Fund Investors

DO YOU WORRY about your mutual funds in this market?"Fund investors have had a rough few months," says Business Week, "and if the market doesn't correct quickly, they will feel more miserable come December. Not only could funds continue to go south but fund holders will also get hit with heavy taxes on capital gains that funds paid shareholders.""Don't bet on a sure thing. Avoid buying stocks that look certain to be big winners. Enthusiasm for high-fliers pushes prices to risky levels. On average, the 'most popular' stocks gained less than half as much as the S&P 500 from their popularity peaks through July 31, 1998."

Fourteen Maryland biotechnology companies tapped nearly $6 million in new funding from investors who qualified for a state tax credit. The Biotechnology Investment Incentive Tax Credit is a state-mandated program that allows for a 50 percent tax break, up to $250,000, per investor in a qualified biotech company. To qualify, companies must be less than 12 years old, have headquarters in Maryland, employ fewer than 50 people and be state-certified as a biotechnology company. The tax credit is a central component of Gov. Martin O'Malley's BioMaryland 2020 plan, a 10-year, $1.3 billion strategy for growing the state's biotech industry.

Late last year, the guardians of the retirement savings of millions of ordinary Americans waded into the steamy jungle of Indonesia to get a piece of what looked like the investment opportunity of a lifetime. Bre-X Minerals Ltd., a previously unknown Canadian exploration company, was issuing ever-growing estimates of the century's largest gold discovery, and dozens of mutual fund managers could not get into the action quickly enough.Today, many of those funds -- and, by proxy, their shareholders -- are victims of a once-in-a-generation fraud that turned their investments of close to $500 million into little more than some worthless holes in the ground.

The 2000s were that type of decade for investors as the stock market showed its fickle ways, brutalizing investors in two bear markets, then turning sweet when a rally seemed hard to believe. Through it all, investors wrestled with choices: fleeing to safety, hunting for a mutual fund they thought they could trust or trying to recover from losses. Now, said Morningstar Inc. director of mutual fund research Russel Kinnel, it's clear there was a lot of churn that didn't take investors far. "People's market timing was very poor," he said.

While mutual fund investors may have lost their lunches during the roller-coaster ride of the third quarter, their appetites came roaring back in the fourth quarter, pushing returns on growth-oriented funds skyward for the year."

CARRIE is a single, disabled woman from Washington state who has money in the Putnam funds. In that last way, she's similar to Larry from Palm Beach Gardens, Fla., a married retiree who has his life savings there. They share common questions that have sprung up since Boston-based Putnam Investments was charged in a civil suit by Massachusetts Secretary of the Commonwealth William Galvin. They're not exceptionally concerned about the departure of Lawrence J. Lasser, the Putnam chief executive who took it on the neck two weeks ago, and they don't, in fact, own funds directly tainted by the scandal.

WASHINGTON -- Here's the bottom line of the mutual fund business: Investment companies hype what they sell, and investors haven't a clue what they buy.That should come as no surprise to anyone who has tried to navigate the legalistic shoals of a fund prospectus or stumbled across the latest ad from XYZ Co. trumpeting its five-star-rated funds.The numbers are old news: As of December, one out of every four Americans -- that's 63 million of us -- owned shares in one or more of the 6,270 mutual funds out there.

It shouldn't come as a surprise, but those who own mutual funds are financially better off than most people. Not because their funds do so well, but because they have the disposable income to buy them in the first place.A new survey by the Investment Company Institute, the fund industry trade group, found that mutual fund shareholders have a median household income of about $60,000 -- not bad considering that Census figures show that only 16.5 percent of American households have incomes in the $50,000 to $75,000 range.

Dear fund industry bigwigs: I know you're busy trying to put a bow on a solid performance year so that you can sell it hard in 2007, but I'd hate for the holidays to pass without sending a reminder that investors expect results. Performance is not a gift, it's a promise you make to customers. That doesn't mean that you shouldn't be giving patient, long-term customers a little something extra. With that in mind, here is what I want from the fund industry and its regulators this holiday season, on behalf of fund investors everywhere: An assessment of how sister funds work together.

Come December, you may care deeply about how your mutual fund profits are taxed. By that time, however, recently introduced legislation that would give fund investors a sensible bit of tax relief will be dead. Again. A few folks on Capitol Hill have been fighting a futile battle for years now, trying to change the way funds are taxed, and lowering the burden for buy-and-hold shareholders. With the market making more gyrations than a belly dancer on speed, there's a good chance that fund managers will make a lot of moves to protect their profits this year, recognizing the gains they have picked up during a long bull market and resulting in big tax bills at the end of the year.

For many people, the only time of year they care at all about horse racing is when the Kentucky Derby rolls around. Once racing's Triple Crown has ended, investors forget about the ponies for another 12 months. But before the Preakness and Belmont run their courses, fund investors would be wise to recognize the similarities between picking a racehorse and selecting a fund. The key factors in your choice of horse or fund - and how you structure your wager - are surprisingly close. And while some people place bets on both funds and horses based on names, hunches and other guesswork, examining a fund's key components the way a savvy bettor observes a thoroughbred, improves your odds of finishing in the money.

Investors are being offered the chance to drink from the Holy Grail of mutual funds, buying into a mysterious vessel with legendary powers, and yet the very opportunity to use the great chalice could prove that the whole idea is more fantasy than reality. For the first time since 1982, the Sequoia fund is opening its doors to new investors. If ever there was a legendary fund, this is it. Sequoia is the mutual fund started by Warren E. Buffett's stockbroker; Bill Ruane was a friend of Buffett when he co-founded Sequoia in 1970, at a time when Buffett was liquidating his investment partnership and advising his clients to take their cash to Sequoia.

Many fund investors will get an unpleasant surprise from their tax preparer this year, a bill for the distributions they got from their funds, even though those funds may have had a disappointing year. Year-end numbers for 2007 are not available yet, but it is clear that distributions will amount to a record of more than $500 billion. You read that right: a half-trillion dollars, nearly $100 billion more than in 2006, and that was the previous record. That means that $1 out of every $23 invested in funds today was recycled, passed back to the shareholder and, in most cases, back to the fund again, creating a tax liability along the way. By the time final numbers are available, investors with taxable fund accounts will have paid Uncle Sam more than $25 billion for the privilege of playing buy-and-hold in 2007.

One thing fund investors know for sure about 2008: We won't have the Ameritor Investment fund to kick around any more. Inarguably the worst mutual fund in history, it's one of hundreds of funds that were snuffed out of existence in 2007. Mutual funds aren't human, so their death - whether by liquidation or merger - does not diminish us the way the passing of a friend or loved one does. While there is no mourning period, it would be wrong to ignore for whom the bell tolled, if only because some funds leave behind a legacy of lessons for fund investors.

Mutual fund investors brace yourselves: You might be in your biggest tax bite since 2000. Around this time each year, funds pass on dividends and capital gains earned on the sale of securities to investors. This year's distributions are expected to be exceptionally high, partly due to the volatile stock market. "This will be one of the worst [years] we have seen on record in terms of the tax bill," says Tom Roseen, senior research analyst with Lipper Inc. Roseen estimates that this year's tax tab will be close to that of 2000, when fund investors in taxable accounts paid $33.1 billion in taxes on capital gains and dividends.

Investors are supposed to get more conservative over time, and fund investors seem to have grown up a lot in recent years. It's not that they are all turning toward safer funds, it's just that they seem to have given up performance surfing, the dangerous habit of always trying to own the funds that top the short-term performance charts. Many industry watchers will tell you that the media's practice of publishing big quarterly fund reviews is a bit anachronistic, a throwback to a time when investors had a different mindset.

IN THE roaring stock market of the late 1990s, what you didn't know about mutual funds probably didn't hurt you. Regardless of a fund's particular shortcomings, the rising tide of the market lifted almost everyone to profitability. But that tide ebbed about a year ago, and lots of investors have since found themselves exposed in many cases by what they didn't know about how their funds work. With that in mind and in an effort to help investors pick up the small details of fund ownership, here is a pop quiz on some basic concepts all shareholders should know.

Individual mutual fund investors, who helped push the Dow Jones industrial average to record highs during its bull run, are pulling back from the diving stock market.T. Rowe Price Associates Inc. said yesterday that August marked the first month in more than five years that more money went out of the company's stock funds than came in."It is a change in direction," said Steve Norwitz, a vice president at Baltimore-based T. Rowe Price, who added that the last month the company's U.S. stock funds had net outflows was March 1993.

There's a difference between reacting to short-term market wiggles and overreacting to them. So while experts routinely tell fund investors to ignore day-to-day deviations, what happens over a month or two can be telling, particularly in bond funds. And based on what has been going on in the mortgage and credit markets for weeks now, this is a time for many bond fund investors to react and recheck their position. That's not a call to sell bond funds, but rather to examine performance more closely, because the wild conditions that the market has lived through since the end of June have created the perfect crucible for stress-testing a bond fund's portfolio and your tolerance for what the fund holds.