PERSONAL FINANCE : DOWN THE ROAD : MUTUAL FUND PRIMER

Mutual funds have become one of the nation’s fastest growing investment vehicles. No wonder.

They are the small investor’s money manager, allowing you to obtain a piece of a professionally managed, diversified portfolio of stocks or bonds with an initial investment of as little as $100. Good funds will usually outperform such less exciting investments as certificates of deposit and Treasury bills.

But for many novices, picking a mutual fund is a daunting chore.

Kurt Brouwer, president of Brouwer & Janachowski, a San Francisco investment firm, has very specific rules for picking high-performing funds. Invest in a fund, he says, only if it passes all of these tests:

- It has never lost 15% or more of its value in a single year.

- Its annual expenses total less than 1.5% of assets, provided assets total more than $30 million. Very small funds of less than $30 million naturally tend to have high expense ratios because some costs are more or less fixed regardless of the fund’s size.

- It does not borrow money to buy extra stock.

- It did not lose badly during the market downturns of 1973-74, 1977, 1981-82 and, in the case of funds that invest in small-company stocks, mid-1983 to mid-1984.

- It does not charge so-called 12b-1 fees of more than 0.25% of assets annually. The fees are used for marketing to attract new investors.

- It has outperformed the most relevant market index over the last 10 years. A possible exception to this rule are newer funds run by portfolio managers who consistently beat the market while previously running other funds.

Michael D. Hirsch, chief investment officer at Republic National Bank in New York, believes that before handing over money, you should telephone the fund and demand to speak with someone conversant in its goals. The statement of purpose given in a prospectus is often copied verbatim from another fund’s prospectus, with only the names changed, and thus the information on investment strategies is unreliable, he charges.

One of the most comprehensive reference books for evaluating mutual funds is “Wiesenberger Investment Companies Service,” a 1,000-page tome available in many libraries.

Also popular is the “Handbook for No-Load Fund Investors” ($38) and the monthly No-Load Fund Investor newsletter ($82 a year). Write: P.O. Box 283, Hastings-on-Hudson, N.Y. 10706.