An investment `car pool' where you leave the driving to the pros

If you're considering dipping a toe in the stock or bond market, a mutual fund offers a relatively inexpensive baptism. Stripped of all the hype, a mutual fund is basically a company with one purpose: to invest. The fund raises the money to invest by selling shares to the average Joe or Jane. That money can be pooled to buy large quantities of stocks, bonds, commodities, options, or money market securities.

And a mutual fund is a great equalizer -- it erases several disadvantages the less well-heeled investor may encounter. For instance, you don't have to worry about the daily ups and downs of the market. The mutual fund hires a professional money manager to do that.

Diversification is another mutual fund bonus. Not all of your hard-earned savings are sitting in one stock because that's all you can afford. By spreading your money among dozens of securities, the fund reduces the risk that your investment will be wiped out by some unforeseen event.

Another plus of mutual funds is easy access to your money. You can cash in your shares at any time and get the current market value.

For its services, the fund management keeps some of the money invested, typically less than 1.5 percent of the total assets. Some funds also charge a fee when you invest or withdraw money (more on that later).

The money the fund earns on your investment is split up equally among all shareholders. The $100,000 investor doesn't get a better rate of return than the $1,000, just because he's a bigger shareholder.

A few years ago, mutual funds came in basically three flavors: vanilla (income and growth), chocolate (growth), and strawberry (aggressive growth). But mutual funds, like gourmet ice cream, have become enormously popular. Now there are more than 1,000 funds, ranging from foreign stock funds to mortgage-based funds (`a la Government National Mortgage Association, or Ginnie Mae) to tax-free bond funds to stock sector (industry-specific) funds. And that's just scratching the surface.

So how should you go about choosing a mutual fund?

``Look at past performance; there's no other answer,'' advises Adriane Berg, of Adriane G. Berg & Montag Associates, a New York financial planning firm.

Performance information is available from a variety of sources. Most libraries carry the hefty Wiesenberger Investment Services volume. This annual edition also contains profiles on individual funds and a management history.

Some libraries carry the Mutual Fund Sourcebook (Morning Star Inc., 53 West Jackson Boulevard, Chicago 60604, $135), which is published quarterly. It tracks only stock funds, but it's one of the few sources that correlates risk and performance.

Less exhaustive than Wiesenberger but easier for making quick comparisons among funds is Donoghue's Mutual Funds Almanac (Box 540, Holliston, Mass. 01746). This $23 annual edition covers 850 funds, distinguishes between commission and noncommission funds, and lists minimum investment requirements.

Money magazine and Barron's, available on most newsstands, publish quarterly mutual fund performance data. And Forbes magazine reviews mutual funds each year in the fall.

Most financial planners tell clients to judge a fund on at least five years' performance. Ten years or longer is an even better benchmark, because funds and their managers tend to have investment biases. A manager that does well in, say, an inflationary period may do poorly in a disinflationary period. Investors should look for fund managers with the most consistent long-term record.

But there are many new funds now. Some have done quite well over the last two or three years. Should you avoid them? Not necessarily. But you may not want to put all your money into that fund. Since it's relatively unproven, it should be considered riskier.

In choosing a fund, you may also want to consider investing in one that is part of a ``family'' of funds. A fair number of companies with multiple funds will allow you to move your money from one fund to another, with no extra charge. It's know as ``switching.''

Ms. Berg calls switching ``critical'' to a mutual fund investor. ``As your needs change and the market changes, it gives you alternatives.'' But critics of the practice say novice investors often end up chasing trends, switching after a fund has made its greatest move.

One last consideration in selecting a fund: Will it be the ``load'' or the ``no load'' variety? About 60 percent of all mutual funds are load funds. In a load fund you pay a commission fee (either at the start or when you withdraw from the fund) that can be as high as 8.5 percent of your investment.

So if you have $1,000 to invest and the fee is 8.5 percent, only $915 will be invested. And that is lost ground that has to be made up in the mutual fund's performance.

Load funds are sold through brokerage firms or by the mutual funds' own salespeople. They, not the fund managers, get the commissions. The money you pay for a load-fund sales commission is not an incentive to spur performance.

Studies have shown that there is little difference between the performance of no-load and load funds. Then why would anyone choose a load fund?

First, because you pick a fund based on performance. And load or no, if it's a good fund you want to be in it. Second, a broker may help you in the selection process. But be aware that he or she may have only a limited number of funds to offer.

Also, if you have a broker, the broker should keep you abreast of changes in the market. This could be more important to you if you're switching between funds. But remember that the attention you get is paid for every time you make a new investment.

Still, a no-load offers considerable savings if you do your own homework and the fund meets your investment criteria.

For a free catalog and basic directory of most mutual funds, write to the Investment Company Institute, 1600 M Street, Washington, D.C. 20036.

Free with a self-addressed stamped envelope: a bibliography of articles, books, and newsletters on no-load mutual funds, from the No-Load Mutual Fund Association, 11 Penn Plaza, Suite 2204, New York, N.Y. 10001. And for $2, an annual directory of 370 no-load funds is available. For this one, write No-Load Mutual Fund Association, Box 1010, Dept. P-5, South Orange, N.J. 07079.