THE IDEA BEHIND mutual funds was to make investing simple for people who weren't comfortable picking stocks, but still wanted to be in the market. But choosing the right mutual fund has become like trying to pluck a tiny glass bead from a handful of sand.
The number of mutual funds has soared to 7,512 -- six times the number 10 years ago, according to Morningstar Inc., the Chicago-based company that tracks the mutual fund industry.
There are funds designed to invest in Internet stocks, mining operations and even sporting goods companies. There are funds for short sellers, and funds for "socially correct" investors.
"It is a very confusing game," says Jim Raker, a research analyst with Morningstar. "People ask me all of the time, 'What should I invest in?' You get so inundated with information."
"It is crazy," adds Avi Nachmany, an analyst with Strategic Insight, a New York-based mutual fund research company. Selecting the perfect mutual fund "is an impossible task."
And it's not likely to get any easier. In the first six months of this year, 310 new mutual funds were offered to investors.
Nachmany expects mutual fund companies to keep adding new funds.
"It is really very important from a management company view point that you have a wide range of complimentary investment styles and multiple offerings so you can insure that in any phase of the market cycle, you have one great fund."
The fast growth also has meant that the experience level of mutual fund managers is dropping, notes Robert G. Mewshaw, an investment counselor with Van Sant and Mewshaw Inc. in Lutherville. The average mutual fund manager has run a fund for just 3.3 years, Mewshaw says.
"It is terrifying. That says you have a lot of inexperienced people out there running billions of dollars," he says.
What's more, only 425 mutual fund managers have been running the same fund for 10 years or more, and only 1,168 funds have been in business for 10 years or more, Mewshaw says.
This explosion of mutual funds and the evaporation of the talent pool comes as millions of Americans are solely responsible for managing their retirement. Everyone from janitors to engineers to corporate executives is participating in company sponsored 401(k) plans, where they make decisions on how their retirement money is invested.
Gerry O'Connor, research director with Access Research Inc., a Windsor, Conn., consulting firm that works with mutual fund companies, said 401(k) plans take much of the pain out of picking a mutual fund because the choices are limited.
Plans generally give investors about six options, ranging from aggressive growth funds to guaranteed funds to bond funds, he says.
"If you talk about 401(k) plans, it is not the same world as for somebody who is an individual investor," he says. "For the person in a 401(k), there is a lot less potential for confusion."
O'Connor said Access surveyed 1,100 people who are contributing to 401(k) plans and asked if they were confused about the plan and its investment options. Nearly 40 percent said no, while 14 percent said they were confused.
But step outside the safety of a 401(k) plan and the sheer number of choices can either cause paralysis or result in poor decisions.
People are so confused, they are "starting to collect mutual funds like they collect stocks," says Deborah Voso, a certified financial planner with Voso Associates in Frederick. "I am just amazed."
She says investors she works with are buying the latest, hot mutual funds because they've read about them in magazines and newsletters.
"You end up with portfolios that have the same stocks in them," she says.
Experts say the best way to choose a mutual fund is to know why you are saving. Is the money for retirement, a house, college education or a car? If it's longer term, equities are the best bet because investors have plenty of time to ride the ups and downs, they say. If the investor has a much shorter time frame, short-term bond funds and money market funds are best.
When picking a fund, investors should also look at the management's tenure, the fund's long-term performance and fees, says John Woerth, a spokesman for the Vanguard Group, the nation's second largest mutual fund company.
Woerth says costs, or the fees investors pay for the fund, are often overlooked.
Vanguard, which is one of the industry's low-cost producers, charges mutual fund holders a fee of 0.31 percent a year on average, compared with the industry average of 1.11 percent. On a $10,000 investment, Vanguard charges $31 on average, compared with $111.
Don't become enamored by a fund based on one or two booming years, the experts say.
Last year, as the Dow Jones industrial average soared to record heights, it wasn't uncommon to see funds return well over 50 percent.
Says Voso, "Never look at one-year results. 1995 was fun but it wasn't realistic."
Pub Date: 8/26/96