"Hot" Mutual Funds

Q: I've got a mutual fund that isn't doing so hot right now. In fact, I can't find it on a single list of "hot funds." Should I try to do better? -- D.S., via the Internet

A: Yes, you should try to do better -- not because the fund is "cold" today, but because most managed mutual funds don't ever do very well compared with the overall stock market. While it should be the job of a mutual fund to beat (or at least match) the returns of the stock market, the vast majority of funds simply don't.

Last year, a staggering 88 percent of mutual funds failed to match the S&P 500 -- the most widely followed benchmark index for the stock market. This year about 87 percent are losing to the S&P. With returns like that, throwing darts at a list of stocks gives you a better chance of beating the market than owning a managed mutual fund. (Actually throwing darts at a list to prove this can be quite fun. Though as Mom always pointed out, it's fun only until somebody loses an eye.)

What's a college Fool to do? Should you grab a copy of the latest SmartFunds magazine at your local Kwik-E-Mart with the cover screaming, "The 10 Bestest Funds You Absolutely, Positively Have to BUY RIGHT NOW for 1999"? Run, do not walk, from such headlines. The worst strategy of all is the one promoted by these magazines -- to switch in and out of funds every year, trying to pick the "hot fund."

We'll tell you the boring truth: There aren't new funds every month or every year that are likely to be any "hotter" than the rest over the long term. If you want to invest in a mutual fund, the only one you should consider is an index fund. An index fund is designed to mirror the returns of a market index such as the S&P 500. Even with such low aspirations, it still manages to beat more than 80 percent of the mutual funds out there.

If you own the Bullish Global Wisdom Fund, or any fund that doesn't have the word "index" in it, the odds are that your fund is underperforming. The sooner you sell it and get into an index fund, the sooner you can expect to match the returns of the stock market. More on the good ol' index fund next week.

What Now?: Want to find out about the good, the bad and the ugly of your very own mutual fund? Check out where you can run a search on your funds comparing their performance in bright pretty colors against the mighty S&P 500. Be sure to check your blood pressure first, though. Unless you own an index fund, there's about a 90 percent chance you'll be upset at what you see.