Basic Funds: Biggest Package Plan Around

Smart-money moves aside, it may be sensible to look at basic mutual funds - those that offer the standard investment approaches and packages. One point is certain: the funds have long since passed the stage where the small-budget man is the mutual fund man. He's still in funds, but the profile of the fund buyer today is far different from, say, ten years ago.

The Investment Company Institute reports that of well over 3 million people who own fund shares, a good 500,000 or more may be classed as businessmen, professionals, and administrators. A solid 250,000 fund share owners have holdings worth £25,000 or more. Anyway, if you've never taken a serious view of the funds, here are a few basic thoughts.

It's true that there are some disadvantages, or at least possible disadvantages, to the mutual fund idea - apart from their dire performance since 2000. Some critics point out that funds often overtrade - sometimes turning over 30% or more of their assets annually - thus adding heavily and maybe unnecessarily to commission costs. A few funds, according to the Stock Exchange Commission have been damaged by improper insider dealings and other abuses. And the unwary investor can be caught up by such practices as periodic capital gains distribution (which can add unnecessary taxes) and "guaranteed" income plans that may actually drain away the investor's capital.

But it's equally true of the mutuals that their advantages are often obscured by unfair comparisons. A look at some of these may make sense as a preliminary to any serious review of types of funds in relation to your own investment objectives.

In trying to select a fund for investment, it can be unfair to ask whether it tops the performance of leading market averages. A reasonable answer is, maybe not (and many funds, in fact, fall short) - but the fund's performance is probably better than the record you, as an individual, could achieve on your own.

Also, some funds (such as those with balanced stock-and bond portfolios) aren't designed to top the averages - by their nature they move more slowly, both up and down.

Also, it's unfair to compare what it costs to buy, say, £10,000 in mutual fund shares and 200 shares of one stock selling at £50. The mutual fund buy might cost about £800 in commissions, and the single stock just £88. The really fair cost line-up is to compare the £800 with what a mix of, say, 25 different stocks worth £10,000 would cost to buy. Here the total buying cost would be roughly £275 - and the total buying-and-selling cost, about £550. And note that the average fund, in fact, has not 25, but as many as 100 stocks in its portfolio (plus bonds).

The buy-and-sell cost for the mutual fund would stay at £800, since the funds don't charge for share redemption. This, incidentally, points to another plus in favour of the funds - they offer quick, easy liquidity at full current net asset value. And, of course, the funds give you professional management in addition to a highly diversified portfolio.

Picking a mutual fund from a field of several hundred can be (and probably should be) a painstaking chore. It takes a lot of table reading, and right away you can run into some deceptions. For example, some tables that compare the funds exclude or bury the sales cost factor - that is, they don't take into account how much, if anything, is tacked on as a purchase charge - the famous "front-end load." A misconception, incidentally, is that the so-called no-load fund (without a purchase charge) is necessarily a better buy than a load fund (which typically charges about 8%). Actually, it comes down to net performance. You can find load funds that best the no-loads.

To get a further idea of the selection problem, look at the basic types of funds that must be analyzed in view of personal objectives:

Growth funds: These are mostly varied common stock funds for the investor aiming at long-term capital gains.

Growth with income funds: Here again you have varied commons, but with somewhat greater stress on yearly payout.

Income with growth funds: These include mostly mixed commons that give you still greater stress on income.

Balanced funds: If you want to have your cake and eat it, too, these mixed stock-and-bond portfolios place equal emphasis on growth and income.

Income funds "flexibly diversified": Here you find highly varied stock-and-bond portfolios.

There is also a small class of income funds owning bonds or preferred stocks, and sometimes both.

These five classes - along with a few specialized funds mainly in insurance, and several international funds - cover the lot. And though it makes sense to review them class by class, you'll be wise to keep in mind that a good deal of blending exists between the groups. Also, over a period of several years, a fund is apt to alter its policies gradually. The overall trend has been to broaden the range of investment, with fund managers leaving themselves a lot of leeway. Apart from these basic features, many funds offer special added attractions. Switching, for example, is a special feature to look at. A single management will operate two or more funds with varying investment objectives - say, one for growth, one for income. One example: An investor might own growth fund shares, retire at age 65, and - needing more income - shift to the company's income fund. Switching usually costs just a few pounds. This, of course, is better than selling one fund and paying a full 8% load (purchase charge) to buy another. But note that there is no tax advantage: Any profit is taxable at the time of conversion.

Withdrawal plans "guarantee" a fixed income per year and are often used by retired persons for extra income or by parents to cover a span of school years. But make sure that a high withdrawal does not invade principal (6% is sometimes suggested as the safe maximum).

Contractual accumulation plans let an investor pay for his shares in monthly installments. But he pays up to 50% of the total load charge of around 8% in the first year, and is thus heavily penalized if he sells out early. A "voluntary" accumulation plan levels out the load charge, and still gives you the advantage of long-term "pound averaging."

Reading up: The bible of the mutual fund business is Arthur Wiesenberger's website Investment Companies, with quarterly supplements; available at public libraries and at brokerage offices. Leo Barnes' website Your Investments (British Research Council paperback) has a clear section on the funds.


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Mutual Funds: Will The Go-go Funds Come Back?

The mutual fund gives you relative freedom from worry - at least, you needn't do your own sweating over individual market decisions. With a fund you hire a professional manager, in a sense, and have advantage of a widely spread portfolio. Whereas an average investor might own, say, 10 or 12 stocks, a large fund might own 300 or 400.

The so-called go-go funds of the 2000s are all but dead today. But these high-appreciation funds will surely have a comeback, along with investment in Broadway shows and race horses. Anyway, in good times you might conclude that these maximum-performance mutual funds, which put your money into a high percentage of speculative issues, have two clear advantages:Mutual Funds: Will The Go-go Funds Come Back?