BOSTON — In buying retail-oriented mutual funds, say fund experts, consider the following key points:
1. Know which segments the fund's retail companies are in. Reason: Certain subsectors follow the economy. In up markets, mass retailers such as Sears and J.C. Penney tend to hold their own, or outperform the market. But down markets can be troublesome for these companies as consumers become more selective and head to discount chains such as Wal-Mart.
2. Specialty stores tend to do well irrespective of the economy. Examples include The Gap, The Limited, and TJX Companies. Many retail funds carry such firms precisely to ensure steady returns.
3. Find out whether a prospective retail fund has cooked up its returns by buying into a red-hot online retailer. An Internet company may take a harder hit in a downturn, lowering overall returns for the fund.
4. Some funds invest in liquor, tobacco and gambling companies to bolster returns. Read through a fund's prospectus if you want to avoid such companies.
5. While retail funds can be productive, remember that you can usually duplicate their returns by buying into an index fund, particularly those geared to the Wilshire 5000 index, which is a listing of virtually all publicly traded companies.
6. Retail funds may have slightly higher management expenses, because they require more careful monitoring by the fund companies. But be wary of stock funds with expenses ratios above 2 percent, unless you are dealing with a major fund company, say experts. If the expense ratio seems unusually high, ask a fund spokesman to explain why. It may affect your buy decision.