Spate of mutual funds can confuse investors

Andrew Leckey

February 05, 1993|By Andrew Leckey VTC | Andrew Leckey VTC,Tribune Media Services

Don't be a casualty of the mutual fund explosion.

Many investors become overwhelmed by choices among mutual funds and panic, making the wrong decisions.

There are 1,623 stock funds and 2,636 bond funds available to American investors, according to Lipper Analytical Services.

That compares with 454 stock funds and 497 bond funds a decade ago.

Reasons for growth of mutual fund assets from $300 billion to $1.5 trillion in a decade are simple.

Mutual funds provide diversity by pooling a large group of stocks or bonds, then top off the bargain with professional management.

There are always spectacularly performing funds that garner attention with huge percentage gains in total return, though such leadership tends to move around each year.

It's possible to pinpoint an investment goal, such as growth or income. You can select from endless types of funds, among them stock, bond, municipal bond, gold and international stock or bond.

All this can be too much of a good thing. With so many funds, so many fancy titles, so much performance data and a sea of advertising, investors get confused.

They buy each new fund they encounter, and don't keep personal needs in mind. They compare advantages and disadvantages in the wrong way.

Know yourself before you invest.

"The first thing an individual must do is analyze his or her own investment needs and what they want their money to do, then decide how venturesome they wish to be," advises A. Michael Lipper, president of the New York-based Lipper Analytical Services fund-tracking firm.

"Look at whether you'll be an investor over a long period of time, meaning at least five years, for there's usually at least one market decline in a five-year period and keeping it in that long minimizes risk."

There are plenty of choices to meet your needs.

"Start by recognizing it's impossible to fairly evaluate thousands of funds to find the perfect fund," says John Rekenthaler, editor of the Chicago-based Morningstar Mutual Funds investment advisory publications, which help average investors make fund choices. "Limit your search by setting time horizons and personal investment objectives."

Understand costs involved in a specific fund.

A "load" is a sales commission that goes to whoever sells fund shares to a shareholder, thereby reducing your initial investment. Some funds sold directly to the investor are "no-load," while others charge loads on the initial investment from 1 percent ("low load") up to 8.5 percent. Some funds have "back-end loads," which are deferred sales charges when you sell, that can be 0.5 percent to 6 percent of initial investment.

There also can be a confusing annual charge, called the "12b-1" plan, of 0.1 percent to 1.25 percent of fund assets each year. The adviser uses that to pay for distribution costs such as advertising and literature.

Look at past performance to find whether a fund is likely to boost the value of your investment dollars.

"Examine how badly the fund you've chosen does at its worst, to consider whether or not you could tolerate another such period," Lipper stresses. "Examine whether the fund is doing a great deal better or worse than its peers with similar objectives."

Check the long-term numbers.

"For most people, it doesn't make sense to buy a fund that doesn't have a track record of at least five years, and a 10-year history is preferable," says Rekenthaler. "Total return measures how much money you get back after making your initial investment, and you should compare total return figures with the average fund that has the same investment objective."

Among information in the prospectus investors receive are explanations of such topics as condensed financial data; a fee table; investment objectives; and fund management.

Look at check-writing, telephone exchange privileges and minimum initial investment. Consider how many funds the mutual fund company offers.

Don't go overboard.

"The individual investor tends to overdiversify his mutual funds, and, because the average fund is diversified as it is, I don't see any need to have more than six funds," concludes Rekenthaler. "Each mutual fund has 50 to 100 holdings, so by buying five stock mutual funds doing five different things, you could easily have exposure to more than 250 stocks.

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