More ways to win - or lose - big
HALF a trillion dollars. That's not a hunk of the federal budget. Or a big piece of the United States' debt. It's the money in US mutual funds. By the end of March, according to the Investment Company Institute, the nation's stock, bond, and income funds held assets of $505.9 billion. Those assets were spread among some 2,000 mutual funds, more than 300 of which did not exist a year ago. The new funds have given investors more ways to take part in corporate and municipal bond markets, international currency exchanges, options and futures markets, and convertible securities.Skip to next paragraph
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There are also more new funds pursuing old investment strategies: US stocks, bonds, money market instruments, as well as stock and bond markets around the world.
``We always get a lot of new funds when the market booms,'' says Lynn Hopewell, a financial planner in Falls Church, Va. ``It happened in the '60s, too.''
But the growth in the 1960s has been greatly overshadowed by the recent surge. Most of the funds that started two decades ago invested in the stock market. After all, that was how mutual funds began - professional stock-pickers who pooled the money of many investors to get better returns than those investors could get on their own. Since buying bonds was considered fairly easy and risk-free, there weren't many new bond funds in those days.
It's a different story in the 1980s, however. Over 70 percent of the new funds are of the bond or income variety. Investors, many of whom were introduced to mutual funds through high-paying money market funds several years ago, have turned to bond and income funds - especially bond funds - for high yields. Corporate bonds, utility bonds, foreign bonds, US government bonds, taxable municipal bonds, and tax-free municipal bonds are just some of the alternatives available to investors seeking the apparent security of bond funds.
In recent weeks, however, many of those investors have had some unpleasant surprises. Unlike money market funds, where the share price, or net asset value, never changes, the NAV on bond funds can go down. When interest rates started up earlier this spring, they took bond prices and the NAVs of bond fund downs with them. It was not uncommon for bond funds to lose 40, 50, 60 cents or more of their share price in a couple of weeks. The decline in share price more than offset any gain in yield. It was easy to lose money in a hurry.
Investors who stayed on top of the situation made hurried calls to their funds and switched all or most of their money to those lower-yielding but safer money market funds. If they didn't call at the very beginning of the slide, however, they may have been worse off, especially if they sold their bond funds at the low point.
``It's a tremendous problem for the average lay investor to correctly perceive the yield on bond funds,'' Mr. Hopewell says. ``Bond funds used to be stable, steady performers. Now, investing in a bond fund is almost like investing in a stock.'' One company, he recalls, advertised a bond fund with a 12 percent yield. ``But the true yield was more like 8 percent. Twelve percent included distribution of capital gains.''
This has been a growing problem for the mutual fund industry: as funds proliferate, the companies that sell them have to advertise more and more aggressively to win investors' hearts and cash. With bond funds, the way to do that is with large-type claims of big yields - and tiny-type reminders that yield and share price can fluctuate.
Another problem, says Norman Fosback, editor of the Mutual Fund Forecaster, a Fort Lauderdale, Fla. newsletter, is that ``investors will look at past performance in selecting funds.'' This is true of both bond and stock funds and it means that ``at any given time, certain funds are going to be at the top of a list [of best performers] and the same funds can be at the bottom later on.''
At both ends of the performance list