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1997-98: REVIEW AND OUTLOOK

The Basics of Mutual Fund Investing

There's Plenty of Info for 60% Who Haven't Yet Taken the Plunge

January 04, 1998|RUSS WILES

If you haven't yet joined the mutual fund revolution, don't worry--you're not alone. Roughly 60% of U.S. households still don't own one of these investments, although it's safe to say that most middle-income investors are at least familiar with the fund concept.

In decades past, people purchased mutual funds either directly from the company--the so-called no-load or no-commission route--or through a full-service brokerage.

Today you may find yourself dealing via a bank, a financial-planning firm or even your place of employment, assuming it offers a 401(k) or 403(b) retirement program.

Even if you lean on a financial advisor, it's wise to be familiar with fund basics. A good source for general information, including toll-free phone numbers, is the Directory of Mutual Funds and other Investment Companies, published by the Investment Company Institute, a trade group. The directory costs $15 and can be ordered by writing to the ICI at 1400 H St. NW, Washington, DC 20005-2148.

For do-it-yourselfers, another good publication is the "Investor's Guide to Low-Cost Mutual Funds," a product of the Mutual Fund Education Alliance and also $15. Write to Department 0148, P.O. Box 419263, Kansas City, MO 64193-0148, or call (816) 454-9422.

For more in-depth coverage of funds, including performance ratings on a five-point scale, check out "Morningstar Mutual Funds" or the "Value Line Mutual Fund Survey," both of which can be ordered by subscription or found in large libraries.

Funds that have earned high marks often tout their ratings in advertisements, but it's important to note that these grades reflect past results and thus may not be indicators of future success. Also, you should be aware that Morningstar and Value Line employ different assumptions in handing out ratings, such as basing their grades on different time periods. To make things more complex, Morningstar's top grade is a 5, whereas Value Line's is a 1.

Unless you deal through a broker, the standard procedure for investing is to call a fund company on its toll-free phone line, order the prospectus, read the literature when it arrives in the mail, then send in your completed application with a check. You can expedite the process by downloading a prospectus and application from the Internet, assuming the firm offers this option.

Although a few funds require minimum investments of $10,000 or even more, for most the minimum is $3,000 or less. Even if you can't afford a fund's normal minimum, you will be able to buy shares for $2,000 a year or less if the company offers individual retirement accounts, as most do.

Of the many interesting marketing wrinkles in recent years, none compares with the so-called supermarket concept. You can now buy and hold various funds from different companies without paying any commissions--and keep them all in one account at a discount brokerage such as Charles Schwab, Fidelity Investments or Jack White. Consolidating your investment activity helps to simplify your paperwork, including tax records. Also, you can quickly switch money among fund families without waiting for your redemption check to arrive in the mail each time.

Investors usually incur no added fees to invest through a supermarket; rather, participating fund companies pay a small fee to be included in a program. These companies save money by having the brokerage handle shareholder services for them, and by riding the brokerage's marketing coattails.

Full-service brokerages offer their own variations of supermarket programs, and many even offer no-commission funds. But investors in these plans pay for advice in some form or another, typically as an advisory fee of 1% to 1.5% of their account balance each year.

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