Choosing the Best Ones for You

BEFORE YOU invest in a mutual fund, write or phone the fund company for its prospectus and its latest financial report. You can find the addresses and phone numbers of most widely available funds in advertisements in financial magazines or the business pages of newspapers. Read the latest financial report to learn how much the fund has gained or lost not only over the past year but also over the past five or 10 years, and how well it has held up over periods of major market downturns. The report also lists the securities the fund holds.

Meanwhile, the prospectus should clearly define the fund's investment objectives. Make sure you are comfortable with them. Look also for the section that says whether the fund's managers are allowed to shift out of stocks and into, say, U.S. Treasury bills or certificates of deposit as market conditions change. This flexibility to switch into fixed income investments gives you added protection against losses when stocks turn down. The prospectus will also tell you whether the fund carries a load, up to 81/2%, or is a no load. Some funds also charge fees of I % to 5% when you sell your shares; be sure to check in advance whether the fund you are considering levies such redemption fees.

You typically buy a no load fund directly from a mutual fund company and a load fund from a broker or financial planner. In return for the commission, the broker or planner should be able to give you investment advice and tell you the fund's objectives, what it invests in and how it has performed in both up and down markets. If he or she does not know or refers you to the prospectus instead, find another salesperson. Better yet, particularly if you do not need ongoing advice from a broker or planner, buy a no load fund and save the commission.

A load fund's strong performance over time can make up for the commission. But there is no evidence that load funds as a group outperform no loads. Above all, remember this: a far more important consideration than the size of the commission, if any, is how well the fund has performed compared with others.

Be aware that funds on a roll are sometimes swamped with new shareholders and more money than they can wisely invest. Make sure you note the size of a fund's total assets. Generally, smaller funds are nimbler than their larger brethren. That is because funds managing less than $100 million of capital are better able to invest a significant portion of their assets in a promising company with a slim amount of outstanding stock. The larger a fund, the more difficulty it has buying a lot of those thinly traded stocks of small companies. If the fund's total assets have risen to $500 million or more over the past several years, chances are it will move away from emerging growth companies. Many mutual fund firms manage a "family" of funds. They let you switch your money from one fund to another, usually just by making a telephone call. This convenience can be important if you buy into a

fund that invests aggressively for maximum capital gains. When the fund is rocked by a declining market, you can quickly switch to a steadier income oriented fund.

A superb way to invest in mutual funds is to buy the shares of not just one but several of them. This increases your chances of scoring consistent gains. For example, over the three years to 1989, you would have done well if you had put money into international funds, growth and income funds and capital appreciation funds. Those that specialize in foreign owned companies scored impressive gains while the dollar was decreasing in value relative to foreign currencies. Lately these funds have tumbled, due in part to the strengthening of the dollar. But growth and income funds have remained sound even though investors lost faith in them after the 1987 crash. Capital appreciation funds have tracked the continuing strong economy.

You can get even greater diversification by investing in other kinds of funds that specialize in single industries or geographical regions. But because these so called sector funds concentrate in one economic area, you should limit your investing in any one of them to about 10% of your assets. That way you will not be hurt too badly if that sector turns down.

Whichever types of funds you choose, you should consider following a strategy called dollar cost averaging. You just put an equal amount of money into the same fund at regular intervals. That way, you buy most of your shares when stock prices are down, and you avoid the temptation to invest heavily near a market peak.

The choices you make among funds will depend on your career and your financial and family situations. You need to ask yourself what your financial commitments will be in the future for college costs, retirement or other necessities. Can you afford to take some risks now, or is preserving your money supremely important to you?

Once you have answered such questions, look for a package of different mutual funds that suits your needs. Many strategists recommend putting 20% to 40% of your investment money into corporate or tax exempt bond funds. That's because bonds pay unusually high interest rates. Also, some bond funds have done well in recent times. Among top ranked corporate bond funds for the year ending June 30, 1989, were SEI Institutional Managed Trust Bond, which returned 18.99%; Vanguard Fixed Income Investment Grade, with a return of 15.62%; and Dreyfus A Bonds Plus, which returned 14.4%.

You might also consider one of the municipal bond funds. Their dividends are usually exempt from federal taxes. For a list of the top performing high yield tax exempt funds for the five years ending June 30, 1989, see "Your Investments/Mutual Funds: Tax exempt Bond Funds."

You also have to decide how much money to put into the different types of funds. If you are young and confident and have few obligations or dependents, you might want to emphasize aggressive funds that aim for maximum capital gains. But if you are saving for college bills or an approaching retirement, you probably would be more comfortable with so called growth funds, which are less volatile, or still more conservative growth and income funds.

If you are planning to buy and hold your mutual fund shares, you will most likely turn away from the most aggressive stock funds. They are better suited to people who are fund switchers. Such investors dump their stock fund shares and buy money market fund shares when the stock market turns down.

Always remember that you will make the wisest selections if you consider such changing personal factors as your age, your family situation and your financial responsibilities. Take a fairly young couple, earning comfortable salaries from their two jobs. They would be smart to aim for long term growth of capital. To get it, they might put one third of their mutual fund assets into aggressive growth or long term growth funds. Another third would go into a growth and income fund, and the last third into a bond fund.

A couple in their 40s and with two or more teenage children would take a different tack. College costs probably would be on their minds. So such a couple would want to keep a fair amount of their mutual fund money say, 10 % in a money market fund, where they could withdraw it swiftly and without fear that their shares had lost value. Our mid life couple would also be concerned about building a nest egg for retirement. Thus, they probably would want to put half of their fund money into growth and growth and income funds, a third or more of their investments into bond funds and perhaps 5% in a gold fund as a hedge against inflation.

Still older couples who need to concentrate on preserving whatever wealth they have built for retirement in a few years might put 20% of their fund assets into growth funds with strong records in weak stock markets. Another 35% might go into growth and income funds, and still another 35% would be put into bond funds, including one that invests in tax exempt bonds. The remaining 10% should go into a money market fund.