Seven Common Misconceptions
about Investing in Mutual Funds

Few investors have the time, skill or inclination to study securities and companies, and to evaluate how economic forces and the financial markets may affect them. That's why large institutions hire professional money managers. And it's also why many individual investors choose to invest in mutual funds. But, the mutual fund market is quite complex. In fact, there are more mutual funds than New York Stock Exchange- listed companies.

So even though a professional will be managing the assets you invest in the fund, you must still choose a fund. Fortunately, there's a wealth of information available to help you pick. But you may experience information overload, and even develop a mis-perception or two about how mutual funds really work. These mis-perceptions can create unrealistic expectations or cause you to make inappropriate investment returns.

1. Your return from a mutual fund depends only on how well the fund performs. FALSE. Even if a fund has a good performance record, investor behaviour can have an important impact on total investment returns, while a "buy and hold" strategy can help you achieve higher returns over time. Most investment professionals agree that you should select mutual funds that meet your investment objectives, then have the patience and long- term perspective to let your money go to work.

2. To make money in mutual funds, you have to "time" the market. FALSE. Usually time, not timing, allows an investment to appreciate. So- called "market timers," those who try to invest only at the most opportune moments, run the risk of being out of the market during periods when it achieves the highest results.

3. The best way to pick a mutual fund is to use its past performance record. FALSE. While past performance can be one indicator to consider in selecting a fund, it is important to choose a mutual fund with an eye toward the future and avoid investing using only a rear- view mirror. Consider other issues, such as the fund's holdings and the manager's track record.

4. Investing in a mutual fund always means that a portfolio is diversified. FALSE. Owning one mutual fund does not guarantee that your portfolio is diversified. Mutual fund experts recommend that investors consider buying different types of mutual funds. Depending on the investment objective and the time frame, you might choose to allocate your portfolio across a number of specialized funds that invest, for example, in growth stocks, value stocks or short and long- term fixed- income securities. This investment strategy, known as asset allocation, is important as not all investments perform the same way at the same time. A diversified portfolio can allow investors to maximize their potential investment returns within their risk parameters.

5. No- load funds are always better than funds with sales charges. FALSE. Certainly all investors should consider the effects of paying a sales charge as part of their overall evaluation of a fund. However, ignoring mutual funds sold by a sales force will greatly reduce your number of investment choices, and many studies have shown that the effect of a sales charge is greatly diminished over time.

6. The value of an investor's principal is constant in a bond fund. FALSE. Unlike money- market funds, bond funds do not offer stability of principal. As market conditions change, the value of the bonds in the fund will increase (when interest rates fall) or decrease (when interest rates rise), as will the value of the original investment made in the fund. If you are uncomfortable with the volatility inherent in a bond fund, consider perhaps a money- market fund, which provides stability of principal.

7. Yield is the most important factor in choosing an income fund. FALSE. A mutual fund's yield, which is often cited in advertising, is measure of interest income. While yield is important for investors who are seeking a stream of income from their investments, a more important measure is total return. Total return is the measure of a fund's net performance over a certain period of time, including the combined effects of any income, dividends and capital gain or loss produced by the investments. A fund's performance on a total return basis may not be comparable to its performance in terms of yield.

If you're considering investing in mutual funds, talk to a professional financial consultant who has the tools and experience to evaluate the wide variety of funds available and who can help you in the selection process.

by David Fox, Financial Consultant and Vice President, Smith Barney Inc., Miami. Contact# (toll free) in the Caribbean 1 (800) 327-0146 or (407) 393-1500

Executive Time "Online" also has a printed version which is available throughout the Caribbean and some selected North American cities.