How to Make Money

JUST as there is no perfect person or painting or poem, so there is no perfect investment. But the one that comes closest for most people is the mutual fund.

What you get from a mutual fund, at relatively low cost, is professional management of your money. Your investments are handled by people who devote their full time and attention to them. You also get diversification. A fund buys a wide variety of securities and then sells its own shares to the public. The price of a share rises or falls every day, along with the rises and falls of the total value of the securities the fund owns. And you can sell your shares back to the mutual fund at any time.

Funds offer you an increasingly broad range of investment choices to meet your specific objectives. You can buy anything from aggressive but risky funds that aim for maximum capital gains to more conservative funds that hold bonds or tax exempt securities and aim to pay you high regular interest. Then there are money market mutual funds, which give you an escape hatch once readily available only to the rich professional investors. If you think there is trouble ahead for stocks, you can switch out of the stock market and into the safe money market just by making a phone call to the mutual fund company. To have this flexibility, just be sure that the company you choose offers a variety of stock, money market and other mutual funds.

Mutual funds often beat the broad market indexes. From 1973 to 1989, funds that invest primarily in stocks gained more, with all dividends reinvested, than the Standard & Poor's index of 500 stocks. But short term investments in mutual funds can be very risky, particularly in declining markets. Too many people learned that lesson in the crash of 1987, when many funds though by no means all of them plunged.

Once you invest in a fund, you may receive dividends every quarter and capital gains distributions semi annually, or annually if the fund has earned either. A fund earns and distributes capital gains if and when it sells securities at a profit. Almost all mutual funds offer to reinvest your earnings automatically in additional shares. You can also use mutual funds for your Individual Retirement Accounts and Keogh plans.

What kind of mutual fund should you choose and how should you choose it? The answers are explored in later chapters, but in sum the choice depends on your objectives and on how much time you are prepared to spend regularly studying the stock market. Perhaps you follow the financial news but you certainly do not want to reexamine. and make changes in your investments as often as every week. What you need is a mutual fund that over the years consistently climbs more than the stock market averages during good times while not falling more than the averages in bad times. Quite possibly that will be one of the so called growth funds, which invest in the stocks of expansive but well established companies, or growth and income funds, which favor bonds and the stocks of large companies that yield big dividends. Pick with care because many of these funds do not do as well as the market averages. Those that do usually have managers whose records of success go back five or 10 years.

On the other hand, what if you are willing to pay really close attention to your investments and try for spectacular gains during bull markets? Then you are a candidate for so called maximum capital gains funds. They are aggressive funds that search for the fast moving stocks of small, potentially rapidly rising companies. But be ready to bail out of such a high flier quickly. Maximum capital gains funds tend to climb fast and then tumble fast when the market starts to turn down.

You can specialize and hedge your bets by buying so called sector funds, which concentrate on specific areas of the economy. Let us say you are essentially optimistic about stocks but also a bit wary about a possible resurgence of inflation. In that case, you can invest part of your assets in a technology stock fund, which buys into promising though risky technology companies. But simultaneously you would keep another part of your money say, 10 % in a fund that buys gold mining shares. They most likely will jump if severe inflation threatens.

A major decision is whether to buy a fund from a stockbroker or a financial planner or directly from one of the mutual fund companies. The broker or planner will charge you a load, or commission, usually 2% to 81/2%. But for that, he or she will also give you considerable advice. If you feel you need that counsel, it makes sense to buy a load fund. But if you do not need hand holding, you might as well buy a so called no load fund directly from a fund company and save the commission. For a directory of no load funds, send $5 to the Mutual Fund Education Alliance, 520 North Michigan Avenue, Suite 1632, Chicago, Illinois 60611.

Even with the commission taken into account, the strong long term performers tend to be split fairly evenly between load and no load funds. However, if you want to put your money in a mutual fund for only a short time a year or less you should go with a no load fund. A load fund always has to earn a higher total return to perform as well as a no load. And one year is seldom long enough for a load fund to do that.

Some previously no load funds are charging fees of I% to 3 % when you buy, and others impose exit fees. More than 1,000 funds are using yet another method: under what is called the 12b I plan, fund managers take money directly from shareholders' assets to pay for advertising, marketing and distribution. Funds charge anywhere from 1/100 of 1% to 1.25%. To discover if you are paying a l2b I levy, look in your fund's prospectus for the table that itemizes all expenses in a standard format and shows the hypothetical total costs over at least one and three years.

Whether you choose load or no load, market professionals advise that you not necessarily buy the hottest fund of the moment. As mentioned earlier, the funds that do spectacularly well when the market is rising often do spectacularly badly when it begins to fall. In short, this year's heroes can easily turn into next year's bums.

So it is wise to look for funds that have been consistently profitable over the years, those that have outperformed the broad stock indexes in both up and down market cycles. This provides the best test of fund managers' ability to handle money over the long term. To compare the performances of 750 mutual funds over the current year and the previous five years, you can buy Mutual Fund Profiles, a quarterly published jointly by Standard & Poor's and Lipper Analytical Services. The four issues appear in November, February, May and August and cost $110. To subscribe, write to Standard & Poor's Corporation, 25 Broadway, New York, New York 10275 0123.