What you know that just ain't so

Your Funds

Your Money

September 25, 2005|By CHARLES JAFFE

Mark Twain once noted that "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

When it comes to mutual fund investing, however, both situations can lead to mistakes, misjudgment and poor money management.

The more you know about how funds work, the better you will do if your funds ever pose a real investment test.


1) True or false: When a mutual fund changes portfolio managers, it can wait months before notifying shareholders.

2) True or false: Management needs your approval to change the style or investment policies of your fund.

3) Which of these fees is a no-load mutual fund allowed to charge investors: a) termination fee; b) short-term redemption fee; c) low-balance fee; d) management fee; e) 12b-1 fee; f) all of the above.

4) Yes or no: In a taxable account, you transfer money from the XYZ Growth fund into XYZ Value. You never touch the money. Do you owe capital gains taxes on profits earned in XYZ Growth?

5) True or false: A mutual fund can continue to use a star manager's superior track record in advertising, even after the manager is gone.

6) A total expense ratio of 1.5 percent is considered below average in which of the following investment categories: a) international; b) small-cap; growth; c) large-cap growth; d) general bond funds.


1) True. No rule forces funds to notify you of a change in managers. Funds need only tell you of the change in the next regular mailing.

2) False, although there are a few cases where management still needs your OK.

Shareholder approval is required on "fundamental issues" - which sounds like it should include investment policies - but most firms have rewritten prospectuses so that style and policy issues are considered "non-fundamental," meaning they can be altered without a vote.

3) f. "No-load" is about sales charges. Fees for closing accounts, quick redemptions, falling below minimum account size, or management of the fund have no bearing on the load. The 12b-1 fee - which is for sales and marketing - is trickier, but so long as it does not exceed 0.25 percent, regulators allow a fund to be described as a no load.

4) Yes. Phone transfers are a sale and a purchase, and the sale is a taxable event, meaning you owe for any gains realized by selling (or you get the tax benefit from any losses recognized in the trade).

5) True. The manager's record belongs to both the fund and the manager. That's why a manager can use his record to pump up interest in a new fund, while the company running his old fund can continue to tout the superior results earned during the star manager's tenure.

6) a and b. Lipper Inc. pegs the average total expense ratio for international funds at 1.70 percent, and at 1.69 percent for small-cap growth funds. The expense ratio for the average large-cap fund is 1.47 percent; for general bond funds, average cost is 1.01 percent.


Charles Jaffe is senior columnist for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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