds purchased securities, usually shares of stock, in companies that the managers believed would take off over the short term. They are highly speculative -- as close to boom-or-bust as you can get in mutual funds. When they do well, they do very well -- but beware when hard times come!
The income funds, on the other hand, are more conservative. They look for high quality investments in shares and other securities that are likely to provide a good income over time. They put much less emphasis on the appreciation of the securities themselves. When there is a huge increase in overall market value, these funds, of course, increase in value as well. When the market takes a hit, they also take a hit. But again, it is not as spectacular as that experienced by the funds that have climbed out farther on the limb. Mostly, they continue to be a source of good, steady income (which, of course, can be and, in most cases, should be reinvested).
Your third criterion is the fund's investment managers. Many observers believe this is paramount. While few have achieved the fame of Peter Lynch, the legendary manager of the Fidelity Magellan Fund whose retirement last spring was front-page news, fund investment managers are the key players in the degree of success a fund achieves.
If you are looking seriously at a particular mutual fund, find out the name of the fund manager. You should determine his or her track record. The reason is simple: this is the person (or, in some funds, small group of persons) who decides where the money is invested. The fund's record alone tells you little if the investment manager was hired the week before last. You need then to know what the new decision maker has been up to over the last five years or so, too.
The five-year record until now has told little about the performance of a fund during a market decline (and an economic slowdown). The October, 1987, crash isn't really a good indicator. Neither are the one- and two-day declines that have been experienced from time to time. But the broader and longer-lasting drop of the last few months provides a good test of a fund's qualities and those of its managers.