MAY 2003

Lesson 101

The NAIC Mutual Fund Program

The goal of the NAIC Mutual Fund Education Program is to help you become a successful, informed mutual fund investor. NAIC -- the National Association of Investor Corporation -- was founded in 1951 to provide investment education to individuals and investment clubs.

For many years, NAIC staff and volunteers have focused their efforts on common stock investment education. In 1996, NAIC broadened its mission to include mutual funds and in 1997 kicked off its efforts by publishing The Official NAIC Mutual Fund Handbook (NAIC, 1997).

Since its founding, NAIC has provided investment education to over 2.6 million people. NAIC and the mutual fund education program operate on four basic principles:

• Invest a fixed amount regularly and for the long term. Academic studies tell us that it is impossible to time the stock market. By investing small amounts regularly, you can protect yourself against unpredictable and inevitable market fluctuations. When you dollar-cost average in this way, you purchase more shares of your selected investment when share prices are low and fewer shares when prices are high.
• Reinvest all of your earnings. By reinvesting all dividends and capital gains in your account, you will continually purchase more shares, and you will reap the magic of compounding. By reinvesting any returns you receive from your fund investments, you will see your money grow at a faster rate.
• Buy stocks in good quality growth companies. NAIC urges individuals to invest in growth companies. Mutual fund investors should invest in funds whose managers invest in quality growth companies and hold them for the long term. Growth companies are those that regularly increase their sales and earnings.
• Diversify. While the first three principles are designed to grow your capital, this defensive principle is essential to minimize risk. By spreading out your money over different categories of growth mutual funds, you protect yourself by not putting all of your eggs in one basket.

Coping with information overload

While adhering to NAIC principles can aid you in reaching your investment goals, investing in mutual funds can seem complex because of the sheer number of funds vying for your investment dollars.

There are now more mutual funds in the United States than there are individual stocks. The variations among these funds in terms of objective, performance, cost and risk is considerable.

We want to help you sort through the vast amount of information that is available about mutual funds so that you can use the right information to help you make better decisions about mutual fund investing.

NAIC investors focus on the long term. Rather than darting in and out of the market, we expect to hold onto each investment as long as it seems likely to produce a superior return or until we have found a better investment.

To enjoy the advantages of mutual fund investing, investors must exercise care and judgment. Unfortunately, many fund shareholders have been given little direction in selecting funds that will help them meet their long-term investing goals.

Studies have shown that during the 10-year period between 1986 to 1995, 78 percent of general stock mutual funds under performed the S&P 500 index, a well-known industry benchmark

By using the tools in the NAIC mutual fund program to identify, compare and monitor the funds that meet program standards, you will have increased your odds of a successful investing experience.

NAIC has promoted the sound principles of stock selection, retention and regular investing for over 50 years. The same principles apply to the study of mutual funds.

The NAIC Tools

Based on our principles, NAIC developed six tools to help investors analyze stock and bond mutual funds, compare them to each other, and monitor their performance over time. The six tools are:

• The NAIC Stock Fund Check List: using the Check List, you will become aware of a particular stock fund's key elements, including how the fund invests, what the fund invests in, the tenure and effectiveness of current management, tax considerations and fund expenses.
• The NAIC Stock Fund Comparison Guide: with this tool, you can compare stock funds in the same category to each other, again emphasizing the key elements from the Stock Fund Check List.
• The NAIC Stock Fund Trend Report: allows you to monitor a stock fund over time, to see if management is consistently performing to your standards, keeping costs down, and investing in growth companies.
• The NAIC Bond Fund Check List: using the Check List, you will become aware of a particular bond fund's key elements, including how the fund invests, what the fund invests in, the tenure and effectiveness of current management, and fund expenses.
• The NAIC Bond Fund Comparison Guide: with this tool, you can compare bond funds in the same category to each other, again emphasizing the key elements from the Stock Fund Check List.
• The NAIC Bond Fund Trend Report: allows you to monitor a bond fund over time, to see if management is consistently performing to your standards.

Armed with these tools, you'll be better able to select and monitor the mutual funds in your investment portfolio. But before you go on to using these tools, you need to become familiar with some of the characteristics of mutual funds.