What to Weigh in Picking Mutual Fund Family
What are investors doing with their money now that returns on the most conservative investments, such as Treasury bills and certificates of deposit, have evaporated?
They’re pouring money into mutual funds like never before. Net flows into these investment pools are running at roughly twice their 1991 pace. And 1991 was the biggest year for mutual funds since the record year of 1986, according to the Investment Company Institute, the industry’s Washington-based trade group.
Most of the influx seems to be from unseasoned investors who may be unsure about how to choose individual funds--a question that even savvy insiders can’t agree on. With about 3,500 funds to choose from, it is a troubling question indeed.
So how do you choose an individual fund? Here’s a thought: Don’t even try.
Consider shopping for a fund family instead.
Then, once you’ve chosen a family or two you’re comfortable with, your decision might boil down to whether to put your money into a stock, income or money market account.
This strategy immediately narrows the field to about 300 companies. And it could save you money as well.
If you stick with one fund family, you usually pay only one “load”--that’s fund-speak for an up-front sales charge equal to a percentage of your investment--even if you transfer into new load funds. And that can boost your overall return.
Consider what happens to someone who starts with a $10,000 investment and earns 10% annually. If this investor puts money in 5% load funds, paying a new load when he switches funds in the third, fifth and seventh years, his account value amounts to about $22,048 at the end of the 10th year. But, if he pays the load just once, when he first invests, he’ll accumulate $25,717.
Even those who invest solely in no-load funds--those without up-front sales fees--can benefit from the convenience of dealing with only one or two fund families. It simply keeps your investment and tax information consolidated.
How to decide on a family? A few funds can be eliminated solely on the basis of their performance. Guides published by Lipper Analytical Services and Morningstar Investments can help you identify poor-performing fund families.
Several more can be eliminated because they don’t offer the types of funds you like--such as tax-free municipal bond funds or global income funds.
After that, investors can limit the choices by concentrating on service. Ideally, investing with a mutual fund should be convenient as well as economically rewarding. You need only decide the types of things you want and determine where you can get them. Here are a few thoughts to consider:
* Do you want to deal with a big family that has billions under management and offers many types of funds? Or a small family that may provide greater accessibility to fund managers? If you want a family with more than 10 funds, your choices drop to about 50.
* Do you want to be able to invest in person--either through branch offices or investment counselors--or are you comfortable investing over the phone? If you must invest in person, your choices drop to a handful of big companies with lots of branch offices, such as Fidelity Investments, or to load-fund companies, such as Franklin Securities, that sell their wares through investment counselors and securities brokers.
* How much do you have to invest? Almost all fund companies have minimum investment requirements that usually range between $1,000 and $1 million. A few companies, such as Janus Group, will waive minimum requirements if you agree to invest regularly.
* How do you want to invest? All companies will accept lump sums, but many will also set up automatic savings plans through employers, banks or even the Social Security Administration.
* Do you want or need services in another language? Some groups, such as Colonial, provide investment materials in Spanish, for example.
* Is it likely you’ll want to talk or invest outside of normal business hours? Many big fund companies, including Fidelity, T. Rowe Price, Dreyfus and John Hancock, offer 24-hour automated phone services, which allow you to check account balances, order checks and handle other routine transactions at any time of the day or night. A few will let you transfer money between accounts, redeem shares and wire money in the wee hours as well.
* How often do you plan to alter your investment plan? Some groups, such as Franklin and Hancock, will allow you to transfer in and out of their various funds as many times as you like. Others, including Fidelity and T. Rowe Price, limit the number of transfers you can make in one year.
