Investing 101: Updated and Expanded

Chapter 8. MUTUAL FUNDS

Don't have the time, skill, or interest to pick individual stocks? There's no need to give up on investing. You can get a professional to do the stock picking for you. The easiest and least expensive way to do that is to build a portfolio of mutual funds. If you choose funds wisely, not only can you save time, you can also enjoy steady returns.

But first, a little deprogramming may be necessary for those who frequent magazine stands. There are no "Best Funds to Buy Now." There is no one-size-fits-all "Fund Portfolio for the New Millennium." Indeed, the hottest funds of today are frequently the coldest funds of tomorrow. Buy them at your economic peril. "There is more risk of loss when you buy a fund that's at the top of the performance charts than there is when you buy a fund at the bottom," says A. Michael Lipper, chairman of Lipper Inc., a mutual fund information and ranking service based in New York.

So how do you pick good funds? First, a little background on mutual funds is required.

WHAT IS A MUTUAL FUND?

Mutual funds are investment pools that collect money from many investors and use it to buy stocks, bonds, and other investments. The type of securities the fund buys is spelled out in a detailed investment document called a prospectus. Each investor owns a pro-rata share of the assets in the pool.

The fund company employs an investment manager, who chooses the specific stocks or bonds to buy and sell based on criteria spelled out in the prospectus. "Open-end" ...