Fund choices limited by only money, time

MUTUAL FUNDS

October 03, 1993|By WERNER RENBERG | WERNER RENBERG,(c) 1993 By WERNER RENBERG

"How many funds and fund families will it be practical for me to have when I retire in one year?" a reader asks.

"I have 11 funds in five families. All are no-load.

"A certified financial planner wants to manage me. He wants me to cash out of two funds but add nine new ones in nine families. He charges a fee for each.

"How much is too much to have in a fund?"

To be "practical," the number of funds you might own at any time depends on such things as the amount of money you have to invest and funds' minimum investment requirements. These are often lower for individual retirement accounts.

It also depends on the time you have to follow your funds and, in cases of taxable accounts, to calculate and provide the information needed yearly for your income tax forms.

Naturally, strategy considerations can influence the minimum number that it would be prudent to own. They involve factors such as investment objectives -- yours and the funds.

The number of bond funds you need hinges first on whether you need taxable or tax-exempt funds, or both.

Another determinant would be your choices of the various short- , intermediate- , and long-term bond fund categories in which you want to be invested: U.S. Treasury and/or other U.S. government, investment grade and/or speculative corporate, mixed government-corporate, and high- or medium-grade municipal securities.

Unless you are restricted by circumstances, you probably would be best served by several equity funds that offer you the potential balance of reward and risk that seems right for you.

They probably should consist of a couple of broad-based growth, growth and income, and/or equity income funds to form the core of the equity portion of your fund portfolio.

Funds that are concentrated in small U.S. companies and in foreign stocks could also be included.

You may want to have funds in one or more of these categories to profit from a variety of investment policies and styles.

In addition, you also may want to include a diversified aggressive growth fund and a fund concentrated in an economic sector that seems to have good long-term prospects.

Given these points, 11 funds don't seem to be too many. Unless there are good reasons, 20 do seem to be excessive, however.

(The number of your fund accounts may be larger if, in addition to IRAs, you also have invested in funds through 401[k], simplified employee pension [SEP], or other tax-deferred retirement plans offered by your employer.)

Investing IRA money in a number of funds need not complicate your life when, after you retire, the Internal Revenue Service pTC requires you to start receiving minimum yearly distributions at around 71.

As long as your IRA accounts have the same beneficiary or beneficiaries, you don't have to tap each one for a proportionate withdrawal. As for limiting your stake in any fund, there are no hard rules. If a fund serves your needs well, allocating as much as 20 percent of your total portfolio to it should be OK. Of course, bear in mind how the portfolio is divided among investment objective categories.

* "I'm surprised to read," another reader says, "that one should diversify into several mutual funds. I thought the reason you invest in mutual funds is to spread the risk."

Diversified equity funds, to give an example, do provide you some insulation against the risks of being concentrated in individual firms or industries.

You invest in different equity funds because they neither rise nor fall uniformly. Some may rise faster than market indexes because they are heavily invested in companies or industries whose stocks are enjoying above-average performance. Some fall faster when the market drops because their principal stocks are doing worse than average.

Because equity funds are exposed to the risk associated with the stock market, it's prudent to also own a bond fund or two.

* "If you have several Fidelity funds, is it diversification?" asks another. "Is it a risk to be only with Fidelity?"

Excluding single-state municipal bond funds, Fidelity has about 110 directly marketed equity and bond funds. That would indicate the opportunity to pick funds offering ample diversification.

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