Considering ways to capitalize on investment alternatives for '92

MUTUAL FUNDS

December 29, 1991|By WERNER RENBERG | WERNER RENBERG,1991, Werner Renber

If you're going to make New Year's resolutions, consider a few that could make mutual fund investing more rewarding, and are easier to keep than promises to go on a diet or clean the garage.

1. To treat forecasts of stock and bond prices and interest rates with skepticism and not let them rush you into decisions to buy or sell fund shares. No one can say for sure when the economy will pick up steam or what financial markets will do in 1992 or any year.

You know the recession will end sooner or later; recessions always have. Whether bond and stock markets will do well in 1992 will depend, among other things, on how much government recession remedies revive fears of inflation and on how much corporations improve profits. If you're invested in well-run funds, take some comfort from the knowledge that skilled managers are acting, or standing pat, in your behalf.

2. To think through your investment objectives and make certain you're in the funds you should be. "To make money" is a bit imprecise. By specifying whether you want to emphasize income or capital appreciation or whether you want to have both, you'll be better able to affirm whether you're properly invested.

3. To avoid incurring more risk than you can afford. Don't think of investing in equity or long-term bond funds unless you plan to be in them for several years and can tolerate an occasional decline in share prices.

4. To avoid playing it too safe by taking less risk than you can afford to achieve your investment goals. With money-market interest rates around 5 percent and falling, you deprive yourself of higher income, and the possibility of capital appreciation, if you keep more money than prudence warrants in savings accounts, CDs or money-market funds.

Depending on your circumstances and investment time horizon, you may find it desirable to switch some money into short-term (one- to five-year) or intermediate-term (five- to 10-year) bond funds and/or equity funds. Given the risks involved with stock prices at current levels, caution would suggest investing by dollar-cost averaging, which involves investing fixed sums at regular intervals, instead of putting down a big sum at once.

5. To understand what makes a fund tick before you invest in it. Study the prospectus and latest shareholder report to make sure its objectives match yours. Also, be sure you're comfortable with its investment policy (which describes what it will, can and can't invest in).

6. To put to work all the money you intend to invest, instead of diverting as much as 8.5 percent of it to sales charges. Do your own research and concentrate on no-load funds. This is especially important when investing in bond funds, whose sales charges can eat up most of your first year's 7 percent or 8 percent yield.

7. To get your money's worth in advice if you prefer to deal with a broker or other salesperson and, therefore, have to pay sales charges. When a fund is recommended as suitable for you, ask why. Is it only because of its historic and expected performance? Or are there other considerations? Perhaps the fund is sponsored by the broker's firm or has a special incentive for the broker, such as an paid trip for two to Hawaii, if he sells enough of the fund's shares?

8. To look beyond performance advertising when it indicates a fund is generating an unusually high total return or yield. The fund's investment practices, such as concentration in one sector or in low-grade bonds, may be too risky for you, or the fund's management may have temporarily waived some or all of its fees to attract new investors. Or, happily, it may be a fund whose portfolio is well-managed and whose expenses are consistently low.

9. To check why a fund has reported an unusually low total return or yield. Its portfolio may have been poorly managed, it may have been saddled with excessive annual expenses, or both.

10. To remember income tax consequences in considering when and what to buy or sell, but not to let tax considerations overwhelm investment decisions. If you're in a poorly managed fund and see no prospect for improvement, don't hesitate to sell just because you may have a taxable capital gain or a loss.

When looking at money-market or bond funds, check whether taxable or tax-exempt funds make more sense for someone in your federal income tax bracket. A taxable bond fund, for example, would have to yield more than 9 percent to be competitive with a tax-exempt fund yielding 6.5 percent if your tax rate is 28 percent.

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