Paring Down the Many Mutual Fund Choices

The past decade has spawned countless changes in the mutual fund industry. What was once a narrowly focused investment vehicle for individuals has become one of the most pervasive and complex industries in the country, industry experts contend.

As mutual fund assets have soared to more than $1 trillion, consumer choices have become dizzying. Where there were fewer than 600 open-ended mutual funds in 1980, there are now more mutual funds than there are stocks listed on the New York Stock Exchange.

To investors, this is both a benefit and a detriment.

Clearly they have far more options, making it more likely that consumers can find an investment that’s just right for them. But the search has become more difficult than ever.

How do you decide, for example, between an open-end fund or a closed-end fund? Do you buy no-load, low-load or fully loaded products? Should you invest in money funds, stock, bond or gold funds? Should you consider balanced accounts, sector funds or country funds?

If you’re interested in international investing, do you choose a “global” fund, a region--such as Europe or Asia--fund or a country fund, such as those that invest in the German or Spanish stock markets? Do you want to invest with a big fund family, or are you more comfortable with small investment houses? And, possibly most important, do you even know what all your choices are?

If you think mutual fund investing might be for you, you should start narrowing your choices by first answering the simplest of questions.

For example, are you interested in an open-ended fund or a closed-end fund? The difference: With an open-end fund, you can buy and sell your shares at any time, usually at net asset value and often directly through the mutual fund company. (Net asset value is per-share market value of a fund’s investments minus sales and management fees. It is generally calculated every business day.)

Closed-end funds, on the other hand, are listed on stock exchanges. They have a limited number of shares, so they can trade at a premium or a discount to net asset value. Generally speaking, their trading prices are more volatile than open-ended funds, and getting in and out depends on finding a willing buyer or seller.

You should also consider whether you want to invest with a large fund “family” or if you prefer a small investment house that manages only one or two mutual funds.

To a great extent, the choice will be a personal one. Some small investment houses give investors ready access to fund managers, who are willing to talk about specific investments and strategies. Mutual fund “junkies” may like to talk to managers on a regular basis, said A. Michael Lipper, president of Lipper Analytical Services, a New York-based company that tracks mutual fund performance. This is almost always impossible if you invest with a big fund family.

Fund families, on the other hand, provide a number of conveniences that are often unavailable through a small investment company.

For example, they frequently offer 24-hour investor hot lines that allow individuals to check on their account value and easily transfer money between accounts.

In addition, if you bought into a loaded fund--one with an up-front sales charge--most will allow you to transfer your money into another loaded fund without paying the sales charge a second time.

If you anticipate that you might switch funds several times over the course of the years, it may make sense to invest with a fund family where such changeovers can usually be handled within 24 hours for a $5 or $10 fee.

Finally, you need to consider your investment objectives.

Your investment goals should depend on how much risk you are able to take, how sophisticated you are about various investments and how quickly you may need to withdraw your money.

Then match your investment goals with the investment objectives of different types of funds.

The Investment Company Institute, a Washington-based trade group that represents much of the mutual fund industry, says there are about 22 broad investment objectives in the mutual fund industry, all promising different risks and rewards.

Lipper breaks down the investment goals more narrowly and thus reports nearly 50 goals.

Once you’ve narrowed the field by choosing between open- and closed-end funds, picking a small investment house or a large fund family and determining your investment objectives, you’re ready to start shopping for a specific mutual fund.