Early bird tickets for Baltimore’s BEST party on sale now!

A map to guide you in the mutual fund labyrinth


LOS ANGELES -- For many folks, wading into investment waters for the first time means dipping their toes into the world of mutual funds.

That's not surprising, since the first experience usually comes via a company 401(k) or 403(b) plan. It's also easier to invest in mutual funds than to buy an individual stock or bond. But to make the most money out of mutual funds, investors need to find the darlings among the 8,000 funds available, not high-cost dogs. It's not too difficult, and the payoff could be enormous.

Mutual fund investors need to re-evaluate their funds if they can't answer yes to each of the following questions:

Are you invested in a good mutual fund that beats or at least tracks a market index?

Are you adequately diversified?

Can you easily keep track of the paperwork from all your funds?

Do you have a core group of funds you plan to stick with for the long term?

Are you in a low-cost, no-load fund?

Assuming you've answered no to at least one of those questions, here are five steps in managing your mutual fund portfolio.

Step 1: Figure out what you have. Look at the funds' investments, whether in stocks, bonds, money markets or other investment vehicles. Find out whether you're heavily geared toward one type of investment, such as blue-chip stocks like AT&T; and GM, or small-cap technology stocks. Perhaps most of the money is in low-risk money market funds. Tally up where your money is invested.

Step 2: Make sure you're adequately diversified. While each mutual fund is in itself a diversification of investments, many funds invest in one broad sector or company type. While allocating your assets depends on individual preferences and needs, the general rule for people with more than 10 years before they'll need the money is to be 90 percent to 100 percent invested in stocks, said Steve Merritt, president of the nonprofit National Association of 401(k) Investors in Melbourne, Fla.

Among stock funds, make sure your money is divided among large cap funds, small to mid-caps, international and riskier issues.

("Cap" refers to capitalization, the amount of money the company is worth on the market. That number is derived by multiplying a company's share price by the number of shares outstanding. The Walt Disney Co., for example, is a large cap company because its market capitalization is about $84 billion. By contrast, International House of Pancakes' market cap is about $410 million, making it a small to mid-cap stock.)

Step 3: Build a core group of mutual funds. The foundation for your portfolio should be at least three main funds that represent half or more of your holdings, according to "A Common-sense Guide to Mutual Funds" by Mary Rowland.

One sample allocation: Between 25 percent and 50 percent of the money in a large-cap fund, 12 percent to 25 percent in a small-cap and the rest in an international fund.

Compare the fund's return against a market index. For large cap funds, use the Standard & Poor's 500 Index. Small caps could be measured against the Russell 2000 and bonds vs. the Lehman Bros. Aggregate Bond Index.

Don't automatically buy a fund recommended as the hot fund of the year. Look for funds that have performed well for five to 10 years.

Step 4: Avoid load funds as much as possible. Loads are sales commissions an investor pays to join, get out of or while invested in the fund.

A fund's turnover ratio -- whether the fund manager buys and sells a lot -- also determines the amount of capital gains taxes an investor pays. A 50 percent to 60 percent turnover is about average, while 100 percent is high.

Step 5: Review your funds once a year and make sure they still fit your needs.

Pub Date: 5/10/98

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad