Tune in, if you will, to one of the many sources of financial advice offered to the general public. The investment purveyors seem limitless, all vying for your attention. In addition to a presence on radio and television, in newspapers, and over the internet, many of the authorities are now recognized authors, with their books aggressively advertised and prominently displayed. There is certainly a wide array of information being disseminated. Irrespective of the basic soundness of the investment advisory profession itself, the overwhelming fixation of most practitioners is on corporate securities.

No discussion of securities in the first decade of the twenty-first century may ignore what is now the most powerful and profitable marketing tool of the industry: the open-end investment company known as the mutual fund. Since formation of the first such company in the United States in 1924, acceptance by the public grew to become universal. Quite simply, a mutual fund controls a pool of money provided by its shareholders that it invests in a portfolio of securities selected by the fund's managers. In recent years they have proliferated like mushrooms, with over fifteen thousand registered funds now in existence.. vastly more than the number of companies found on the New York Stock Exchange. They exist in near-infinite varieties offering almost every conceivable mix of securities.

For the potential investor with both limited expertise and assets, this type of investment seems to meet two important criteria: knowledgeable selection of securities and advantageous portfolio diversification. Though in theory the mutual fund meets the intended needs, theory and reality do not always coincide. Irrespective of the basic soundness of the investment advisory profession itself, the overwhelming fixation of most practitioners is on these funds, often dominated by index funds. There is no particular magic involved. These vehicles merely rise and fall with the general fortunes of the market. There are legitimate arguments why this approach makes sense for the advisors, if not always for their clients. A primary reason is that shares in a mutual fund now occupy an anointed status within both the investment and the legal communities. Within most limits, an advisor is held blameless if recommendations on this investment prove less than astute. And, as expected, with their being widely touted, natural client resistance is reduced. What has thus been generated by the industry is investment by default.

Although I have objections to the basic concept of mutual fund investment, I can’t overcome a national obsession. Perhaps the best I can do is inform you of matters you must consider. As a start, familiarize yourself with the details of the mutual fund industry. Recognize terms such as alpha and beta coefficients, yield, distribution, load, and volatility. Understand the concepts of conversion privilege and net asset value, and distinguish between index, sector, and non-diversified funds. In short, do your homework, and garner the information from a source other than the firm through which you purchase your investments. Only after you know what is going on can you evaluate whether an offering merits your approval. A visit to the business section of your library or local bookstore will provide what you need. An excellent publication is Barron's Keys to Investing in Mutual Funds.

Next, recognize that the lowest management fees are those assessed by index funds, which are an assembled collection of securities whose composition mimics that of a particular market index, such as the Dow Jones Industrials or the Standard & Poor's 500. As investment analysis and decision-making is not required of the managers, no justification exists for a substantial fee. From this point, the type and amount of fees and charges become less predictable. A major distinction is made between "load" and "no-load" funds. These "loads" are commissions that run as high as 8½ percent of the purchase price. The conventional recommendation, to avoid the load in preference to the no-load funds, is where the admonition usually stops. By rights this is just the start. Many of the no-load funds, although assessing no up-front sales charges, incorporate other equally objectionable fees. These include redemption fees, often known as "back-end loads," to be paid when the shares are sold. A variation on the redemption fee is a deferred charge when shares are redeemed within a number of years, known as a deferred load.

Another goodie approved in 1980 by the SEC is known as the 12b-1 plan. This permits a fund to confiscate up to 1¼ percent per year of the fund's assets for marketing purposes. At this rate, a participant in such a no-load fund over ten years contributes 12½ percent of the investment in such fees. This may not be a load in the technical sense, but the Greek mythological figure Atlas would certainly recognize it for the load it is. You may add to the list of undesirables those funds that debit portions of reinvested interest, dividends, and capital gains, known as reinvestment loads. Finally, there are other less than obvious ways some no-load funds separate client from asset. You must scrutinize the fine print to know where the bodies are buried.

My discomfiture is with the evolution of an industry in which the placing of investors' money seems, at best, a secondary consideration. The fact that a substantial and growing percentage of the nation's assets is now committed to funds fuels a part of the concern. The rapid growth in the numbers and varieties of funds offered triggers more uneasiness. But it is the synergistic effect, coupled with basic human nature, that could result in unpredictable problems for the economy and the nation.

Let me conclude with a final thought. What the future holds for the mutual fund industry is hard to say, but one thing is certain: The fortunes to be made, legally or otherwise, fuel an insidious attraction. If it’s becoming a self-propelled labyrinth with few realistic controls, in the hands of persons who will systematically loot the assets with no compunction, the nation will surely experience a misfortune of momentous proportion.

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