Mutual funds: good idea taken too far?


Mutual funds were designed to take much of the confusion and some of the risk out of stock-market investing. By allowing investors access to professional investment expertise and, through pooling of investment funds, to a diversified mix of securities, individuals were promised the same kinds of investment benefits once reserved for large, institutional investors.

Well, it may well be that mutual-fund companies have taken a basically good idea and gone too far with it. Today, there are so many different kinds of funds, with so many differing investment objectives, that shopping for a fund can be an arduous and unpleasant experience.

T. Rowe Price Associates Inc., a Baltimore-based mutual-fund company, indirectly acknowledged such a state of affairs last summer when it introduced two new funds that were actually composed of other mutual funds. The company's Spectrum Income and Spectrum Growth funds invest in a mix of up to seven other T. Rowe Price funds and adjust their holdings to reflect changes in market conditions.

Further, the funds have consistently failed, on average, to perform as well as most of the general measures of stock-market activity. Why pay management fees and other costs of operating a fund when you can do even better by trying only to match the market?

Such questions are being asked with great frequency these days, since the boom year of 1989 was followed by the mutual-fund industry's worst outing since the mid-1970s. According to Lipper Analytical Services Inc., the leading statistical tracker of mutual funds, the average stock fund (including any dividends paid to holders) posted a return of minus 6.27 percent in 1990.

That compares with a 3.1 percent decline in the Standard & Poor's index of the stocks of 500 industrial companies and a 0.54 percent dip in the Dow Jones index of 30 industrial stocks.

Unfortunately, despite their concept of simplifying your investment life, even the concept of how to measure mutual-fund performance is not simple. As Lipper and other fund experts correctly note, mutual funds do have to maintain cash holdings and pay administrative expenses to handle the flow of customers in and out of their funds.

So, even without paying any hotshot stock picker, a mutual fund has legitimate costs that put it at a comparative disadvantage with the "unmanaged" market averages.

Further, some compelling evidence can be assembled that the stock market is always completely and fairly valued. The prices of individual stocks are set by traders who have access to complete information, which means there are no "bargains" as ++ such, or chances for mutual funds to regularly outperform the market.

Well, Ivan Boesky (illegally) and Warren Buffett (legally), among others, seem to have disproved the notion that the market is always "efficiently" priced. So have some mutual-fund managers, which is whymeasuring fund performance is such a big deal.

So, you owe it to yourself, and whoever might benefit from your mutual-fund investments, to pay careful attention to fund performance. Don't make the mistake of assuming they're all the same.

Nearly 3,000 funds are out there, holding assets worth more than $1 trillion. And nearly every fund, and certainly every "family" of mutual funds, can lay claim to being the right choice for you.

Further, the funds' fee structures can be complicated, and so is the language of the fund industry. There are funds for growth, small growth, income, growth and income, yield, high yield, international, gold and on and on.

Still, nearly every investor should have some portion of his money in mutual funds. And, whether you like it or not, some portion of your retirement program is tied up in mutual funds. Literally, you can't afford not to know about them.

So, the first order of business in approaching mutual funds begins with you. You must accept responsibility for learning about funds and for choosing the funds that best match your investment objectives.

Overall, the best guide to what you want in a mutual fund is the description of what the end uses of this investment will be.

If you're saving for a child's education or your own basic retirement needs, you should adopt a conservative approach that is tilted toward preserving your capital and achieving some growth over time.

If you're close to retirement and will need access to your money, you might want a fund geared to produce income while protecting your capital.

Alternatively, you might decide on a high-risk approach to investing. My idea of what it takes for high-risk investing is capital that you can afford to lose and that you don't need quick access to.

Over the years, mutual funds have tailored their offerings. So, the job of deciding on your investment goals has been made easier by thefact that mutual-fund offerings are already broken down into fairly discrete kinds of funds.

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