Mutual funds and other
investment companies are often
labeled by the objectives they hope
to accomplish, such as current
income or growth.
Mutual fund families may have a
number of different funds available
to meet various objectives. Note,
however, that there is no guarantee
that any mutual fund will actually
attain the desired objective.
Mutual Funds can be
loosely classified as one of these:
(1) diversified common stock
(2) balanced fund,
(3) bond and preferred stock fund,
(4) municipal bond fund, and
(5) money-market fund.
In comparing one mutual fund to
another, it is important that both
funds have a similar investment
objective. For example, it wouldn't
be fair to compare the expenses of
an intensely managed aggressive
growth fund to those of an index
Each type of fund has a
different investment objective that
requires it to take a different
investment approach, and those
differing approaches are going to
affect each fund's expenses.
However, it would be fair to compare
the expenses of one aggressive
growth fund to another aggressive
growth fund, or the expenses of one
index fund to another index fund. To
begin with, then, the investor has
to determine which investment
objective he or she wants to
achieve, and then compare the funds
that have that investment objective.
Once an investor has determined his
or her investment objective, there
are three major factors by which
mutual funds can be compared.
A record of successful growth or
appreciation in the fund's capital
value in the past is a positive
sign, but it is no indication that
the growth will continue in the
future. The larger and more
successful a fund becomes, the more
difficult it is to maintain that
growth. Performance rankings of the
top funds change considerably over a
period of time.
Every investment involves risk.
Investors hope that, if they are
willing to take a greater risk, they
will be rewarded with a greater
return. Analysts use "risk-adjusted
performance" to rank funds of a
given type on their rate of return
adjusted for risk, measuring a
fund's performance in both up and
down markets. A volatile fund may
produce above-average gains when the
market is up. But it may also lose
value much faster than average in a
falling market. Funds that have
performed well in both good periods
and bad may be ranked higher than
more volatile funds with a greater
A final element for comparison
between funds is cost. The expense
ratio gives you the fund's operating
expenses for the year expressed as a
percentage of the fund's average net
assets. In general, the lower the
expenses, the greater the return to
The management advisory fee,
somewhere around 0.5% of net assets,
is usually the largest single
component of operating expenses.
Most funds will try to keep their
operating expenses around 1% of the
fund's assets. But currently funds
range from a low expense ratio of
.29% to as high as 9% of assets. The
average stock fund in the early
1990s had an expense ratio of 1.6%.
Expenses higher than average will
reduce the investor's return.
Investors will find many features
that cannot be
statistically from fund to fund.
the special features
may weigh heavily with specific
investors. The presence or absence
of features like telephone
transfers, exchange privileges,
front-end or back-end loads, or
minimum purchase amounts may
override differences in performance
with these investors.
Most mutual funds offer a variety of
ways for an investor to purchase
shares. One of these is an open or
regular account. Under this
arrangement, an investor estab-
the account by making a substantial
lump-sum investment with no
commitment to make regular
purchases. However, because the
account is "open,"
the investor may
make additional investments as
desired and as money is available.
Because there is usually a sales
charge assessed on each individual
purchase, investors should be aware
that they may benefit from
accumulating small dollar amounts
into larger amounts before each
In addition, there are
generally specified dollar
amounts, like $5,000, at which the
sales charge is reduced.
Dollar cost averaging
concern about making
an investment at the "wrong"
Investors sometimes delay investing
when the market has been rising
rapidly because they feel that it
may be due for a correction.
Meanwhile, the market continues to
rise and they lose what would have
been a good opportunity to invest.
Or they may delay investing when the
market has been falling because they
fear it may be in a long-term
downward trend. They wait until
market shows some strong upward
movement, and then they find
themselves on the other side of the
cious circle continuing to delay
while they wait for a correction.