The Proactive Investor: Finding an Investment Company

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Finding an investment company is easy. Finding one that you like and trust is the hard part. It requires extensive research and honest answers to lots of different questions.

When you start looking around, don’t be afraid to interview the companies. After all, they'll be working for you! When you get to meeting them, ask some of these questions and you should find what you're looking for:

1. When was the fund organized?

An old fund has a record. In investing in a new fund, the most important factor to consider is the character of the sponsorship.

2. How big is the fund?

Bigness is neither an assurance of superiority nor a handi–cap. There is no clear evidence that size is of overriding importance.

3. Who are the underwriters or sponsors of the fund?

The investor needs to know something about the firm that puts its stamp of identification on the fund. Very often, the management contract has been made with a corporation whose stock is owned by the underwriters. This is permitted under the Investment Company Act.

4. How much must the investor pay in the way of a sales commission to buy shares in the fund?

The average selling charge or "load" is 8 to 8.5 percent of the net asset value per share. The charge is not unreasonable, provided that the investor clearly understands that shares in funds should not be bought in expectation of quick profits.

5. What is the basis of the management fee?

The management fee is an annual cost, whereas the selling commission is charged only when the shares are bought. The standard management fee is .5 percent of the assets annually. The fund usually pays the fee in quarterly portions. The fee is not unreasonably high.

6. Is the rate of the management fee reduced as the size of the fund grows?

Since the costs of management do not rise proportionately with the increase in net assets, there is a growing opinion that the fee should be reduced if the assets increase; thus, a .5 percent annual fee might be reduced to .375 percent when net assets exceed $50 million, and so on. A number of funds have adopted this practice for some years.

7. What type of fund is it?

8. What is the fund's objective?

The prospectus includes a statement of objectives, such as capital appreciation, stability of income, long-term participation in the development of the economy, or the singling out of undervalued securities. Objectives also may include a program of remaining fully invested at all times, or of maintaining a position that will allow the fund to try to take advantage of changes in the business cycle and shift its investments in order to benefit from swings in stock prices.

9. If the fund has functioned over a period of years, what has its record been?

The record may be tested by the extent to which net assets per share, adjusted for capital gains distributions, have risen in a rising market and the extent to which they have fallen in value in a declining market. The investor should not be swayed by a rise or fall during a short period of three or four months. The investor should also examine the dividend return on the average price, exclusive of capital gains distributions.

Investors can't be shy about demanding information on investment companies. Those who are, or who blindly invest in the first company they see, will suffer the consequences of their laziness or timidity.

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