Prison inmates need to adopt a long view when buying funds

Your Funds

Your Money

August 22, 2006|By CHARLES JAFFE | CHARLES JAFFE,MARKETWATCH

The words "time horizon" have a different meaning to someone who is in prison than to an average investor.

But even prisoners have concerns about making their money grow. For proof, consider some questions recently sent in by guests of our state or federal correctional system. They are surprisingly representative of average investor concerns, just with long identification numbers built into return addresses.

Because everyone who isn't planning on having a government facility dish them three square meals a day for life needs to be concerned about building a financial future, here are answers to some things that conspiring (and convicted) minds want to know.

I don't have much to invest, just about $250 right now. I could do that this year, and maybe a little more each year for the next three, if I am lucky. I am interested in mutual funds, but is it worth it for me to invest if that's all I can afford? Thomas, Federal Transfer Center in Oklahoma City

Time may be your enemy in prison, but it's your friend when it comes to investing. Even small amounts can grow to be significant given the right kind of investment returns and sufficient time to grow. Starting off small is much better than not starting at all.

If you don't invest and the money gets spent, it's hard to imagine that you'll be better off than if you saved for the future. Moreover, if you can only save a small amount today, think about how you will catch up in the future; it certainly won't be easier if you blow the few dollars you could set aside now.

I want to start a mutual fund account. I have about $200 for it if there is a fund that wants someone with that little. Is there? Tim, Earnest C. Brooks Correctional Facility in Muskegon Heights, Mich.

Once someone decides to invest their small dollars, they often feel locked out of the fund world. Minimum initial deposit requirements have been on the rise for over a decade, and finding a place to put short money can be a chore.

There are, however, some funds that still have low minimums to get started; the problem with most low-minimum funds is that the trade-off for shareholders getting in small is that expenses tend to be a bit above average (someone has to pay to service all of those tiny accounts).

Typically, investors are better off shopping for the funds they want than looking for issues with minimums they can afford. The reason is that most firms waive their minimums for shareholders who make automatic monthly or quarterly deposits, taken electronically from a checking or savings account. Some may require a small deposit - say $100 to open the account, plus $100 a month - and they may charge a nasty fee if the automatic deposits are stopped before the account grows beyond the required minimum.

For a list of low-minimum funds and funds that allow entry for small-but-regular dollars, check out the Web site of the Mutual Fund Education Alliance at www.mfea.com. But if you have a favorite fund or firm in mind for your cash, call their service representatives to see how they bend minimum rules, and how you might squeeze in.

It might sound weird coming from a person in a place like this, but how do I know I can trust a mutual fund? How do I know they won't just take my money and run away? James, Lompoc Federal Correctional Institution in Lompoc, Calif.

Management can't run away with the money because they don't have it; instead, the fund's cash and shares are held and safeguarded by a custodian. What's more, the fund is a separate company; if the management firm collapsed, the fund's assets would remain in place - with the custodian - and would survive. The fund could then be liquidated - with each investor getting their share of the proceeds - or moved to a new management company.

That said, do be careful about where the money goes, particularly if you are investing through an intermediary. Many investors have been scammed after writing deposit checks to the wrong party, making them payable to a rogue adviser, rather than the reliable fund company or custodian. The bad guy can then cash the check, give the investor faked statements and pretend that everything is fine, right up to the time when their plot falls apart.

Follow the instructions in a fund's prospectus for making a deposit; if your adviser suggests you do something different, ask questions, and check in with the fund to make sure everything is on the up and up. Rogue advisers often wind up in prison, but their burned clientele seldom gets all of its stolen money back.

jaffe@marketwatch.com

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

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.