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Financial Planning: A Midyear Guide 1987 : part three: Mutual Funds : New Mutual Funds Appeal to Those Who Like Element of Risk

June 21, 1987|Victor F. Zonana | Times Staff Writer

Until recently, investing in common stock mutual funds was considered, well, boring.

"The funds were for conservative people who wanted a managed investment--something that they didn't have to worry about," said Neal Litvack, marketing manager for Fidelity Investments.

But times have changed, and with a vengeance. Purveyors of mutual funds have come up with so many new twists in recent years that today's investor faces a bewildering array of choices. Those choices, financial planners say, encompass a spectrum of risk that ranges from conservative to wildly speculative.

The industry has added many new categories of funds to the once-bland menu of "growth" funds and "income" funds. Today, there are index funds and international funds, funds that invest in a single stock market sector such as technology, and "strategic" funds that employ such sophisticated trading strategies as hedging.

There is even hourly pricing for investors who want to jump in and out of the market, and short selling, for those who want to bet against a particular stock market group.

"For the average investor, it is a jungle out there," said San Francisco financial planner Lawrence A. Krause. He frets that unsophisticated investors are being lured into risky investmen1948284517impressive past performance.

"These people will panic when the stock market, as it inevitably must, turns against them," Krause said, adding that heavy redemptions by frightened investors will accentuate and prolong a stock market downturn.

Other critics view the proliferation of mutual funds as a sign of unhealthy speculation, although industry spokesmen insist that mutual fund companies are merely providing investors with more choices.

Are they ever. The number of mutual funds has climbed almost as quickly as the Dow Jones industrial average. The total count, including bond and money-market funds, just broke 2,000, up from 1,843 at year-end 1986 and 1,531 at the end of 1985. There were just 426 funds at year-end 1975, according to the Investment Company Institute.

To put those numbers in perspective, only 30 new funds were born in the entire decade of the 1940s, for a grand total in 1950

of 98 mutual funds.

But the recent innovations in the industry involve more than just a

proliferation of investment vehicles. Funds now can be bought and sold with a phone call, eliminating redemption hassles and potentially costly mail delays.

Last July, Fidelity Investments went the industry one better by introducing hourly pricing on its 35 Fidelity Select portfolios, which focus their investments on single market sectors or industries.

"It gives the investor the opportunity to match his transaction to what is actually happening on the stock market floor," Litvack said. "It gives the investor more control."

Other mutual funds are priced just once a day, at the end of trading, so their investors must wait until the end of the day for their buy or sell orders to be executed.

Given today's volatile stock market and huge intraday price swings, hourly pricing can be a valuable feature for the nimble trader who wants to jump in and out of the market.

"In effect," explained Litvack, "we are creating our own stock market."

There are Fidelity Select portfolios that focus on such broad sectors as technology and precious metals and such narrow sectors as computer software, American gold and restaurants.

In February, Fidelity added another first for investors in its eight most popular Select portfolios: the ability to sell a portfolio short.

Shorting involves the sale of borrowed stock by investors who hope to profit by repurchasing the stock at a lower price.

Suppose an investor believes that gold prices are about to drop. The Fidelity short-selling program allows the investor to short Fidelity's precious metals portfolio, which invests in companies that mine gold and other precious metals.

As is the case with individual stocks, people who short mutual funds must initially deposit cash or marketable securities equal to a minimum of 50% of the market value of the shares sold short. Investors may borrow the rest, paying standard margin interest rates.

Perhaps for that reason, perhaps because mutual funds investors tend to be less sophisticated than stock market players, the program has yet to catch fire. Of the 225,000 people who have a total of $3.4 billion invested in the Select portfolios, only about 500 have participated in the short-selling program, according to Litvack.

Another reason the program has been slow to catch on is that investors who feel bearish about an industry are likely to pick what they think is the weakest stock in the group for shorting, rather than shorting the entire group.

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