The size of the pool gives you other advantages. Because the fund buys
and sells securities in large amounts, commission costs on portfolio
transactions are relatively low And in some cases the fund can invest in
types of securities that are not practical for the small investor.
The funds also give you convenience First, it's easy to put money in
and take it out The funds technically are "open-end" investment companies,
so called because they stand ready to sell additional new shares to
investors at any time or buy back ("redeem") shares sold previously You can
invest in some mutual funds with as little as $250, and your investment
participates fully in any growth in value of the fund and in any dividends
paid out. You can arrange to have dividends reinvested automatically.
If the fund is part of a larger fund group, you can usually arrange to
switch by telephone within the funds in the group—say from
a common stock fund to a money market fund or tax-exempt bond fund, and
back again at will. You may have to pay a small charge for the switch. Most
funds have toll-free "800" numbers that make it easy to get service and
have your questions answered.
8.2 Load vs. No-load
There are "load" mutual funds and "no-load" funds. A load fund is
bought through a broker or salesperson who helps you with your selection
and charges a commission ("load")—typically (but not always) 8.5% of the
total amount you invest. This means that only 91.5% of the money you invest
is actually applied to buy shares in the pool. You choose a no-load fund
yourself without the help of a broker or salesperson, but 100% of your
investment dollars go into the pool for your account.
Which are better—load or no-load funds? That really depends on how much
time and effort you want to devote to fund selection and supervision of
your investment. Some people have neither the time, inclination nor
aptitude to devote to the task—for them, a load fund may be the answer. The
load may be well justified by long-term results if your broker or
salesperson helps you invest in a fund that performs outstandingly well.
In recent years, some successful funds that were previously no-load
have introduced small sales charges of 2% or 3%. Often, these "low-load"
funds are still grouped together with the no-loads, you generally still buy
directly from the fund rather than through a broker. If you are going to
buy a high-quality fund and hold it a number of years, a 2% or 3% sales
charge shouldn't discourage you.
8.3 Common Stock Funds
Apart from the money market funds, common stock funds make up the
largest and most important fund group. Some common stock funds take more
risk and some take less, and there is a wide range of funds available to
meet the needs of different investors.
When you see funds "classified by objective", the classifications are
really according to the risk of the investments selected, though the word
"risk" doesn't appear in the headings. "Aggressive growth" or "maximum
capital gain" funds are those that take the greatest risks in pursuit of
maximum growth. "Growth" or "long-term growth" funds may be a shade lower
on the risk scale. "Growth-income" funds are generally considered middle-of-
the-road. There are also common stock "income" funds, which try for some
growth as well as income, but stay on the conservative side by investing
mainly in established companies that pay sizable dividends to their owners.
These are also termed "equity income" funds, and the best of them have
achieved excellent growth records.
Some common stock funds concentrate their investments in particular
industries or sectors of the economy. There are funds that invest in energy
or natural resource stocks; several that invest in gold-mining stocks,
others that specialize in technology, health care, and other fields.
Formation of this type of specialized or "sector" fund has been on the
increase.
8.4 Other Types of Mutual Funds
There are several types of mutual funds other than the money market
funds and common stock funds. There are a large number of bond funds,
investing in various assortments of corporate and government bonds There
are tax-exempt bond funds, both long-term and shorter-term, for the high-
bracket investor There are "balanced" funds which maintain portfolios
including both stocks and bonds, with the objective of reducing risk And
there are specialized funds which invest in options, foreign securities,
etc.
8.5 The Daily Mutual Fund Prices
One advantage of a mutual fund is the ease with which you can follow a
fund's performance and the daily value of your investment. Every day,
mutual fund prices are listed in a special table in the financial section
of many newspapers, including the Wall Street Journal. Stock funds and bond
funds are listed together in a single alphabetical table, except that funds
which are part of a major fund group are usually listed under the group
heading (Dreyfus, Fidelity, Oppenheimer, Vanguard, etc.).
The listings somewhat resemble those for inactive over-the-counter
stocks. But instead of "bid" and "asked", the columns are usually headed
"NAV" and "Offer Price". "NAV" is the net asset value per share of the
fund. it is each share's proportionate interest in the total market value
of the fund's portfolio of securities, as calculated each night It is also,
generally, the price per share at which the fund redeemed (bought back)
shares submitted on that day by shareholders who wished to sell The "Offer
Price" (offering price) column shows the price paid by investors who bought
shares from the fund on that day. In the case of a load fund, this price is
the net asset value plus the commission 01 "load" In the case of a no-load
fund, the symbol "N.L." appears in the offering price column, which means
that shares of the fund were sold to investors at net asset value per
share, without commission. Finally, there is a column on the far right
which shows the change in net asset value compared with the previous day.
8.6 Choosing a Mutual Fund
Very few investments of any type have surpassed the long-term growth
records of the best-performing common stock funds. It may help to say more
about how you can use these funds.
If you intend to buy load funds through a broker or fund salesperson,
you may choose to rely completely on this person's recommendations. Even in
this case, it may be useful to know something about sources of information
on the funds.
If you have decided in favor of no-load funds and intend to make your
own selections, some careful study is obviously a necessity. The more you
intend to concentrate on growth and accept the risks that go with it, the
more important it is that you entrust your money only to high-quality,
tested managements.
There are several publications that compile figures on mutual fund
performance for periods as long as 10 or even 20 years, with emphasis on
common stock funds. One that is found in many libraries is the Wiesenberger
Investment Companies Annual Handbook. The Wiesen-berger Yearbook is the
bible of the fund industry, with extensive descriptions of funds, all sorts
of other data, and plentiful performance statistics. You may also have
access to the Lipper Mutual Fund Performance Analysis, an exhaustive
service subscribed to mainly by professionals. It is issued weekly, with
special quarterly issues showing longer-term performance. On the
newsstands, Money magazine publishes regular surveys of mutual fund
performance; Barren's weekly has quarterly mutual fund issues in mid-
February, May, August and November; and Forbes magazine runs an excellent
annual mutual fund survey issue in August.
These sources (especially Wiesenberger) will also give you description
of the funds, their investment policies and objectives. When you have
selected several funds that look promising, call each fund (most have toll-
free "800" numbers) to get its prospectus and recent financial reports. The
prospectus for a mutual fund plays the same role as that described in "New
Issues." It is the legal document describing the fund's history and
policies and offering the fund's shares for sale. It may be dry reading,
but the prospectus and financial reports together should give you a picture
of what the fund is trying to do and how well it has succeeded over the
latest 10 years.
In studying the records of the funds, and in requesting material, don't
necessarily restrict yourself to a single "risk" group. The best investment
managers sometimes operate in ways that aren't easily classified. What
counts is the individual fund's record.
Obviously, you will want to narrow your choice to one or more funds
that have performed well in relation to other funds in the same risk group,
or to other funds in general. But don't rush to invest in the fund that
happens to have performed best in the previous year; concentrate on the
record over five or ten years. A fund that leads the pack for a single year
may have taken substantial risks to do so. But a fund that has made its
shareholders' money grow favorably over a ten-year period, covering both up
and down periods in the stock market, can be considered well tested. It’s
also worth looking at the year-to-year record to see how consistent
management has been.
You will note that the range of fund performance over most periods is
quite wide. Don’t be surprised. As we have stressed, managing investments
is a difficult art. Fund managers are generally experienced professionals,
but their records have nevertheless ranged from remarkably good to mediocre
and, in a few cases, quite poor. Pick carefully.
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