Business Matters What to consider when selecting a mutual fund

By Kevin FitzGerald

Last column’s question sought some general information on mutual funds. We continue this week with providing some additional pointers to consider before investing.

It’s hard to miss reading or hearing about mutual funds lately. Today, a perusal of nearly every newspaper or magazine with a financial section is sure to reveal some mention of mutual funds. The articles often talk about the billions of dollars flowing into mutual funds — $21 billion in May alone. But where is all this money coming from?

Who owns mutual funds?

An estimated 63 million individuals, or nearly 37 million households, own some type of mutual fund, up abut 20 percent from 31 million households in 1994. According to a survey conducted by the Investment Company Institute, the typical mutual fund investor is middle class, 44 years old, has financial assets of $50,000, is employed and is likely to be married. Although the typical mutual fund investor is age 44, Generation Xers (ages 18 to 30) have a higher portion of their financial assets in mutual funds (38 percent) and tend to concentrate in equity funds. Baby boomers (ages 31 to 49), while having twice as many financial assets as Generation Xers, have a smaller percentage of their assets invested in funds (27 percent). Fund investors have long-term goals, with 84 percent citing retirement as their top investment goal.

With so many investors owning mutual funds, and so many fund companies touting double-digit returns, you’re probably ready to jump on the bandwagon, if you’re not already. If you are, consider these tips first before you do.

Tips for mutual funds investors

Read the fund’s prospectus. This is the fund’s selling document and contains information about costs (such as loads, expenses and management fees), risks, past performance and the fund’s investment goals. You can get a prospectus directly from a fund, or from your financial advisor. Read it carefully before you invest.

Make sure a mutual fund fits in with your investment goals and risk tolerance. Are your investment goals short-term (three-to-five years) or long-term (five years or more)?

Once you determine this, select a fund with equivalent goals. For example, a fund that invests in three-month government bonds is meant to be held for the short-term, while a fund that invests in growth stocks is probably a better choice for long-term investors. You must also consider the level of risk involved in any mutual fund; generally, the higher the potential return, the greater risk. Your financial advisor can help you make these decisions.

Look at performance figures in relative terms. Many funds tout double-digit returns, but there are many questions you should ask about these numbers. Just because a fund returned over 20 percent last year doesn’t necessarily mean that it will earn that return in subsequent years. In fact, this year’s number one fund could easily become next year’s below average fund. Look at other indicators like its five-or ten-year track record, as well as short-term performance. Short-term performance dips could indicate that a stellar performer is headed down. Also, consider the fund’s peer-group performance. Good sources for performance figures are the financial pages of your local daily newspaper or The Wall Street Journal.

Select funds that offer you flexibility and portability. Many fund families allow you to exchange your shares for shares of another fund managed by the same adviser. Although you may be charged a fee for this service, it is usually less than transferring assets to a new fund family. Some brokerage firms now offer portability, which allows you to take proprietary funds with you if you change brokerage firms.

As with any financial decision, the advice and counsel of a financial advisor is an invaluable resource in helping you choose investments that suit your life stage and income needs.

As with all securities, the value of the fund will fluctuate with market conditions. Therefore, an investor’s shares, when redeemed, may be worth more or less than their original cost.

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The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Kevin FitzGerald is First Vice President-Investments at PaineWebber. He focuses on the areas of professional money management, asset allocation and retirement planning. He can be reached at 1-800-654-6162, ext. 448.