‘Baby Steps’ May Be Best for a Novice Investor

In the film comedy “What About Bob?,” the neurotic character played by Bill Murray is told to overcome his many fears by dealing with them gradually--in “baby steps,” as the psychiatrist put it.

People investing in mutual funds for the first time--including traditional bank customers put off by the unusually low yields now paid on savings accounts--would be wise to heed similar go-slow advice.

Mutual fund assets jumped 26% during 1991, while total bank and thrift deposits dipped about 1%, according to IBC/Donoghue’s Money Fund Report, a newsletter based in Ashland, Mass.

In December, the most recent month for which numbers are available, fund sales were 94% above the year-earlier level. This suggests that a lot of mainstream bank customers are being tempted by mutual funds.

But anyone entering the realm of risky investments for the first time will learn that there’s a right way and a wrong way to go about it. People who leap in blindly and boldly risk serious damage to their pocketbooks.

Here are tips on getting started:

* Don’t rush into anything. Mutual funds are diversified investments that tend to rise and fall gradually, following the general trend of the stock or bond market. Prices usually don’t swing by more than a few percentage points a month, so there’s no need to hurry. Take the time to understand what you’re buying.

Even if you miss one high-flying stock or bond portfolio, you will still be able to choose from nearly 2,200 others, in addition to about 1,200 slow-moving money market funds.

* Do some preliminary research. Familiarize yourself with the way mutual funds operate, what they invest in, their risk and return potential, and the various types of shareholder services available. At a minimum, you should be able to tell the difference between a fund’s yield and its total return.

* Don’t give your bank’s fund salesman the benefit of the doubt. Banks now peddle mutual funds, in competition with stockbrokers, financial planners and fund companies that market to the public directly (usually without charging a sales fee). As a depositor at a bank, you might feel secure about the institution’s ability to manage money. Yet there’s no guarantee your bank will do better than other companies that pick stocks or bonds. Besides, there’s a good chance the mutual funds your bank is selling are managed by another firm anyway.

Above all, don’t assume that any funds you buy at a bank carry federal deposit insurance: No mutual funds have this type of protection.

* Pick a good fund family. Rather than spread your investments all over the place, concentrate on one or two fund groups. This will simplify your record keeping and make it easier to move money from one investment to the next.

Lean toward families that have at least one portfolio in each of the following categories: money market, high-quality bond, tax-free bond, growth stock, small-company stock and international stock. As you become more financially sophisticated, you can round out your portfolio with top-notch choices from other fund companies.

* Start with a money market fund. After you’ve decided on a particular family, it’s often a good idea to put your cash into the money market fund and transfer cash into riskier portfolios when you’re ready.

Most companies will let you use dollar-cost averaging, a strategy in which you automatically transfer a fixed amount each month into the fund or funds of your choice, thereby easing into the stock or bond markets.

* Consider a “pyramid” approach. This is a fancy way of saying that you should put most of your assets in conservative funds, with smaller increments in more risky portfolios.

What’s a typical mix? That depends on your risk tolerance, age, liquidity (near-term cash needs) and other factors. For example, Sheldon Jacobs, author of “The Handbook for No-Load Fund Investors,” recommends the following fund breakdowns for pre-retirement investors: 30% in bonds, 25% in conservative stocks, 15% in international stocks, 15% in cash, 10% in aggressive stocks and 5% in gold.

According to Jacobs, retirees would want to increase their weightings in bond and conservative-stock funds, while younger investors would drop bonds and bump up their exposure to stocks.

* Emphasize retirement plans. If you can afford to tie up your investments for many years, use tax-sheltered retirement plans to invest in mutual funds. Even if you can’t deduct what you put into an individual retirement account, the money will grow tax-deferred until you withdraw--a nice benefit.

Assuming your company offers a 401(k) plan and matches your contributions, that can be an even faster way to build up wealth.

According to a survey by Hewitt Associates of Lincolnshire, Ill., 84% of the companies offering 401(k) plans match employee contributions. In the most common arrangement, the firm chips in 50 cents for every $1 the employee invests. The vast majority of these programs offered mutual funds as one of the investment choices.

* Consider a stockbroker or financial planner. If you don’t believe that you can research, choose and monitor mutual funds on your own, it’s a good idea to work with a professional.

You will pay a price for the assistance--sales charges range from about 3% to as much as 8.5%. But a good adviser will help you stick with a long-term investment plan and prevent you from making costly errors.

Conflicting Trends With banks paying lower interest rates, financial advisers say some traditional savers are moving cash into riskier stock and bond mutual funds. Over the past year, banks and thrifts have been losing assets, particularly in small certificates of deposit (those under $100,000). During the same period, assets of stock, bond and money market funds have increased substantially.

In trillions of dollars:Mutual fund assets:

Dec. 1990: $1.067

Dec. 1991: $1.347

Small CD deposits:

Dec. 1990: $1.160

Dec. 1991: $1.057

Sources: IBC/Donoghue’s Money Fund Report, Federal Reserve Board, Investment Company Institute.