SOME people won't buy a car when a new model first rolls off the production line. They'd rather wait until all the bugs are out before they put any money down. Many in the investment business stand by this same rule. Don't buy a fund in its first year, no matter how tempting it looks, they advise. ``We prefer ours a little seasoned,'' says one investment specialist in New York.
Not everyone heeds this advice, however. With the recent wave of new mutual funds, investing in them has swelled, not ebbed.
While analysts tend to regard young funds with some interest but more than a little caution, many investors see them as ways to break into and cash in on new markets.
The rise of new funds has created more investment opportunities, but has also made it harder for the average investor to spot the weaker funds, those riding a market fad, or carbon copies of successful funds.
For this reason, many will not even consider a fund until it has passed the ``three-year mark.'' A ten-year period is the measure most often used to determine a fund's performance, because it covers a variety of market conditions, and rules out any special short-term circumstances that might favor a particular type of investment. But younger funds, lacking a long track record, may have less than a year in which to be judged.
However, other investors will not discourage new funds simply because they are still young, says Steven Norwitz, of T. Rowe Price, an investment firm in Baltimore.
``Small, new funds have the great advantage of flexibility, although they lack the stability of older, larger funds,'' says Reg Green, of the Mutual Fund News Service in San Francisco. And, they can enhance an already diverse portfolio.
Finding the fund that's right for you means you have to ``search a little more, and do your homework,'' says Gerald Perritt, editor of The Mutual Fund Letter, in Chicago.
Here's what some of the experts look for when doing their ``homework:''
An experienced manager. Does he or she have a successful track record?
Success. How and why has the fund succeeded so far?
Diversity. Does the fund have a ``sensible'' variety of investments?
Safety. Does the fund's return cover the risks it takes to meet its objectives?
Investment style. How does it plan to meet its objectives?
Like any fund, a new one should suit your own risk tolerance, and match your own objectives, Mr. Norwitz notes. Some investors enjoy the excitement of taking an extra risk, a risk which the novice may wish to avoid.
Since a young fund doesn't have much of a performance record, you have to rely on the fund manager's track record.
``The family a new fund comes from is a very good clue as to the kind of manager you're dealing with,'' Mr. Green says. Whoever is running it should have a history of investment success, at least part of which is in the same area as the new fund, says Donald Rugg, president of Charlesworth & Rugg, a California money management services firm.
When the Meridian Fund was started two years ago, its manager had proven his ability to maneuver well in a rough market, says Vivian Keegan, the fund's business administrator. ``He attracted quite a bit of attention,'' she says. This fund invests in small and medium-sized companies.
Another fund, called the Pasadena Growth fund, is less than a year old, but has already gained $13 million in assets solely through word-of-mouth, says its manager, Roger Engemann. This no-load, open-end fund also relies on small but fast growing companies, which do better than larger companies over long periods of time, Mr. Engemann says.
Although his other mutual funds invest in larger companies, he says, this one doesn't, and is geared to those who ``don't want the volatility that growth-oriented companies have demonstrated over the past few years.''
But while a lot of young funds show very good early performance records, such high percentage gains can often be misleading, says Michael D. Hirsch, vice president and chief investment officer at Republic National Bank of New York.
Investing in new funds is ``a mixed bag,'' Mr. Perritt adds.
Because initially, newer funds tend to be better performers. And being small, they have a smaller and more flexible asset base than a larger fund, and can therefore buy in and out of a stock much more quickly without disturbing the price.
But being small is no guarantee that a fund will perform well. ``Size has got to be allied with the right kind of philosophy and management,'' Green says.
This same flexibility can bring an equally large percentage drop. And while new funds often overtake larger, older funds on the [market] upturn, he says, they also react more to market fluctuation.
A rash of ``mutual fund clones,'' as one small fund administrator called them, have caused investment analysts to warn those interested against jumping at young funds that show immediate big gains in performance.
``You've got to watch out for a lot of new funds that are merely following an investment fad,'' Perritt says. Funds that come out in the middle, or at the tail end, of a market spurt, may be due for an equally immediate drop, he says.
A lot of these are specialized funds, which can be easily avoided by working only with diverse, and more conservative ones. ``If they're specialized in an area that's very hot, you've got to be leery of them,'' Mr. Norwitz says.
Those that are doing exceptionally well, like the gold funds over the past year or so, Green says, may be viewed by the novice as a very good investment. But being so dependent on special circumstances usually is not a very good strategy, especially for a young fund.
Many of the prosperous new funds, like the year-old Babson-Value Fund, are successful simply because they are as ``sensible'' as other mutual funds that have been around longer, Perritt says. And they often come from a well-known family of funds with a history of stable management.
Because the environment has become so competitive, says Perritt, ``fellows coming out with a single fund probably don't stand a chance of sticking in the long-run.''
``But if it's made it through three years, then it's passed the market test,'' says Michael Hirsch.
Although an uncommon problem, questions can also arise with the objectives in a fund's prospectus. ``Sometimes, even though a new fund has stated its objective, it might be groping around for a specific style of investing,'' Mr. Rugg says. This is very rare indeed, analysts agree.
But says Green, you sometimes do find a manager who changes his mind after a fund has come to market, and shifts the weight of his portfolio. If he does, however, he runs the risk of being blamed for any decline experienced by his fund. The best way to insure against this is to do thorough research on the consistency of the manager's investment style, analysts say.