New bond offerings are a different animal altogether. The bond markets are highly professional, and there is nothing glamorous about a new bond offering. Everyone knows that a new A-rated corporate
bond will be very similar to all the old A-rated bonds. In fact, to sell the new issue effectively, it is usually priced at a slightly higher "effective yield" than the current market for comparable older bonds-either at a slightly higher interest rate, or a slightly lower dollar price, or both. So for a bond buyer, new issues often offer a slight price advantage.
What is true of corporate bonds applies also to U.S. government and municipal issues. When the Treasury comes to market with a new issue of bonds or notes (a very frequent occurrence), the new issue is priced very close to the market for outstanding (existing) Treasury securities, but the new issue usually carries a slight price concession that makes it a good buy. The same is true of bonds and notes brought to market by state and local governments; if you are a buyer of municipals, these new offerings may provide you with modest price concessions. If the quality is what you want, there's no reason you shouldn't buy them-even if your broker makes alittle extra money on the deal.
8. MUTUAL FUNDS. A DIFFERENT APPROACH
Up until now, we have described the ways in which securities are bought directly, and we have discussed how you can make such investments through a brokerage account.
But a brokerage account is not the only way to invest. For many investors, a brokerage has disadvantages-the difficulty of selecting an individual broker, the commission costs (especially on small transactions), and the need to be involved in decisions that many would prefer to leave to professionals. For people who feel this way, there is an excellent alternative available-mutual funds.
It isn't easy to manage a small investment account effectively. A mutual fund gets around this problem by pooling the money of many investors so that it can be managed efficiently and economically as a single large unit. The best-known type of mutual fund is probably the money market fund, where the pool is invested for complete safety in the shortest-term income-producing investments. Another large group of mutual funds invest in common stocks, and still others invest in long-term bonds, tax-exempt securities, and more specialized types of investments.
The mutual fund principle has been so successful that the funds now manage over $400 billion of investors' money-not including over $250 billion in the money market funds.
8.1 Advantages of Mutual Funds
Mutual funds have several advantages. The first is professional management. Decisions as to which securities to buy, when to buy and when to sell are made for you by professionals. The size of the pool makes it possible to pay for the highest quality management, and many of the individuals and organizations that manage mutual funds have acquired reputations for being among the finest managers in the profession.
Another of the advantages of a mutual fund is diversification. Because of the size of the fund, the managers can easily diversify its investments, which means that they can reduce risk by spreading the total dollars in the pool over many different securities. (In a common stock mutual fund, this means holding different stocks representing many varied companies and industries.)
The size of the pool gives you other advantages. Because the fund buys and sells securities in large amounts, commission costs on portfolio transactions are relatively low And in some cases the fund can invest in types of securities that are not practical for the small investor.
The funds also give you convenience First, it's easy to put money in and take it out The funds technically are "open-end" investment companies, so called because they stand ready to sell additional new shares to investors at any time or buy back ("redeem") shares sold previously You can invest in some mutual funds with as little as $250, and your investment participates fully in any growth in value of the fund and in any dividends paid out. You can arrange to have dividends reinvested automatically.
If the fund is part of a larger fund group, you can usually arrange to switch by telephone within the funds in the group-say from
a common stock fund to a money market fund or tax-exempt bond fund, and back again at will. You may have to pay a small charge for the switch. Most funds have toll-free "800" numbers that make it easy to get service and have your questions answered.
8.2 Load vs. No-load
There are "load" mutual funds and "no-load" funds. A load fund is bought through a broker or salesperson who helps you with your selection and charges a commission ("load")-typically (but not always) 8.5% of the total amount you invest. This means that only 91.5% of the money you invest is actually applied to buy shares in the pool. You choose a no-load fund yourself without the help of a broker or salesperson, but 100% of your investment dollars go into the pool for your account.
Which are better-load or no-load funds? That really depends on how much time and effort you want to devote to fund selection and supervision of your investment. Some people have neither the time, inclination nor aptitude to devote to the task-for them, a load fund may be the answer. The load may be well justified by long-term results if your broker or salesperson helps you invest in a fund that performs outstandingly well.
In recent years, some successful funds that were previously no-load have introduced small sales charges of 2% or 3%. Often, these "low-load" funds are still grouped together with the no-loads, you generally still buy directly from the fund rather than through a broker. If you are going to buy a high-quality fund and hold it a number of years, a 2% or 3% sales charge shouldn't discourage you.
8.3 Common Stock Funds
Apart from the money market funds, common stock funds make up the largest and most important fund group. Some common stock funds take more risk and some take less, and there is a wide range of funds available to meet the needs of different investors.
When you see funds "classified by objective", the classifications are really according to the risk of the investments selected, though the word "risk" doesn't