Tending your mutual-fund garden involves choices on reaping

The hardest part of investing in mutual funds is having to make choices. If you choose a stock fund over a bond or money-market fund, you still have to decide which specific investment objective you want to pursue: growth, aggressive growth, income, or a combination of all these.

Even after you pick a fund, your decisionmaking isn't over. On the application form you send in with your first check, you are asked to choose a method of distribution. For many investors, this can be as confusing as picking the fund in the first place.

''We get almost as many questions about distributions as anything else,'' says Jeff Wilkinson, assistant to the portfolio manager at the Denver-based Janus Fund. Much of the confusion, Mr. Wilkinson says, centers on the difference between distributions and dividends.

The dividend, he says, is similar to the dividend at any corporation: It is a share of the profits. Its size is decided by the board of directors, and it changes periodically depending on the company's fortunes, or it can be skipped altogether.

The distribution, on the other hand, is not something ordinary corporations have to worry about, while mutual funds are required to pay it, if there's anything to pay. To satisfy tax law, mutual funds must pay at least 90 percent of their taxable income (consisting of interest, dividends, and short-term capital gains paid by the stocks in the fund's portfolio) in the form of distributions to investors.

As for long-term capital gains, the fund can either include these with the distribution or reinvest them. This year's tax law, which shortened the capital-gains holding period from one year to six months, means that, for now, investors will have a slightly lower capital-gains tax burden.

Now that you know what the distribution is, you can decide what to do with it. Fund applications usually have three choices, or methods of distribution.

The first, and most commonly used, is automatic reinvestment. You never see the annual distribution, except for a little line on your fund statement. Instead of sending you a check every year, the fund uses the money to buy you more shares. This is very much like compounding at a bank, where interest is added to the principal to make a larger base for generating future interest. Of the three options, automatic reinvestment is probably the most efficient and the one that will make your investment grow faster in a rising market.

Most mutual funds prefer this option, too, since it saves them from having to print and send out so many checks. In fact, Wilkinson says, if you fail to pick one of the three options on your application, most funds will automatically begin reinvesting your dividends. Or if you don't know which of the three suits you best, check this one; you can always change your mind later.

The second option is to take the income portion of the distribution in cash, while reinvesting the capital gains in additional shares. This is good for people who want to use the income portion of their fund but don't want to eat into the capital. A retiree, for example, who has built up a mutual fund investment over several years may now choose to receive the income portion.

The third option is to take both income and capital-gains distributions in cash. While this will restrict the size of your investment, it will give you more income you can use and will simplify your accounting when you decide to sell the fund shares: with no reinvested distributions, the cost basis of the shares being sold will be the same as when they were purchased.

If you follow your fund closely, you'll notice its per-share price drops on the day of the distribution. The per-share price, or net asset value (NAV), is calculated by dividing the fund's net assets by the number of outstanding shares. After distribution, the net assets have dropped by the amount sent to shareholders who wanted their shares in cash. At the same time, the number of outstanding shares increases if more shares were purchased by those who selected dividend reinvestment.

Knowing the distribution date is also important for someone who hasn't bought any shares yet, or who wants to add to current holdings. If you buy before the distribution date, you have bought a share of other shareholders' profits and you immediately incur a tax liability. If you buy after that date, on the other hand, you will avoid the tax liability for that calendar year, and you will be able to buy cheaper shares with your money because the NAV will be lower. Lost Treasury coupons

I recently clipped a coupon from one of my US Treasury bonds. But before I could redeem the coupon, it was lost. Is there any way I can still redeem it? Does the Treasury keep records of coupon numbers, showing which ones have been cashed and which ones are yet to be redeemed? - F. M.

The Treasury does not keep such records, and your coupon can be redeemed by anyone. That's how ''bearer'' bonds got their name: the bearer is whoever carries the bond or its coupons to the bank teller window. There is a way, however, to protect your bonds in the future. You can register them with the Federal Reserve Bank, which will mail a check for interest, principal, or both to you or someone else you name. Ask your nearest Fed bank for Form PD3905, to designate the person who is to receive the payments. Send this form, along with your bonds and remaining coupons, by registered mail to that Fed bank.