With hundreds of mutual funds available already, why does the world need any more? Yet every year, new funds are peddled to the public -- most of them pegged to a sales gimmick rather than to a useful new approach to investing. Here's a look at the most recent crop:
* Funds of funds: An old idea is creeping back, and not necessarily for the best. It's a mutual fund that buys shares in other mutual funds instead of buying stocks and bonds directly. This concept floundered in the 1970s, on dull investment performance and the spectacular crash of the multifund empire run by Bernard Cornfeld. But now, at least two new funds of funds are available, with others likely to follow.
The no-load (no sales charge) FundTrust offers four separate investment portfolios through Furman Selz Mager Dietz and Birney in New York City.
The question most often raised about such a fund is the multi-layered cost. You pay fees to FundTrust; you also pay fees and expenses to the mutual funds (including load funds with sales charges) that FundTrust buys. The higher your cost, the tougher it is to get a decent return. Diversifying among mutual funds is a good idea, but you might want to do it yourself.
The Vanguard Special Tax-Advantaged Retirement (STAR) Fund, now in registration at the Securities and Exchange Commission, will invest only in other Vanguard mutual funds. Despite the name, there is no particular tax advantage to this investment; Vanguard plans merely sell the fund to holders of Individual Retirement Accounts and other pension plans. You pay no sales charge and no investment advisory fee for the STAR fund itself, but do pay the fees of the underlying mutual funds. STAR says it will charge a separate, but small, administration fee.
* Story funds: Brokerage houses and fund groups are always looking for quick investment stories that will sell a fund to the public. New last year were Merrill Lynch's Fund for Tomorrow (dubbed the "baby boomer" fund, because it means to invest in demographic changes), and the New Economy Fund, investing in the shift to service industries.
But for such vague purposes, why buy a new and untested fund? Any good, established mutual fund will be investing in economic changes, and has the advantage of a performance history.
* Women-need-help funds: The no-load Libra stock and money-market funds, from Somerset Capital Management in New York, argue that women investors need something special. The funds' underlying investments have no particular gender identity -- only the sales pitch does. But so far, most women have been smart enough to know that there is no such thing as a "female" investment. The Libra stock fund has attracted only around $1 million since March.
* Hot-sector funds: The year saw a number of funds specializing in one or another of the hottest industries at the time: defense, energy, gold, medical technology, health care, communications and so on. Investors face two risks: First, such a fund generally comes out when the industry has been rising fast, which means that the big gain in the stocks is probably over for a while. Second, you lose the value of broad investment diversification, which is what mutual funds are supposed to be about.
* New funds from good managers: These are worth the closest look. Paul Reed, of the United Mutual Fund Selector, likes three: the no-load Nicholas II (in Milwaukee), managed by Albert O. Nicholas, up an excellent 16 percent in a year when the market as a whole was flat; the no-load Greenspring Fund from Daniel Long III in Baltimore (so far, available only in California, Hawaii and mid-Atlantic states), up 13 percent; and John Templeton's load fund, Templeton Global II, down 2 percent.
* Ginnie Mae funds: A lot of investors got hot under the collar last year unit trusts that invest in mortgage-backed securities guaranteed by the Government National Mortgage Association, because they didn't understand what they were getting into. In particular, they didn't realize that changes in interest rates would change the market value of the trust.
With Ginnie Mae's new mutual funds, investors are more likely to understand that their investment's value will fluctuate. But buyers should consider other income investments first. You'll probably get a better yield from a bond fund that is tax exempt.
When looking at new funds, ask: Why buy into an unproven investment? It may pay to take a flyer on a small new fund from a well-known manager, because these often have a lot of oomph when the market moves up. Otherwise, you're safer with a fund that has a good market history of success.