- The Washington Times - Tuesday, March 25, 2003

Stung by a three-year bear market, many investors are turning to mutual funds that promise they won't lose money. But financial advisers caution the principal-protected funds are loaded with expenses and restrictions that could hurt returns unduly.
These funds come with insurance policies that guarantee the principal, typically after five or more years, minus expenses. Investors are assured of no losses in a downturn, while they can reap gains if the market recovers.
Investors have responded, pushing the funds' net assets to $9.1 billion at the end of January from $3.95 billion a year earlier, fund tracker Lipper Inc. says.
But advisers say principal-protected funds, which now are concentrated in bonds, don't make a lot of sense at a time when many believe stocks can go only upward, and bonds downward, in coming years. They say investors can achieve better results at lower costs by maintaining diversified portfolios and using a buy-and-hold strategy.
"It's a feel-good product, but when the market comes back, then somebody that's not paying for that extra feel-good benefit ideally should see a much more positive response in their portfolio," said George F. Leupold Jr., a financial planner in Cherry Hill, N.J.
Still, investors who got into principal-protected funds awhile ago benefited in the three-year bear market.One-year returns for ING's 11 principal-protected funds, for example, ranged from 1.47 percent to 6.33 percent through February, Morningstar Inc. said.
In contrast, the Standard & Poor's 500 stock index has lost 24 percent, and most money market funds now are paying yields of 1 percent or less.
Mark Wilson, a certified financial planner in Newport Beach, Calif., said many investors were calling to ask about these funds much as they did with Internet funds during the tech boom.
"The markets are down so significantly and people are so gun-shy, the return guarantee sounds really, really attractive right now," he said.
He generally advises against them, noting that the restrictions can be complex. The funds typically are sold during an offering period that lasts several months. Afterward, investors must reinvest their dividends and distributions but otherwise can't add to the investment.
If money is withdrawn before the end of the holding period, typically five years or more, investors lose the guarantee on their principal and may have to pay penalties.
Expenses can be high. The insurance may cost an additional 0.4 percent of total assets, often pushing the expense ratio up to 2.25 percent compared with the 1.47 percent for the average domestic stock fund, Morningstar says.
The funds generally are sold through brokers and thus come with additional sales charges. "Make sure you're not getting sold on this," warned Jeff Tjornehoj, research analyst at Lipper.


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