Before investing in mutual funds, consider your goals and tolerance for risk

November 29, 1992|By Knight-Ridder News Service

You have some money to invest and want to take the dive into mutual funds? Don't know which ones to pick?

Small wonder. There are about 3,000 mutual funds today, more than the number of companies listed on the New York and American stock exchanges combined.

But choosing a mutual fund isn't an insurmountable task. The first order of business: Narrow the field to match your investment goals, says Don Phillips, who knows a thing or two about mutual funds.

Mr. Phillips is the 30-year-old publisher of Morningstar Mutual Funds, which tracks the performances of 2,600 mutual funds. The accuracy and integrity of the reports have made Mr. Phillips and his colleagues among the mostly widely quoted authorities on mutual funds. Fund companies use Morningstar ratings to tout their products.

"There are three basic reasons to invest in mutual funds," Mr. Phillips says. "Instant diversification, convenience and professional management."

Here are factors he considers in buying or rating a fund:

* Goals. Why are you investing? To buy a house? For your children's education? For retirement?

Choose a fund whose objectives match your own. If you're looking to finance a college education, growth funds are a good choice because the stock market historically has provided the best returns over the long haul. If you're retired, and income and asset preservation are your main concerns, low-risk bond funds are probably your best bet.

* Load vs. no-load. There are two types of mutual funds: those that come with up-front sales fees, called loads, and those that don't, called no-loads. If you've done your homework and know which fund you want to invest in, consider no-loads -- funds marketed directly to the public by the fund company.

If you need the advice of a professional money manager, loads may be preferable. The load pays the commission of your investment adviser.

* Expenses. Pay attention to expense ratios, which are listed in a fund's prospectus. These are the costs of running the fund, including any loads or sales fees.

The average for an equity fund is 1.5 percent; a taxable bond fund, 1 percent; and a municipal-bond fund, 0.75 percent.

* Service. Does the fund company make it easy to invest? Many have low minimum investments, such as $50 a month. Many funds can also arrange for the money to be automatically deducted from your checking or savings accounts.

* Performance. One of the most overrated -- and overadvertised -- factors in choosing a fund is how it has performed, particularly in the short term. Morningstar and another tracking firm, Lipper Analytical Services of New Jersey, regularly publish statistics on fund performance. Chasing hot funds is not always a good idea and is a common mistake of novices. The intent, after all, is to buy low and sell high.

As any fund prospectus will tell you, past results are no indication of future performance. But if a fund has had the same manager for years and usually outperforms the market, chances are it will continue to do so.

* Management. The mutual-fund industry has spawned its share of legends -- John Templeton and Peter Lynch, to name two -- and many fund managers today have followings like those of professional athletes.

The key, Mr. Phillips says, is to make sure that the people and practices that built the fund's track record are still in place.

* Style. How does the fund manager or managers pick stocks or bonds? Do they buy more volatile growth shares or out-of-favor value shares? Are they on the road frequently, visiting companies or municipalities in which they invest? Or do they sit in the office reading reports, studying charts, and chasing rumors? Different styles perform better under different market conditions. Try to diversify here, too.

* Risk. Match funds to your risk tolerance. Like other investments, some funds are riskier than others. How much risk can you tolerate? The crucial factor to consider is performance.

* Diversity. Never have all your eggs in one basket.

Like anything else, if you invest in mutual funds, don't put all your money in one place. Besides stock funds, there are bond funds, junk-bond funds, funds that invest in certain countries or regions, funds that invest in specific industries, funds that invest in market indexes and money-market funds.

It's wise to have a mix of stock, bond, overseas and money-market funds, Mr. Phillips says. Or try the growing number of "asset allocation" funds that hold a bit of everything. Don't invest only in mutual funds.

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