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Should you invest in new mutual funds?

- Alan Lavine and Gail Liberman

Investing in a new fund is enticing.

It's exciting to put your money into something that does well from day one. Then again, the fund could be a dud.

Before considering any mutual fund, make sure the fund's investment holdings differ from your existing mutual funds. Too much of the same types of investments could unnecessarily increase your risk.

It's generally best to track the performance of a new fund compared with similar funds for at least three years. See how the fund does in both up and down markets.

Some mutual fund groups put what's known as "seed money" into a new fund. If the fund registers whopping double-digit returns, they make it available to the public and promote the heck out of it. On the other hand, if the seeded fund doesn't do well, it's closed before anyone can invest in it.

A word to the wise. If you buy a hot fund right off the bat based on performance, it may be too late. The market could turn in another direction.

Consider a new fund, when:

  • A fund manager with a good track record is managing it.

  • It's with a fund group that has a number of funds with good long-term track records.
If you decided to invest in a new fund, make sure it enhances your mix of funds, and avoids duplication. You typically want to own large company growth funds, large company value funds, mid-size company growth funds, mid-size company value funds, small company growth funds, small company value funds and an international fund.

Be advised: New funds may have higher expenses because the asset base of the fund is small. This could mean fewer people are paying higher fees. On the other hand, some fund groups might initially cut fees to attract more business. If you buy a mutual fund through a broker, expect to pay a sales commission.

Before you invest in any mutual fund, read the fund's prospectus. Check its investment objectives to make sure they jive with your own. And always read the risks very carefully.


Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.

To read more columns, please visit the column archive.

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