Sharp Mutual Fund Investors Test Portfolio Regularly Use These Tips To Assure Your Program Is On Track

Almost everybody, it seems, owns a piece of a mutual fund. But whether most people are savvy fund investors is another matter.

A litmus test is whether an investor periodically examines his or her portfolio to make sure it’s faring as well as it should, still conforming to investment goals and reflecting lifestyle changes. If you’re doing this, congratulations. If not, here are eight tips that will keep your investment program on track and alleviate fears that you may be making big mistakes.

Check whether the fund portfolio manager is the same person who was at the helm when you bought fund shares.

If the same person is running the show, don’t give the matter another thought. If there is a new manager, check his or her published record. If it’s mediocre - or one doesn’t exist - that’s often a sell signal.

Make sure the performance of your funds is competitive with funds of the same type.

If you have, say, a small stock fund, make sure it’s faring as well as the average among other small cap funds, perhaps by going to the library or on-line and checking Morningstar Mutual Funds and similar sources. The key is to compare apples with apples, especially if your fund invests in an arena that hasn’t been especially hot. For example, don’t expect a small stock value fund to keep pace this year with big-cap growth funds, many of which are loaded with high-flying technology stocks.

Make sure your funds still mesh with your life situation.

You may have been contributing regularly to an aggressive growth fund to help finance your child’s education. If he or she will be a freshman within two years, it’s probably time to switch the money to a more conservative investment. Or say you’ve recently gotten a promotion and a big raise. That probably means it’s time to switch investments from a taxable bond fund into a tax-free municipal bond fund.

Make sure your fund isn’t veering sharply away from the investment style that persuaded you to buy it in the first place.

“Style drift” is surprisingly common. Since 1990, for example, $1.1 billion-asset Alliance Growth Fund has shifted from a mid-cap growth fund to a small-cap fund blending growth and value to a large-cap fund blending growth and value. Depending on your investment goals, that could be a big problem. Alliance Growth has been more blatant than most funds, but evolving styles are hardly uncommon.

Make sure your fund fees aren’t rising.

The average diversified U.S. stock fund has an annual expense ratio of 1.5 percent. You shouldn’t pay much more than that because expenses come straight out of returns. Pay special attention to expenses among money market funds, which are commonly ignored, because this is the only significant difference between one money fund and another. Low-fee leader Vanguard charges less than a third of a percentage point on most of its money funds. By contrast, Merrill Lynch Ready Assets Money Market Fund charges two-thirds of a point, and Dean Witter New York Municipal Money Market Fund charges more than 1 percentage point.

Pay special attention to the performance of a fund as its assets grow.

There are exceptions - such as mutual fund giant Fidelity Magellan - but the track records of most funds deteriorate as they grow bigger, partly because it’s harder to successfully follow more stocks. Typical is Crabbe Huson Special Fund, a small stock contrarian fund. In 1993, with assets of $29 million, it returned 34.5 percent, nearly three times the average growth fund’s return. But now the fund has $800 million in assets. Over the past year, it’s up only 5 percent.

Pay attention to funds that outperform the market, as well as those that under-perform.

If a fund is sharply outperforming its peers, that’s often a sign that it’s taking more risks than it should and that its fortunes may be about to change. Research shows that the top performers from one year tend to be sub-par performers the next. Most of this year’s best performers are heavily loaded with technology issues. If the high-tech rally fizzles, these funds will lag competitors.

Make sure you’re comfortable with the international exposure of your domestic stock fund.

Many domestic stock funds hold overseas stocks. That’s OK - but not if the manager gets immersed in foreign issues and you’re a relatively conservative investor. Fidelity Capital Appreciation Fund, for example, has nearly 50 percent of its assets invested abroad, where its record has been spotty.