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New Protection for Mutual Fund Investors
Creators Syndicate
FIGHT BACK! BY DAVID HOROWITZ
New Protection for Fund Investors
Why have mutual funds become so popular over the past few
years? Because they offer a reasonable balance between risk and
return.
In terms of easy access to your money and investment
protection, it's hard to beat a federally insured bank savings
account. The risk is low, but so is the return. Mutual funds, on the
other hand, offer higher returns because the money is invested in
stocks, bonds, Treasury bills and other securities.
The value of those securities may rise and fall with the
market. But since the fund portfolio contains dozens or even hundreds
of different stocks, swings in individual stock prices are buffered by
the performance of other stocks in the portfolio. Mutual funds are
also professionally managed, which further reduces investors' risks.
That balance between risk and return is what makes one fund
different from another. Most are built around some specific investment
goal, such as annual income or long-term growth. Some funds specialize
in particular types of investments like high technology, overseas
stocks, utilities and tax-free municipal bonds. There are also funds
dedicated to promoting social causes and environmental protection. But
whatever the fund's goals, the basic rule of investing still applies:
the higher the return, the greater the risk.
With more than 5,000 mutual funds competing for investment
dollars, the Securities and Exchange Commission and the National
Association of Securities Dealers have finally drafted some guidelines
for mutual fund advertising. These new rules will help investors make
sense of conflicting promotional claims by those fund managers who say
they are industry leaders.
"We're No. 1!" Who says? Under the SEC's new regulations, any
fund that claims to rank high among its competitors in earnings must
disclose in its advertising who did the ranking and what criteria were
used. Was the fund No. 1 last year, or over the past 10 years, or over
the past 30 years? Funds are forbidden from using rankings compiled by
themselves or related companies. Nor can they claim to be first in
their field based on size alone.
Even so, investors should be wary about basing decisions on
such claims, however well they are documented. Past performance is no
guarantee of future earnings. Funds that advertise high returns may be
investing in high-risk securities. Is that what you want?
You have to go back and compare the fund's investment goals
with your own. What level of risk are you willing to take for higher
returns? Are you more interested in long-term growth or short-term
income? What's the purpose of your investment? Is it a retirement
fund, college fund or monthly income fund?
You should also consider each fund's history. The top 50
national funds have all been in business for years and have
established records for earnings and investor protection. Newer funds
may offer higher returns or narrowly focused investing strategies, but
the risk involved is also greater.
Don't overlook convenience. Is the fund managed locally? Does
it have a toll-free phone number where you can contact fund managers
with questions about your investment? Would you rather deal with an
investment officer at your own bank or directly with the fund
managers? These are all key questions in deciding which fund (or type
of fund) you want to invest in.
If you have any questions or comments, please write to David
Horowitz in the Consumer Forum+ (go FIGHTBACK).
COPYRIGHT 1994 CREATORS SYNDICATE, INC.
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