Mutual funds sales soar low interest rates cited

March 08, 1992|By Glenn Burkins | Glenn Burkins,Knight-Ridder News Service

Mutual fund sales have been sizzling. In fact, January was the best month ever, and February has been almost as good.

That was the word from the Investment Company Institute, a mutual fund trade association in Washington, and from some of the nation's leading mutual fund companies.

About $6.9 billion in new money flowed into stock funds in January, and $9.4 billion went into bond funds, ICI reported. In contrast, about $814.8 million went into stock funds in January 1991, and about $4.4 billion went into bond funds. The figures include reinvested dividends.

Experts said the record sales could be traced, in part, to low interest rates being paid by banks. Others said people were starting to put more money into individual retirement accounts (IRAs).

"People are starting to get serious about saving for retirement," said Steve Norwitz, spokesman for T. Rowe Price, a mutual fund company.

At the Vanguard Group, of Valley Forge, Pa., about $2 billion in new money flowed into mutual funds in January. About one-third went into stock funds, and one-third went into bond funds. An additional 20 percent went into money market funds, and the rest went into balanced funds, which invest in stocks and bonds.

The company's best-selling bond fund was one that invests in junk bonds, which may indicate that, as interest rates stay low, people will take more risks for higher returns.

Compounding lesson -- If you ever needed a reason to start saving now for retirement, consider this:

If you invested $2,000 annually for eight years, then simply let the money compound at an annual interest rate of 10 percent for the next 32 years, you would have about $515,188 when the 40-year period was up.

But if you waited until the ninth year to get started, and you invested $2,000 a year for the next 32 years, you'd have only $378,496, assuming the same interest rate.

That's the magic of compounding. Even though the first person contributed only $16,000, he or she ends up with $136,692 more than the second person, who contributed $64,000.

Both examples assumed that the money grew tax-deferred in an individual retirement account, and that the deposits were made on Jan. 2 of each year.

*

After a year-long free fall, CD interest rates finally may have hit bottom. At least that's the opinion of Bank Rate Monitor, a Florida newsletter.

In fact, the average rate paid on 5-year certificates has risen for three straight weeks, BRM said. That's important because long-term rates usually lead the way when one cycle is ending and a new one is beginning.

With that in mind, BRM said CD shoppers should stay short. In other words, buy CDs that mature in 91 days or less. Investors may see short-term CD rates beginning to rise by early April . . . unless the Federal Reserve steps in again to bring them back down.

*

Since the beginning of time, or so it seems, financial planners have argued about whether or not they should accept commissions when they sell investment products to their clients.

Although most do accept commissions, some say it represents a conflict of interest. After all, can a planner be totally objective if he or she has a financial stake?

The debate recently heated up. The International Association for Financial Planning said it may soon require members to offer their clients a fee-only alternative. In other words, clients could pay a flat rate for financial advice, or they could pay a lower rate and allow the planner to collect a commission if products are sold.

That news didn't sit well with the National Association of Personal Financial Advisors, a group whose members never accept commissions. NAPFA said planners should apply the same standard to all clients, and that standard should be fee-only.

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