Advantages and disadvantages of mutual funds

Mutual funds offer you great returns without the effort of
shopping the Web for individual stocks and monitoring
them. But they also have a few characteristics that can come
back to haunt you.

On the whole, mutual funds are one of the safest, most effortless
investments you can make. They offer the following
benefits:

n Professional management: Mutual funds offer the professional
expertise of sophisticated research analysts. You
can search and view a list of funds that have a specific
manager group by using the Standard & Poor’s Micropal
Web site at www.micropal.com. You can then review
the performance of each manager’s funds. I tell you more
about the Micropal Web site and how to use it later in
this chapter.

n Instant diversification: When you buy a fund, you buy
an interest in a variety of stocks or bonds all at once
rather than one at a time. This variety helps you meet
the objective of a diversified portfolio. The fund prospectus
(which you can download from the Web) tells you
exactly which investments and sectors the fund holds.
n Low entry costs: You can invest as little as $250 in a
mutual fund. You can use the Quicken.com Mutual
Fund Finder (shown in Figure 4-3) at
www.Quicken.com. Click InvestingFFund FinderF
Popular Searches to search for funds that require investments
of $250 or less or $500 or less.

n Shareholder services: The fund may offer check writing
and other useful privileges. The fund’s Web site usually
promotes the services offered or includes a link so that
you can e-mail a service person to find out about them.

Alas, there is no perfection in the world of investment, and
mutual funds come saddled with inherent risks and baggage —
just like any other opportunity. When investing in mutual
funds, beware of the following:

n Fund managers who quit: After you invest in a successful
fund, you need to keep up with changes in management.
For example, when star manager Peter Lynch
ceased to manage the Fidelity Magellan fund in the
1990s, the value of the fund plummeted in relation to
the stock market as a whole. You need to stay current and
check out press releases announcing management
changes. You can do so by reading the business section
of your newspaper or looking at Web sites devoted to
reporting investment news, such as Morningstar at
www.morningstar.com, which I discuss later in this
chapter.

n Loss of control over income tax issues: Because the
fund manager controls when stocks are sold, you may
not always be able to defer your capital gains to years
when they’ll be taxed at a lower bracket or offset by other
losses. (When you invest in individual stocks, you have
the ability to control when you sell them.)

n Misleading sales materials: Advertising materials for
funds may create an erroneous impression as to how the
fund is actually managed and what investments are
included. For example, a fund advertised as low risk may
actually contain some pretty speculative stuff. Download
a copy of the fund’s prospectus and carefully review it to
see what investments are actually included in the fund.
n Hidden fees and costs: Be sure you understand the fees
associated with the fund, as disclosed in its prospectus.
For example, a fund may charge a steep fee when you sell
your shares.