Mutual
funds offer the investor immediate
diversification
into carefully selected and managed
securities. An investment program can be started for a
small
amount of money (typically $500-$1,000) and
subsequent
purchases can be as small as $50.
Automatic
reinvesting of capital gains and dividends
will
speed up the growth of the investment.
A
mutual fund is a professionally managed,
diversified
portfolio of securities, such as stocks or
bonds. The great appeal of mutual funds is that the
investor
shoulders none of the investment decisions or
timing
decisions required by individual stock
investing.
Mutual
fund portfolio managers are trained in
finance
and have years of experience managing
portfolios. Many funds have in-house analysts and
research
staffs to review financial and economic data
and
to select securities that represent the best values
for
capital appreciation or income.
A
diversified portfolio of stocks or bonds reduces
risk. Financial research has shown, for example,
that
60
percent of the time a stock's price moves in tandem
with
the overall market. That movement
represents
market
risk. Twenty to thirty percent of the
time, a
security's
price is determined by specific information
about
a company and/or its industry's outlook.
Luck is
the
final factor that can influence a stock's price.
Portfolio
managers have little control over market
risk
or the vagaries of the financial markets.
If the
stock
market is moving higher, portfolios will
generally
register gains. Diversification,
however,
will
protect investors against non-market risk.
Most
well-diversified mutual funds with asset
values
of more than $200 million hold from 50 to
several
hundred issues. As a result, by holding
a
large
number of issues and maintaining a portfolio that
tracks
the broad market, a few poorly performing issues
should
not hurt the overall performance of the fund.
The
majority of investment companies have a group
of
mutual funds with different investment objectives
from
which to choose, and over the past two decades the
number
of mutual funds to choose from has increased
dramatically. Generally, investors have the option to
make
a telephone call and switch out of their existing
funds
into other funds as their financial needs or
investment
conditions change. (Switching some funds
may
incur a charge.) Once an investor
account has been
established,
future investments can be made by
telephone
directives.
In
addition, mutual funds represent a low cost way
to
invest in the financial markets, as opposed to
frequent
trading on the major exchanges.
Management
fees
for running the portfolio are usually 0.5 percent
or
less, depending on the total assets of the fund.
Fund
performance can be tracked easily, and historic
information
is readily available.
Mutual
funds can be purchased with or without
sales
charges. These are referred to as
"load" and
"no-load"
funds respectively. No-load funds have
no
sales
representatives, and, therefore, no commissions
need
to be paid. (This does not mean, however,
that
there
will never be any fees charged to the investor on
a
long-term basis.) An investor must
carefully choose
a
fund; often a load fund may outperform a no-load
fund,
thus equalizing any initial sales charges paid.
There
is no guarantee that either a load or a no-load
fund
will outperform the other during an extended
investment
cycle.
Investors
should not expect to get rich quickly
from
mutual fund investments, nor should they
experience
high losses. Overall, however, the
opportunities
for the individual investor may be
greater
with mutual funds than with individual stock or
bond
issues. Long-term planning is the key
and, as
with
other investments, patience is a virtue.
Family
of Funds
Many
mutual funds have a broad spectrum of funds
to
meet the
needs
and temperaments of various investors. A
typical
family
of funds might include the following:
MONEY
MARKET FUNDS SECTOR FUNDS
-
Invest in short-term money -
Concentrate on a
particular
market
instruments. area of the
economy.
-
Yields fluctuate daily. -
Typical areas
include:
-
Good during periods of
technology,
health,
energy,
high
interest rates. utilities,
precious
metals,
etc.
MUNICIPAL
BONDS FUNDS
-
Invest only in Muni. Bonds
AGGRESSIVE GROWTH
FUNDS
-
Provide TAX-FREE Income - Very
volatile.
-
May be state tax exempt - Invest
in high-
performing
-
May be subject to Alter-
stocks.
native
Minimum Tax - High
risk/high
return
potential.
BONDS
FUNDS
-
Invest in debt-type GROWTH
FUNDS
instruments. - Invest mainly for
capital
-
Relatively high yield.
growth.
-
Market value fluctuates - Vary
greatly -
read
offering
inversely
to interest prospectus to
establish
rates. objectives of
fund.
INCOME
FUNDS GROWTH &
INCOME
FUNDS
-
Seek maximum income. - Also
called
Balanced
Funds.
-
Invest in bonds, - Seek
capital
appreciation
preferred
or high yield and income from
dividends
stocks. or fixed income
investments.
Exchange
Privilege
Exchange
from one fund to another may be allowed
at
any time
for
a nominal fee (usually $5) and no commission
charge. There
will
be tax consequences at the time of exchange if
there
is a
profit
or a loss.
Load
Funds Can Be a Bargain
When
it comes to investing in mutual funds, one of
the
choices investors must make is whether to select a
"load
fund" or a "no-load fund."
To make the right
decision,
it's important to understand the differences
between
the two types of funds.
A
load mutual fund charges an up-front sales fee,
or
load, when you buy it. A portion of the
sales
charge
goes to the broker/dealer who represents the
fund. For that fee, the broker/dealer explains the
fund
and is obligated to see that it meets your
objectives. The load further obligates the
broker/dealer
to continue servicing your account for as
long
as you own the fund.
No-load
funds, on the other hand, charge no
up-front
sales fee. This can be an enticing
feature
for
many investors. When comparing mutual
fund costs,
however,
it is not only important to consider the
up-front
costs of buying the fund, but also to
understand
the fund's ongoing annual expenses.
For
example, rather than paying registered
investment
representatives to offer their shares and
service
your account, no-load funds offer their shares
through
ongoing advertising. One example of this was
the
1993 Forbes Mutual Fund edition, in which about 83
percent
of the mutual fund advertisements were bought
by
no-load funds. The cost of all that advertising is
paid
by the no-load fund before any of the earnings get
to
you.
To
illustrate this, let's look at a $100,000
investment
in two hypothetical funds, each compounding
at
the same 12 percent gross annual return (Table 1).
Fund
A is a load fund with a 3.5 percent up-front
charge
and annual expenses of 0.6 percent. Fund
B is a
no-load
fund with no up-front charge and annual
expenses
of 1.8 percent.
The
load fund charges $3,500 up front.
However,
because
of lower ongoing expenses, the value of the
load
fund surpasses that of the no-load fund in four
short
years. After 20 years, Fund A is
$138,407 ahead
of
Fund B. Kiplinger's Personal Finance
Magazine
summed
up this example in an article that stated,
"Front-end
loads are a pittance when spread over many
years."
The
debate over load and no-load funds will
undoubtedly
continue with valid arguments on both
sides. As with any investment, however, it's up to
you
to
make an informed decision before you write your
check.
TABLE
1
$100,000
Investment
Fund
A Fund B
3.5%
Load No Load
12%
Gross Annual Return 12% Gross
Annual
Return
0.6%
Annual Fee 1.8% Annual Fee
11.4%
Actual Annual Return 10.2% Actual
Annual
Return
Start $96,500 $100,000
Year
1 107,501 110,200
Year
2 119,756 121,440
Year
3 133,408 133,827
Year
4 148,616 147,477
Year
5 165,559 162,520
Year
6 184,432 179,097
Year
7 205,458 197,365
Year
8 228,880 217,496
Year
9 254,972 239,681
Year
10 284,039 264,128
Year
15 487,309 429,263
Year
20 836,047 697,640
Chasing
Winners Can Make You a Loser
Serious
investing is done with the future in mind;
yet,
some investors are tempted to look only at the
current
hot performers when picking stocks.
After all,
because
we can't predict the future, going with today's
best-performing
investment may seem to make sense,
right? Wrong.
One way to illustrate the folly of this
practice
is by looking at what happens when you always
follow
last year's top-performing mutual fund.
Let's
assume that on Jan. 1, 1973, you invested
$10,000
in the best-performing fund of 1972. On
Jan. 1
for
the next 20 years, you moved your investment to the
best-performing
fund of the previous year. Assuming
all
capital gains and dividends were reinvested, and
allowing
for all sales and redemption charges, Table 1
shows,
year by year, what would have accumulated by
switching
to each year's top performer. By Dec.
31,
1992,
your original $10,000 would have grown to
$95,571. That's not a bad return, even considering
these
were good years for stocks. It even beat
the
market
as a whole by about 10 percent.
But
what would have happened if you had made a
one-time,
$10,000 investment on Jan. 1, 1973, in a
conservatively
managed growth-and-income fund, and you
let
it compound undisturbed for the same 20-year
period? The table shows the results of three such
funds
-- Fund A grew to $107,915, Fund B to $122,724
and
Fund C to $126,109. All three
outperformed the
investor
who switched to the best performer of each
year.
None
of these three funds was ever recognized as
the
top performer in any of those 20 years.
In fact,
they
seldom or never even made the top performance
lists
of financial publications that rate mutual funds
annually. The secret of their success was to
consistently
aim for reasonable investment results,
total
return or a combination of growth and income.
The
examples show that consistent results without
big
surprises can put you ahead over the long haul.
It
beats
trying to chase winners.
TABLE
1
$10,000
Investment Moving $10,000
One-Time
to Previous Year's Top Fund
Investment
in One Fund
Year Fund A Fund B
Fund C
1973 $8,501 $7,842 $8,417
$8,572
1974 8,729 6,435 7,076
7,091
1975 10,509 8,712 9,563
10,257
1976 15,396 11,290 12,838
13,457
1977 18,460 11,000 13,088
12,919
1978 23,555 12,616 14,748
13,937
1979 16,961 15,035 17,926
15,947
1980 27,256 18,227 22,471
19,716
1981 23,658 18,387 24,227
21,204
1982 40,426 24,597 31,504
28,564
1983 50,300 29,557 39,110
36,037
1984 38,653 31,528 41,594
39,100
1985 49,206 42,056 54,317
51,660
1986 80,759 51,197 64,392
63,283
1987 85,825 53,981 67,239
64,167
1988 77,661 61,180 75,879
75,496
1989 102,434 79,170 95,041
97,362
1990 67,402 79,710 93,499
93,601
1991 130,106 100,867 113,809
115,593
1992 95,571 107,915 122,724
126,109
Interesting
Facts About Mutual Funds
Mutual
funds are a relatively straightforward
investment;
however, individual investors may not be
aware
of a lot of the interesting trivia concerning
mutual
funds. The Investment Company Institute (ICI),
the
Washington, D.C.-based voice of the mutual fund
industry,
recently sent out a list of interesting facts
about
mutual funds, including:
* The term "mutual fund" is not
synonymous with
the
stock market. The almost $2 trillion
invested in
mutual
funds is almost evenly divided among stock, bond
and
money-market funds.
* Contrary to popular belief, the
"boom" in
mutual
funds did not begin in the 1990s.
Rather,
during
the decade of the 1980s, fund assets increased
from
$95 billion to $1 trillion.
* An increase in mutual fund assets is not the
same
as an increase in cash flow. For
example,
combined
assets of stock and bond funds have increased
by
$776 billion since 1990. However, only
$446 billion
of
that represents new investments. The
remaining $330
billion
comes from the earnings and appreciation
(rising
values) of existing stock and bond portfolios.
* Most of the "new" money being
invested into
mutual
funds is not from bank CDs or unsophisticated
"savers"
who have never invested. Recent studies
indicate
that most new mutual fund money is being
invested
by people who are already mutual fund
shareholders.
* There were no massive liquidations by stock
mutual
fund managers on Oct. 19, 1987, the day the
stock
market crashed more than 500 points. On
that
day,
only 2 percent of stock fund assets were redeemed
by
shareholders. Two-thirds of those
redemptions were
taken
from the funds' existing cash positions, which
served
as a buffer and prevented greater selling in a
falling
market.
* Although mutual funds are not guaranteed or
insured,
they are heavily regulated under federal and
state
securities laws. No mutual funds have
"collapsed"
or "gone bankrupt" since the Investment
Company
Act was passed in 1940.
* A substantial amount of mutual fund assets
are
in
the form of municipal bond funds, which invest in
the
debt offerings of state and local governments.
These
funds play a vital role in paying for public
services
and infrastructure.
* Of the total assets invested in mutual funds,
about
$390.5 billion is long-term money in retirement
plans.
* Factors contributing to the mutual fund
industry's
current success include the maturing of 77
million
baby boomers, declining interest rates, the
growth
of defined contribution retirement plans, the
massive
refinancing of home mortgages and the large
number
of involuntary lump-sum distributions to
participants
in pension plans.
* Mutual fund shareholders are not the
"rich."
The
median household income of mutual fund shareholders
is
$50,000, meaning that one-half have incomes below
that
figure.
Regulation
of the Mutual Fund Industry
The
first mutual fund began in the United States
in
1924, and in the years that followed, the demand for
securities
grew at an unprecedented rate. Then, in
1929,
the U.S. stock market crashed, followed by a
worldwide
depression. These events signaled the
need
for
federal control of securities, including mutual
funds.
Today,
mutual funds are among the most strictly
regulated
investments under federal securities laws.
They
are regulated by five major statutes:
The
Securities Act of 1933. This act
established
a
number of filing requirements for all mutual funds,
including
the filing of detailed registration
statements
with the Securities and Exchange Commission
(SEC). It also requires funds to regularly disclose
detailed
information about their operations to the SEC,
state
securities boards and shareholders.
Further,
this
disclosure must be uniform, providing the same
information
to all audiences. Under this act, funds
also
must provide potential investors with current
prospectuses
(updated annually) describing each fund's
management,
objectives, risks, investment policies and
other
essential data. The act also approved
but
limited
all mutual fund advertising. The
provisions of
the
act are still in effect.
The
Securities Exchange Act of 1934. This
legislation
regulates the purchase and sale of mutual
fund
shares. It subjects distributors to
anti-fraud
provisions
that are monitored and enforced by the SEC
and
National Association of Securities Dealers (NASD).
The
Investment Advisers Act of 1940. This
act
regulates
the activities of mutual fund advisers.
Specifically,
it focuses on self-dealing and conflicts
of
interest within mutual funds, and it guards against
charging
shareholders excessive fees. In 1992,
the SEC
prepared
a 500-page document with recommendations for
updating
this act; some changes may be forthcoming.
The
Insider Trading and Securities Fraud
Enforcement
Act of 1988. This law requires
investment
advisers
and broker/dealers to develop and enforce
strict
procedures to prevent insider trading.
Insider
trading
occurs when people with access to information
not
available to the general public use that
information
for their own benefit. The act also
expanded
the SEC's authority to regulate insider
trading.
The
Market Reform Act of 1990. This latest
securities
act gives the SEC authority to halt
securities
trading and/or restrict program trading, or
automated
computer trading, usually of huge blocks of
securities. This law was brought about by the
500-point
decline in the Dow Jones Industrial Average
on
October 19, 1987; its purpose is to prevent such
drastic
drops from occurring again.
In
addition to these federal laws, each state has
its
own securities regulations pertaining to mutual
funds. Federal and state laws are all designed to
ensure
that mutual funds are operated and managed in an
open,
consistent way so that investors receive the
information
they need to make investment decisions.
The
first mutual fund began in the United States
in
1924, and in the years that followed, the demand for
securities
grew at an unprecedented rate. Then, in
1929,
the U.S. stock market crashed, followed by a
worldwide
depression. These events signaled the
need
for
federal control of securities, including mutual
funds.
Today,
mutual funds are among the most strictly
regulated
investments under federal securities laws.
They
are regulated by five major statutes:
The
Securities Act of 1933. This act
established
a
number of filing requirements for all mutual funds,
including
the filing of detailed registration
statements
with the Securities and Exchange Commission
(SEC). It also requires funds to regularly disclose
detailed
information about their operations to the SEC,
state
securities boards and shareholders.
Further,
this
disclosure must be uniform, providing the same
information
to all audiences. Under this act, funds
also
must provide potential investors with current
prospectuses
(updated annually) describing each fund's
management,
objectives, risks, investment policies and
other
essential data. The act also approved
but
limited
all mutual fund advertising. The
provisions of
the
act are still in effect.
The
Securities Exchange Act of 1934. This
legislation
regulates the purchase and sale of mutual
fund
shares. It subjects distributors to
anti-fraud
provisions
that are monitored and enforced by the SEC
and
National Association of Securities Dealers (NASD).
The
Investment Advisers Act of 1940. This
act
regulates
the activities of mutual fund advisers.
Specifically,
it focuses on self-dealing and conflicts
of
interest within mutual funds, and it guards against
charging
shareholders excessive fees. In 1992,
the SEC
prepared
a 500-page document with recommendations for
updating
this act; some changes may be forthcoming.
The
Insider Trading and Securities Fraud
Enforcement
Act of 1988. This law requires
investment
advisers
and broker/dealers to develop and enforce
strict
procedures to prevent insider trading.
Insider
trading
occurs when people with access to information
not
available to the general public use that
information
for their own benefit. The act also
expanded
the SEC's authority to regulate insider
trading.
The
Market Reform Act of 1990. This latest
securities
act gives the SEC authority to halt
securities
trading and/or restrict program trading, or
automated
computer trading, usually of huge blocks of
securities. This law was brought about by the
500-point
decline in the Dow Jones Industrial Average
on
October 19, 1987; its purpose is to prevent such
drastic
drops from occurring again.
In
addition to these federal laws, each state has
its
own securities regulations pertaining to mutual
funds. Federal and state laws are all designed to
ensure
that mutual funds are operated and managed in an
open,
consistent way so that investors receive the
information
they need to make investment decisions.
Mutual
Funds Offer Many Convenient Services
In
addition to the benefit of professional money
management,
mutual funds offer a variety of services,
usually
at no cost to their shareholders. These
services
are outlined in the fund's prospectus and can
mean
lifelong investing without ever having to sell
your
fund or move from the mutual fund group.
Of
course,
to fully benefit, you must understand and
properly
utilize these services.
One
common service is the exchange privilege.
If
your
financial circumstances change and you want to
adjust
your portfolio, the exchange privilege allows
you
to easily move your mutual fund investment to
another
fund managed by the same "family of funds."
Because
of this service, it is important to examine all
the
funds offered by a mutual fund family before you
invest.
Another
shareholder service, called automatic
reinvestment,
allows all dividends and capital gains to
be
reinvested automatically, providing additional
growth
potential through compounding.
Reinvestment
also
can be used to make automatic monthly investments
by
authorizing the fund to draw a specified sum from
your
checking account each month.
To
help with record-keeping, mutual funds provide
a
confirmation statement every time activity occurs
within
your account. At the end of the year,
funds
also
provide 1099-DIVs, which show the amount and tax
status
of distributions paid during the year.
And, to
eliminate
the problem of lost or destroyed
certificates,
mutual funds can have certificates held
by
a custodian bank at no cost.
Most
mutual funds also offer IRS-approved,
trusteed
prototype retirement plans for Individual
Retirement
Accounts (IRAs), Simplified Employee Pension
Plans
(SEPs), retirement plans for employees of
non-profit
organizations (403(b)s), and retirement
plans
for the self-employed.
Load
funds -- funds that charge up-front fees --
often
offer discounts for larger investments, whether
made
at one time or over a period of time.
Discounts
typically
apply to investments of $10,000 or more in
one
fund or a combination of funds within a family.
The
"right of accumulation" service allows you to
qualify
for the discount by adding any new purchase
within
a family to the value of your existing shares.
Or,
if you plan to make a sizable deposit over a
13-month
period, you can sign a statement of intention,
without
obligation, entitling you to the maximum
discount
applicable to the total amount you plan to
invest.
Mutual
funds offer a wide range of services in
addition
to professional money management. If you
own
mutual
funds now or plan to invest in them in the
future,
ask your representative about shareholder
services. They can offer substantial benefits at a
price
you can't refuse.
What
You Should Know About Systematic Withdrawal
Systematic
withdrawal is a service offered by many
mutual
funds. At your request, the fund will
send you
regular
checks for a specified amount. This can
be a
real
benefit to individuals who need monthly checks to
help
meet living expenses.
Most
mutual funds with a growth-and-income
objective
pay quarterly dividends and annual capital
gain
distributions. With systematic
withdrawal, you
can
have part of the total return (dividends plus
capital
gains) distributed to you each month.
For
example, assume a fund has historically
averaged
a total annual return of 12 percent,
consisting
of a 4 percent average annual dividend and
an
8 percent average annual gain. You set up an
annual
systematic withdrawal of 10 percent, leaving
your
principal undisturbed as well as adding about 2
percent
a year to its value. As long as the fund
continues
to earn 12 percent or more, your investment
is
working as planned.
However,
what if the mutual fund has an unusually
bad
year? Suppose the fund is able to
maintain its
regular
4 percent dividend, but due to a declining
market,
there are no capital gains. If you
continue to
withdraw
the same amount, the fund will be required to
return
part of your principal, and eventually you could
run
out of money.
To
use systematic withdrawal properly, think of
your
fund as a bucket full of water. At the
bottom is
a
faucet from which you regularly draw a cup of water.
As
long you replace this with as much or more water
than
you withdraw, you will continue to have plenty of
water. But if you continue to withdraw more than you
replace,
your water level will decrease, and your
bucket
may eventually run dry. The same happens
if you
systematically
withdraw more than your fund is earning
--
your principal will decrease, and your investment
may
eventually run dry.
Does
this mean you should avoid systematic
withdrawal? Not at all.
It just means that
flexibility
is the key. If total return decreases,
decrease
your withdrawal. By taking smaller
withdrawals,
you can monitor your investments until the
principal
begins to grow and builds a cushion. Or
you
can
delay beginning withdrawals until the initial
investment
has grown.
Systematic
withdrawal from carefully selected
mutual
funds can be an excellent way to receive regular
income
and still allow your investments to grow.
But
it
requires understanding, monitoring and the
flexibility
to adjust to economic changes.
Mutual
Funds May Not Be What You Thought You Bought
Did
you know that your U.S. government bond fund
could
invest as much as 35% of its assets in junk
bonds? Or that your global equity portfolio includes
U.S.
stocks?
A
mutual fund can use a certain name if, under
normal
market conditions, at least 65% of its assets
are
invested in that category, according to Securities
and
Exchange Commission guidelines.
For
funds that call themselves tax-exempt, the
minimum
mix is 80% tax-exempt and 20% other assets.
If
a
fund uses the term municipal, the requirement drops
back
down to 65%.
Confused? How about the terms "global" and
"international"?
The
dictionary defines global as involving the
world
and international as reaching beyond national
boundaries. So it should come as no surprise to the
literally
minded that global funds include U.S. stocks
or
bonds, while international funds don't?
But many
people
don't realize this.
It
is not the intention of the SEC to give license
for
funds to mislead investors, but to allow those
funds
the ability to have good management.
An
investor can find out generally what a fund can
invest
in by consulting its prospectus, and can
discover
exactly what a mutual fund owns at a
particular
point in time by consulting its annual or
semiannual
report.
The
report will list all the holdings as of a
certain
date, including complicated assets like
derivative
securities and forward currency positions
that
might never get mentioned in the fund's
prospectus. If you want to find out what the fund is
investing
in, the annual report is critical.
Such
a snapshot report is not perfect, but it
gives
investors a better understanding of a fund.
If
you
want a current portfolio mix, call the fund sponsor
to
ask for a fax of the fund's current portfolio.
Finding
out exactly what a mutual fund owns as
well
as what it could buy is crucial information for
investors. It strikes at the heart of what is
happening
with your money and what could happen to the
money,
including the risks that are taken.
The
prospectus, often a drab legalistic document,
lays
out the parameters of the fund's investment
policies,
objectives and possible practices, including
most
expenses, but it is not nearly the whole story.
The
prospectus establishes the rules of the game, but
it
doesn't necessarily establish what the practice is.
Many
funds have elastic investment objectives.
These
can be wild card risks.
Under
SEC rules that took effect July 1, 1993, new
prospectuses
will be more informative, including, for
example,
the name of the portfolio manager.
Total
fund returns for the last 10 years, a
discussion
of the factors and strategies that affected
the
prior year's performance, and a chart illustrating
how
a $10,000 investment would have fared compared to a
broad-based
market index will also be included in the
new
prospectus or annual report.
The
new guidelines don't require funds to list
winners
and losers among their investments, or how the
use
of futures contracts, derivatives or forward
currency
contracts affect performance. But some
mutual
funds
may choose to divulge such information in keeping
with
the spirit of the guidelines.
One
piece of information they won't have to
disclose
in the prospectus is an asset class that
comprises
less than 5% of the total portfolio.
That's
the
current rule and it isn't about to change.
While
the performance of 5% of a fund's assets
generally
does not have a dramatic impact on the
performance
of the overall fund, its effect can be
multiplied
substantially if the asset is used for
leverage. Some extraordinarily powerful residual bond
can
create as much as four times the leverage of a
traditional
bond.
If
interest rates rise, the value of the residual
bond
-- a popular derivative also known as an inverse
floater
-- will drop almost four times as much as a
regular
bond.
The
investor may discover in the fund's Statement
of
Additional Information that the fund can invest in
such
a complicated product but the disclosure won't be
easy
to find. this document is usually
lengthier and
more
turgid than the prospectus.
Another
piece of information not required in a
mutual
fund prospectus or in the annual report is the
cost
of brokerage commissions, which could add up in
funds
with a hefty turnover rate.
Given
current low interest rates and low
inflation,
investors have to be attuned to every cost a
fund
incurs. They have to be conscious of how
much it
costs
to get their money managed. If a fund
has 2% of
assets
in brokerage costs, that may adversely affect
performance
-- or it may not if the portfolio manager
is
skilled at taking short term profits.
The
issue of disclosure about mutual fund
activities
is probably as old as the business itself.
But
recently it has received more attention because of
the
new SEC rules and other developments.
In
mid-1993 the New York City Department of
Consumer
Affairs charged the Dreyfus Corp. and the
Franklin
Advisers for engaging in deceptive advertising.
Dreyfus
was cited for claiming in a brochure that
its
Growth and Income Fund does not invest in junk
bonds
even though its prospectus states that up to 35%
of
its assets may be invested in convertible debt
securities
deemed to be junk bonds. This is the
portion
of the fund left over after 65% is invested in
securities
that resemble the name of the fund.
Franklin
was cited for claiming in an ad that its
Valuemark
II fund guaranteed retirement income for life
even
though the fund pays an annuity issued by an
insurance
company that is only as secure as the
insurance
company itself.
Index
Funds -- And Why You Don't Want One
Mutual
fund companies now offer index mutual funds
designed
to mirror the make-up and performance of a
particular
stock market index. Although the
Standard &
Poor's
(S&P) 500 is the most popular model for index
funds,
other indices are used, with over 60 index
mutual
funds offered.
Index
mutual funds tend to have lower management
fees
than other funds for two reasons: 1)
Since the
fund
invests only in stocks represented in the index,
management
does not need to analyze or select stocks.
2)
Index funds tend to have lower turnover, resulting
in
lower transaction costs and minimal capital gains
distributions
to investors. Index funds are often
almost
fully invested in the stock market, keeping very
low
cash reserves. There is no guarantee
that an index
fund's
performance will mimic the performance of the
actual
index.
Investing
in an index mutual fund requires careful
analysis. Index funds are modeled after different
indices,
and it is important to decide which is
appropriate
for your investment objectives.
Different
funds
modeled after the same index will experience
different
results and will charge different management
fees
and sales charges, making it important to
carefully
review the performance of a fund you are
interested
in.
Pay
particularly close attention to the investment
strategies
of the fund. Some index funds will buy
stocks
in all companies represented in the index, in
proportion
to each stock's market capitalization in the
index. Other funds purchase all of the stocks in the
index
but in different proportions, while others will
purchase
only some of the stocks in the index.
With
all
these variations, the idea of buying an index fund
isn't
as pure and simple as most people are led to
believe. Brokers and salesmen love these funds,
because
the performance will always be exactly what
they
promised -- an approximate tracking of the index.
But
fundamentally there is one major thing wrong
with
index funds -- it is an attempt to sell average
performance
with unthinking management. You should
be
looking
for superior performance with intelligent
management. Yet lots of brokers will try hard to sell
you
an index fund as if it was an acceptable standard
of
performance. It is not even a measure of
performance
-- it is merely an average price of a long
list
of stocks. Don't be fooled.
You
Can Have a Full Team of Managers Even for a Small
Nestegg
Many
investors haven't the time, experience or
inclination
to choose and supervise their investments.
Family
and business might be taking every possible
moment,
and many can't or won't take the time to invest
properly. This is where an investment manager can
help. Of course it will cost, but if you don't have
the
time and experience to do the job, right, a
professionally
managed portfolio is likely to give you
a
better return than a self-managed portfolio that you
don't
devote time to supervise regularly.
The
Investment Monitor Service is an investment
management
system that uses top institutional money
managers
with proven track records. Each manager
stays
within
his specialty, such as blue chip stocks,
international
stocks, corporate bonds, etc. The
monitoring
service shifts funds between managers based
on
changing market conditions. This allows
for
multiple
levels of management -- the managers, who are
constantly
managed for performance, and the allocation
process. As many as 12 different portfolio models are
available
from the Capital Preservation model to the
Global
Aggressive Growth, depending upon your
investment
needs and goals. Each model utilizes
eight
to
twelve managers, all working on your behalf.
All
this might sound expensive, but it actually
costs
no more than the management fee in a typical
mutual
fund, while giving you much greater
diversification
than being invested in just one mutual
fund. The average management fee is 1.75%, and the
minimum
account size is $25,000. No opening
fees, no
closing
fees, no transaction costs. The service
is
also
available for pension plans, IRAs, and 401K
rollovers.
Don't
let that management fee put you off.
Popular
money magazines -- who get most of their money
from
running mutual fund advertising -- have done a
good
job of convincing the public that investment
management
comes free because of all the ads for "no-
load"
mutual funds. But all
"no-load" really means is
that
there is no sales charged added on to the purchase
price. There is a management fee, but they don't
make
it
visible, and most people don't read the fine print.
So
you're not getting free management by using a mutual
fund.
For
more information and a brochure, write
Investment
Monitor Service, 705 Melvin Avenue, Suite
102,
Annapolis MD 21401 or call (800) 545-8972.
