"Mutual funds can be like a big box of candy. The investor doesn't know where to start." That sums up the problem faced by people who have decided it's time to invest in a mutual fund, says Paul Reed, editor of the United Mutual Fund Selector. This problem, he notes, often means people either put off going into mutual funds, or they spend a lot of time switching from one fund to another, which expends a lot of needless effort and can substantially reduce yields.
How, then, is an investor to decide what kind of mutual fund to pick?
In an interview in the Boston office that publishes the semi-monthly mutual fund advisory letter, Mr. Reed discussed some of the questions people should ask before investing and a few of the possible answers.
The first question he says people should ask is: Why are you investing?
"Many people don't have their objectives properly arrayed in front of them," he contends. "This can lead to excessive switching among no-load funds, which is going to disappoint a great many investors."
The Investment Company institute reported some $9 billion in mutual fund assets was switched from one type of fund to another in 1980, up 67 percent over 1979. The 1980 rate was 12 times higher than in 1975.
This reflects both the wider choice of fund options, the more volatile nature of the market, and greater investor awareness of the various alternatives offered by mutual funds, Mr. Reed. says.
He does not disapprove completely of fund switching. In fact, he suggests the average investor start with an investment company large enough to have several funds in its "family" so a person can switch easily if it is necessary.
Still, picking the right fund can be worrisome. A lot depends, Mr. Reed says , on a person's age and financial needs.
An older couple nearing retirement, for instance, would most likely prefer an income fund. Its main objective is supplying money to the investor now, rather than years later.
Also in the income-producing category are the bond funds that invest in corporate and municipal bonds. The municipal bond funds, being tax-free, are usually intended for the upper-income, high tax bracket investor. As a rule, they offer a lower yield than corporate bond funds.
A younger couple, trying to save for their children's college costs, a house, or their own retirement, might consider a growth fund, with its goals of long-term growth. These funds primarily invest in stocks of companies that use income to expand rapidly instead of paying large dividends.
In between are the growth-income funds. They try to find a mix of investments that will pay some current income (though not as much as income funds) plus capital gains as the companies in their portfolio grow.
Combining many of the attributes of these various funds are the balanced funds, which invest in bonds, common stocks, and preferred stocks.
The money market mutual funds are quite different. Like the other funds, they pool the contributions of many investors and professional manage the money.However, rather than investing in the stock, bond, or commodity markets, these funds invest in the money market. There they buy the short- term debts of corporations, governments, and banks.
In choosing a money market mutual fund, the investor must compare the current yields offered by various funds. But with their money placed in short-term instruments, money fund yields can vary rather quickly. And apparently no one has ranked the money funds according to their consistency of performance over several years.
For the nonmoney funds, Mr. Reed prefers to see performance data covering the last 10 years. Although many funds and fund advisers use five-year data, 10 years "cuts accross a lot of bull and bear markets," he adds. "Triple-digit gains have been common for many funds over the past five years." But, he argues, these gains do not reflect the fund's performances in the 1973-75 recession, for instance.
While many people try to invest whatever they can afford at irregular intervals, a more conservative approach is called dollar averaging. Here, the investor buys the same dollar amount of one or several funds regularly, on the same day of every month. This method means fewer shares will be bought when prices are high, but more will be purchased when prices are down. The theory is that over the long haul, the average price of shares purchased will be lower than with irregular purchases.
Before this can be done, however, the investor needs to obtain information from as many sources as possible.
The Investment Company Institute, the trade organization for the industry, publishes a membership list that includes all the mutual fund companies, their addresses, phone numbers (many toll-free), and the type of funds they offer. The ICI is at 1775 K Street, NW, Washington D.C. 20006.
All the funds "will be only to happy to send out copies of their prospectus," Mr. Reed notes.This document lists the fund's investment goals and practices, its investments, executives, and recent performance data.
People interested in general information on the no-load funds that do not charge a sales commission, can write the No-Load Mutual Fund Association, Valley Forge, Pa. 19481.
The DAL Investment Company monitors the performance of 194 no-load funds. For $5 it will send a copy of its NoLoad Fund*X. The address is 235 Montgomery Street, San Francisco, Calif., 94104.
The Hirsch Organization, 6 Deer Trail, Old Tappan, N.J. 07675, publishes an annual Mutual Fund Almanac.
The firm that publishes Mr. Reed's United Mutual Fund Selector (semi-monthly, Mass. 02116.
The Wiesenberger Investment Companies Service, 870 7th Avenue, New York, N.Y. 10019, publishes annual, quarterly, and monthly reports on all types of mutual funds, including money funds. The firm will supply a free sample of its most recent monthly publication ($48 a year), a Wiesenberger official said. In addition, Weisenberger's annual review of the funds is available in many large public libraries.
For information on the money funds alone, write Donoghue's Money Fund Report, Holliston, Mass. 01746. The publishers will also send a free s ample of their weekly publication ($225 per year).