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.

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

``With some groups, like Fidelity,'' Mr. Fosback adds, ``they have so many funds, they're always going to have one in the top 10 in every performance measurement period,'' By the same token, groups like Fidelity also have funds in the bottom 10 for each period, too.

Understanding this is just one problem investors face with the widening assortment of funds. While some investors may be confused, most experts see more opportunity to invest in areas once limited to large investors, to use sophisticated investment techniques like futures and hedging, to and make more money.

``I would say it's never bad for consumers to have more choices,'' Mr. Hopewell says. ``The idea that more choice creates more confusion and is therefore bad is not a philosophy I am comfortable with.''

A wider variety of funds does ``take some energy to distinguish one from another,'' he continues. ``But there's more ability to find something to fit each person's needs.''

``The downside [of the growth in funds] is that with so many, it's difficult even for professionals to come up with the right funds for their clients,'' says Reg Green, editor of Mutual Fund News Service in San Francisco. ``The increased specialization of funds is bound to be confusing....But overall I think the wider number of choices is a good thing. There are about as many funds now as there are stocks on the New York Stock Exchange, and nobody has complained about that range of choices.''

More funds than stocks on Big Board

Actually, there are more mutual funds than stocks on the Big Board, where 1,584 companies were listed at the end of March.

Of the 300 or so new funds, 30 percent were money market funds, notes Roger Servison, vice-president for new product development at Fidelity Investments in Boston. ``And 36 percent were bond funds. So two-thirds of the new funds are in areas that are relatively easy to understand and analyze.''

There are several factors driving this growth, Mr. Servison says. ``First of all, you have a lot of new investment interest out there. Futures. Options. A lot of these new funds are using portfolio insurance strategies. And that's good for the investor because most of them are very sophisticated strategies that most [people] would have difficulty doing on their own.

``Then there's international investing. A lot of these new funds have been internationally focused. That's a whole new area of interest, particularly with what's happened to the dollar recently, and that would be very difficult for investors to participate in without a mutual fund vehicle.''

Even with all the new funds, many investors may still want to look for a solid, basic fund with a history of steady performance. Two such ``foundation funds,'' Mr. Fosback says, might be Mutual Shares and Twentieth Century Select.

``Mutual Shares has a good record of low volatility year in and year out and it turns in good returns,'' he says. Part of the fund's portfolio, he notes, is made up of stocks whose companies might be either in financial difficulty or even bankruptcy. ``There are some good opportunities here,'' Fosback says, ``but they're hard for the average investor to figure out.''

Open an account for a dollar

Twentieth Century Select, he says, invests in smaller stocks or more growth-oriented companies. ``Over the long run, the smaller stocks are the big winners,'' he notes. While this bull market has been led by big blue chip stocks, most up markets are led by advances in smaller stocks. An added attraction for Twentieth Century, Fosback points out, is its no-load, no-minimum policy: an account can be opened for as little as a dollar and there is no minimum required for subsequent investments.

(For a discussion of some other funds with long records - more than 30 years - of solid performance, see page B6.)

While these funds have survived several ups and downs in the markets over the years, it's almost certain that some of those created in this bull market won't survive the next attack of the bears, no matter how aggressively they have been marketed today.

``In the next bear market, some funds will go,'' Fosback says.