Should You Invest in a Mutual Fund?

When it comes to investing, following the conventional wisdom may not always be that wise.

For example, conventional wisdom warns investors to steer clear of new mutual funds and stay with funds that have established track records.

However, using this strategy today could cause an investor to ignore more than 700 diversified U.S. equity funds that have been launched in recent years, including many that have performed very well.

Are these new funds worthwhile-or even superior-investments? To answer this question the Schwab Center for Investment Research, a division of Charles Schwab & Co., Inc., conducted a study of the performance of various new funds-funds that were opened in the preceding year.

Using data on domestic, no-load, equity funds from January 1987 through January 1998, the Schwab researchers divided the funds into two groups-new and old. New funds were those funds with less than 36 months of return history at any point in time. All other funds were classified as old. They then calculated how much each new fund outperformed (or underperformed) the average of older funds during each month of its existence and then averaged this across all new funds for each month. This method of arranging the numbers allowed Schwab to see how new funds performed relative to their older peers as they aged.

By examining the styles of new funds-large cap growth, value and blend (which combines growth and value) and small cap growth, value and blend-Schwab reached the following conclusions:

• New domestic equity funds have had higher returns, driven primarily by greater risk-taking, than their older peers fairly consistently during recent years.

• In general, on a risk-adjusted return basis, only new small-company growth funds have outperformed their older peers.

• Evaluating funds on longer periods of performance is still a good course of action.

"A smart investor interested in a new fund will have done some homework first to determine if it's a wise investment for their particular situation. In other words, don't buy a new fund just because it's new," said Mark Riepe, head of the Schwab Center of Investment Research.

Added Riepe, "Consider a new fund if you like a particular fund manager with an established track record, or if a new fund is managed with a style that matches your objectives and fits within your existing portfolio and asset allocation strategy."

When buying funds, begin by asking yourself the following questions: Does the fund fit your risk profile? Does it clash with other funds in your portfolio, or complement them? Does the fund manager have a track record with an existing fund?

These are questions you should ask yourself when buying a new fund. Not surprisingly, they're quite similar to those you should ask when buying any fund-old or new-and will help determine which funds can help you meet your long-term investment needs.

Investors who are interested in receiving a complete copy of the study, "Do New Funds Offer Better Performance?" should visit the Schwab web site at, call 1-800-435-4000, or visit their local Schwab branch office.

Always obtain a prospectus for any fund you are interested in by calling Schwab or visiting the Schwab web site. Read the prospectus carefully before investing. It contains more complete information including management fees and expenses. Past performance cannot guarantee future results.

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