The trouble with the stock market as opposed to investing in mutual funds is the fact that some stocks go down—quality stocks, too—and it is a devastating experience to pick out so-called "blue chips" such as U.S. Steel, General Motors and Standard Oil of New Jersey only to find after you have held them for a time that they have sagged in price. If they have not sagged they may just have held their own or even increased slightly, but when you, the investor, have sold, the buying commission plus the selling commission plus taxes have resulted in a net loss to you.

You might have been less fortunate than to have picked these "blue chips." You might have picked stocks in sound companies like American Motors or General Dynamics and found that you lost a substantial part of your money if you bought near the peak.

The chief means of hedging against losses on one stock is diversification. When investing in mutual funds, or investment companies as they are sometimes called, there are essentially two safeguards that justify their existence: diversification and expert selection of stocks. They are companies whose sole function is to get together a group of stocks. The investor, by putting his money in the investment company, buys a small fraction of diverse stock holdings. When one particular stock drops, perhaps disastrously, the effect of the drop on the whole portfolio is negligible, so that the effect on the investor in the fund must also be negligible.

These investment companies have become extremely popular in the last two decades. In 1940, investment company assets in total were $1,061,548,000. At the end of 1960, they were $18,800,494,000. They rose 1671%.

There is another great but little stressed advantage in placing funds in in­vestment companies. In the great bull markets of 1958-1959 and late 1960-1961 stocks rose in value with little relation to the underlying assets or even the earnings. There was little to hold up the price of the stocks except warm air. Very often after a spectacular flurry, down they came in price as rapidly as they rose.

When investing in mutual funds, consider that the mutual funds sell at net asset value. You buy into the funds at the exact asset value and you sell out to the fund, not in the open market and not through an exchange—at net asset value. This net asset value does not mean the net asset value of the companies whose stocks are held by the fund. It means the market value of the securities held, but because the fund has a large combination of stocks, the risk of buying an American Motors at a peak price, which cannot be maintained, is minimized. The wild speculative fever that infects many, many stocks is thus to some extent minimized through the device of the investment company.

On the other hand the investor in an investment company cannot ride a speculative stock up to huge profits. He cannot ride a sound but enormous growth stock up—a stock like American Telephone and International Business Machines.

Mutual funds have, however, gone a step further than to provide diversifica­tion and freedom from risk. They have become specialized enough to suit the differing needs of investors. Here are the general types of mutual funds, together with the percentage of funds of mutual fund investors in each type of fund:

Type Of Fund	Per Cent Mutual Fund Assets In Each Type
1. Diversified common stock funds	58%
2. Specialized industry funds	5
3. Balanced funds	26
4. Income funds	7
5. Bond and preferred stock funds	4
6. Canadian funds sold in U. S.	3
	100%

The diversified common stock funds specialize, as the name implies, in com­mon stocks. Common stocks represent the growth element in the stock market, the element of capital appreciation.

In contrast are the bond and preferred stock funds which represent a certain degree of safety and an assured yearly income. Common stock dividends can easily be cut or even eliminated, but bond interest and preferred stock dividends cannot so easily.

An income fund stresses, as the name implies, current cash income from bonds, preferred stock or common stock, and it does not stress capital appreciation, the increase in price of the stock.

A balanced fund attempts to provide for the investor what he well might provide for himself—reasonable income, the conservation of his principal and the long-term growth of the principal. These objectives it accomplishes by buying common stocks, preferred stocks, bonds and sometimes even government securities.
Specialized industry funds are just what the name says they are: they buy the securities of a particular industry such as life insurance, atomic development or electronics. If the investor believes one of these industries is going up in the future and will develop disproportionately in relation to the economy, then this may be the kind of fund to invest in.

Canadian funds merit a special category because they offer certain tax advantages, which are of special concern to the larger investor. Capital gains are not taxed at the 25% rate in Canada, and the Canadian fund does not have to pay any tax on the sale of a security by the fund at a price higher than the fund paid for it.

These are some examples of funds in each category:

1. Diversified common stock funds

Aberdeen Fund, 15 William St., N.Y. 5, N.Y.
Axe-Houghton Stock Fund, 400 Benedict Ave., Tarrytown, N.Y.
Dow Theory Investment Fund, Inc., 7412 Calumet Ave., Hammond, Ind.
The One William Street Fund, Inc., One William St., N.Y. 4, N.Y.
State Street Investment Corporation, 140 Federal St., Boston 10, Mass.
The Value Line Funds, 5 E. 44 St., N.Y. 17, N.Y.

2. Specialized industry funds

Capital Life Insurance Shares and Growth Stock Fund, 445 Park Ave., N.Y. 22, N.Y.
Chemical Fund, Inc., 65 Broadway, N.Y. 6, N.Y.
Financial Fund, Inc., 1000 Second Ave., Seattle 4, Wash.
Insurance and Bank Stock Fund, Southern Equitable Bldg., Little Rock, Ark.
Television-Electronics Fund, Inc., 120 South LaSalle St., Chicago 3, 111.

3. Balanced funds
Axe-Houghton Funds A and B, 400 Benedict Ave., Tarrytown, N.Y. The Prudential Fund of Boston, Inc., 50 Congress St., Boston 9, Mass. The George Putman Fund of Boston, 60 Congress St., Boston 9, Mass. Scudder, Stevens and Clark Fund, Inc., 10 Post Office Square, Boston 9, Mass. Wellington Fund, Inc., 3001 Philadelphia Pike, Claymont, Del.

4. Income funds

The Income Fund of Boston, Inc., 330 Stuart St., Boston 16, Mass.
Puritan Fund, Inc., 35 Congress St., Boston, Mass.
Value Line Income Fund, Inc., 5 E. 44 St., N.Y. 17, N.Y.
Twentieth Century Income Investors' Shares, 4725 Wyandotte St., Kansas City, Mo.
Delaware Income Fund, Inc., 3 Penn Center Plaza, Philadelphia 2, Pa.

5. Bond and Preferred stock funds

Franklin Custodian Funds, Inc.—bond series-37 Wall St., N.Y. 5, N.Y.
preferred stock series
Investors Selective Fund, Inc., 800 Investors' Bldg., Minneapolis 2, Minn.
National Securities Bond Series   120 Broadway, N.Y. 5, N.Y.
National Securities Preferred Stock Series

6. Canadian funds

Canada General Fund, Ltd., 55 Yonge St., Toronto, Can.
Canadian International Growth Fund,  Ltd.,  201  Notre Dame  St.  West, Montreal, Can.
Commonwealth International Corp., 201 Notre Dame St. West, Montreal, Can. Keystone Fund of Canada, Ltd., 635 Dorchester Blvd. West, Montreal, Can. Loomis-Sayles Fund of Canada, Ltd., 55 Yonge St., Toronto, Ontario, Can. Scudder Fund of Canada, Ltd. 11 Adelaide St. West, Toronto, Ontario, Can.

This is one classification of the funds, but an even more specific classification is possible, depending on the needs of investors:

• Conservative investment companies—bonds and preferred stocks
• Aggressive investment companies
• Growth investment companies
• Income investment companies
• Speculative investment companies
• Economic area or industry funds
• Regional or geographic area funds
• Special situation investment companies—like 5, but not as much diversified
• Tax shelter companies—for the larger investor
• Single industry funds and companies

How have the funds fared? What are their financial records, and most im­portant, how did they do as compared with the stock market?

STOCK MARKET INDEXES, 1949-1958
CAPITAL GAINS AND DIVIDENDS ADDED TOGETHER

	Dow-Jones Industrials	Dow-Jones Composite Index	Standard And Poor's Index
1949	+20.1%	+18.2%	+17.7%
1950	+25.7	+28.8	+30.6
1951	+21.3	+18.2	+23.4
1952	+14.2	+22.8	+17.7
1953	+ 1.2	- 1.1	- 1.2
1954	+50.2	+48.3	+51.2
1955	+26.1	+20.4	+31.3
1956	+ 6.7	+ 5.8	+ 6.8
1957	- 8.4	- 8.8	- 9.0
1958	+38.5	+44.2	+42.6

These are the results an investor would have achieved had he bought all the stocks in each of the averages. His own particular selections would, of course, have fared differently, but the above is the average.

How did the mutual funds do as compared with these stock market averages?

MUTUAL FUNDS VERSUS STANDARD AND POOR'S INDEX NUMBER OF FUNDS THAT OUTPERFORMED THE INDEX

	Conservative Balanced Funds	Out of Total	Income Funds	Out of Total	Aggressive& Growth Funds	Out of Total
1949	3	34	5	10	19	48
1950	2	37	1	10	10	55
1951	0	39	0	10	7	62
1952	0	42	0	10	3	64
1953	36	42	6	11	41	69
1954	0	42	1	13	25	70
1955	0	43	0	14	1	74
1956	9	42	4	15	50	75
1957	30	41	4	17	23	79
1958	0	42	6	19	28	88

The table means that in the year 1958, for example, out of a total of 42 balanced funds not one fund outperformed the market as measured by Standard and Poor's stock market price index. Out of 19 income funds six outperformed the market; and out of 88 aggressive and growth funds 28 outperformed the market.

The conservative balanced funds did better than the market only in poor times—1953 and 1957. They are thus, as far as investing in mutual funds is the issue, conservative only in a sense. The income funds did generally a little better, but the aggressive growth funds did the best of all, in good and in poor times. It must not be overlooked, however, that the decade of the 1950's was a bull market decade, a decade of almost constantly rising stock prices. A period of decline might well favor the conservative funds.

It is well to point out here that an average means little. The investor has to pick one or a few funds, and is not concerned with the fact that three out of 21 funds did better than the market. He might not have his funds in one of these fortunate three.

Underlying these summary figures are the excellent tables prepared by Leo Barnes in his book, "Your Buying Guide to Mutual Funds and Investment Companies," published by the American Research Council, Larchmont, N.Y.

These tables present the performance of a large group of mutual funds so that the reader can compare one with another.

From Johnson's Investment Company Chart Book, 1961, the following summary was prepared:

TYPES OF STOCK MARKET INVESTMENTS COMPARED IN GROWTH
1960 vs. 1950

	1950	1960	Since 1950
Mutual Fund Average	100%	262.7%	+163%
Dow-Jones Industrial Average	235.41	615.89	+162
Standard and Poor's Preferred Stocks	179.8	145.7	-  19
Standard and Poor's High Grade Corp.
Bond Average	121.3	95.11	- 22
Standard and Poor's Mun.
Bond Average	138.5	108.1	- 22

Over a ten-year period the mutual funds did about as well as the Dow-Jones average of 30 leading industrial stocks. The yearly performances of stocks and mutuals (to which dividends must be added to get total return) are compared in the table.

All fixed income securities lost over the ten-year period. These are the most conservative investment, and over the long pull they were the poorest invest­ment. Over the short pull, as, for instance in a declining market, they are often the best and safest.

The yearly appreciation (or depreciation) can quickly be determined by dividing the total change over the ten-year period by ten.

TYPES OF STOCK MARKET INVESTMENT COMPARED IN ANNUAL GROWTH
1960 vs. 1950

Mutual Fund Average	+16.3%
Dow-Jones Industrial Average	+16.2
Standard and Poor's Preferred Stocks	— 1.9
Standard and Poor's High Grade Corporate Bonds	— 2.2
Standard and Poor's Municipal Bonds	— 2.2

Each year a kind of Bible of mutual funds is published by Arthur Wiesenberger, 61 Broadway, New York, N. Y. This publication offers detailed figures on each of many mutual funds.

Up to this point, while looking at investing in mutual funds, we have not distinguished between mutual funds and closed end investment companies. A highly important characteristic of mutual funds is that the mutual company investor invests directly with the company and when he wants to withdraw his funds he sells his shares back to the mutual directly. Each transaction is conducted with the mutual fund itself and takes place at the net value of the stocks in the mutual fund's portfolio. This net value is com­puted daily and sometimes twice daily. The mutual fund is thus always in the process of expanding or contracting as investors are buying in or getting out.

A closed end investment company's shares are not purchased from the com­pany or sold to the company. They are traded on the open market. They do not necessarily represent in price the value of the securities held. Like any other stock the price can be either above or below the net value of the underlying assets—in this case stocks. They are thus sold at a "premium" or at a "discount." This is a record of performance of some of the closed end companies:

CLOSED END INVESTMENT COMPANIES VERSUS STANDARD AND POOR'S INDEX
NUMBER OF COMPANIES OUTPERFORMING INDEX

	Number That Outperformed Index	Out Of
1949	14	21
1950	7	21
1951	12	22
1952	5	22
1953	11	22
1954	6	22
1955	0	23
1956	17	22
1957	9	22
1958	4	23

The record of these closed end companies is not bad, but it is not good either Some of the leading closed end investment companies are:

• Adams Express Co.
• American International Corp.
• Boston Personal Property Trust
• Lehman Corp.
• Madison Fund
• North American Investment Corp.

Investing in mutual funds or a closed end investment company is not sim­ply a happy way of securing diversification of investment and expert service in buying and selling of stocks. These services cost something. For the smaller investor the cost of investing in a mutual fund is about 8% of the total amount he invests. For a $1,000 investment he gets about $920 worth of mutual fund shares. This commission is equal to two years' return on his investment at 4% per year. This is not a low commission. When he gets out of the mutual he may pay another 1%; possibly not. If he enters into a contract plan to put so much per month into the fund for so many years, and if after getting started he decides not to continue he can lose half of one year's investment! All fine print on contract plans must be read.

In addition, the fund costs something to run—for offices, clerks, typing, etc. This cost generally does not run over one-half of 1% of the whole portfolio of stocks each year. Then the fund managers may take up to one-half of 1% more for their services. These costs must be determined in advance of investing.

Some mutual funds do not have this 8% "load." Some of these are:

• Stein, Roe and Farnham Fund, 135 South La Salle St., Chicago 3, III.
• T. Rowe Price Growth Stock Fund, 10 Light St., Baltimore 2, Md.
• de Vegh Mutual Fund, 26 Broadway, N.Y. 4, N.Y.
• Wade Fund, Inc., 63 South Main St., Memphis 3, Tenn.
• Rittenhouse Fund, 2 Tenn Center Plaza, Philadelphia 2, Pa.
• Haydock Fund, 1200 First National Bank Bldg., Cincinnati 2, Ohio
• Loomis-Sayles Mutual Fund, Inc., 140 Federal St., Boston 10, Mass. Northeast Investors' Trust, 50 Congress St., Boston, Mass.
• Prudential Fund of Boston, Inc., 50 Congress St., Boston 9, Mass.
• Scudder, Stevens and Clark Funds, 10 Post Office Square, Boston 9, Mass.Mutual Shares Corp., 200 E. 42 St., N.Y. 17, N.Y.
• Johnston Mutual Fund, Inc., 230 Park Ave., N.Y. 17, N.Y.
• Energy Fund, 2 Broadway, N.Y. 4, N.Y.

Since these funds do not offer a selling commission to brokers or salesmen they are generally not available through brokerage offices. Letters have to be ad­dressed to the funds, and the addresses of most funds, both "load" and "no load," are available in the directories referred to above. Brokers will probably have their addresses with which to supply the prospective investor.

It is not simply a matter of buying a "no load" fund because it is cheaper. Some restaurants serve cheaper meals than others but you may get less. You must study what the fund has to offer in relation to your investment needs and see how it performed over the years. A poor performance can offset no load in short order.

When selecting a fund for investing in mutual funds, these are the things to consider:

1. Does the fund suit your particular investment needs and desires for income, growth and the preservation of capital?
2. What has been its performance dollar-wise over the years as compared with other funds and with the stock market?
3. Is it well established and substantial in size?
4. Is it diversified?
5. What is the "load" or acquisition cost and what is the cost of cancellation of a contract plan?
6. What is the operating cost?
7. What is the "management" fee?
8. What are the rules governing the reinvestment of dividends?
9. Will the fund take periodic small investments, and again, if you contract to make these, what is the penalty for failure to make them?
10. What plans and costs are there for withdrawal of funds?
11. Do you need, and are there, special tax benefits, as in Canadian funds?
12. What do brokers and bankers think of the fund's management?

The following publications should be consulted. You will be able to see them at your local public library or at your broker, or you can write for them:

Investment Companies, 1961, Arthur Wiesenberger, 61 Broadway, New York City

Leo Barnes, Your Buying Guide to Mutual Funds and Investment Companies, American Research Council, Larchmont, N. Y.

Forbes Guide to Mutual Fund Profits, Investors' Advisory Institute, Forbes, Inc., 70 Fifth Ave., New York City

Barron’s Quarterly Portfolios, Barron's National Business and Financial Weekly, 388 Newbury St., Boston, Mass.

Lohnson’s Investment Company Charts, Rand Bldg., Buffalo 3, N. Y.

Investment Trusts and Funds from the Investor's Point of View, American Institute for Economic Research, Great Barrington, Mass.

Mutual Fund Directory Section, Dealers Digest Publishing Co., Inc., 150 Broadway, New York 38, N. Y.

Trusts and Estates, Fiduciary Publishers, Inc., 50 East 42 St., New York City

The mutual fund is popular not only with the larger investor but with the smaller one. The average holding per investor is about $4,000, and most of the mutual fund holders have incomes of under $10,000 per year.

There is a good deal below the surface that makes the investment in a mutual fund worth careful investigation. The mutual funds are more than opportunities to diversify stock holdings in organizations which are expert at picking winners.

Let us start to seek out these differences by explaining the mechanism by which you finally receive the fruits of investing in mutual funds. In the first place every year each fund makes two types of payment: (1) income, and (2) capital gain. The income comes from dividends the fund receives on stocks it holds in its portfolio. These it pays out to the fund holders—quarterly, semi-annually or annually. The fund does not pay any taxes on this income, although obviously the usual type of business corporation does—at a rate of 52%. This income is taxable to the individual only, the fund holder who receives it.

In 1961 these income dividends amounted to between 2% and 4% for most funds based on 1961 fund prices.

The second type of payment is the capital gain payment. If the mutual fund bought all its stocks in its portfolio in December 1960 and sold nothing in the year 1961 there would be no capital gains and no capital gains payment to any fund holder, even though the stocks appreciated in the year 1961. It pays out a capital gain only if it realizes a capital gain through the sales of a stock at a price higher than it paid for the stock when it bought it—whether in 1959 or in 1902!

Looking at investing in mutual funds, note that very nearly all mutual funds pay out these capital gains to the fund holders, and they are taxable to the fund holders at the 25% capital gains tax rate. If the fund retains these gains the fund pays the capital gains tax on behalf of the fund holder. The effect on the fund holder is the same whether the capital gain is held by the fund or paid out by the fund to the holder.

Most mutual funds send a notice to the fund holders asking them whether they want the capital gain in cash or in shares. Some of the funds urge the holders to take shares with the result that 70% of the fund holders do take them, and thus leave their capital gains in the mutual fund.

This choice that the mutual fund offers the fund holders is not quite what it appears to be. The letter I received in the mail from a fund in which I hold shares sounded as though the fund had really done fine this year and I could have the money and spend it. There was no distinction made between the income dividend and the capital gains dividend as far as my net worth is concerned.

But let us suppose that the fund is a $100,000 fund and there are 1,000 stock holders, each having a $100 investment. The fund has made $10,000 this year on stocks it has sold and offers to pay this $10,000 out to the fund holders—$10 to each one. All the fund holders accept and each gets his check for $10—the capital gains distribution.

The fund is $10,000 poorer. It now has $90,000, not $100,000, and each fund holder is worth $90, not $100. As soon as this capital gains dividend is paid the value of the stock drops from $100 to $90.

On the other hand if the fund was worth $90,000 in January 1961 and is worth $100,000 in December 1961, on the dividend date (if dividends are paid only once a year) the fund holder may choose to receive the $10, because his invest­ment in the fund in December, after he has received the dividend, is just what it was in the beginning of the year, and he is no worse off.

But let us suppose that the fund we are talking about is a very inactive fund, and that it bought all of its stocks in 1932 and has sold them in 1961. Its invest­ment of $10,000 made in 1932 has grown to $100,000 in 1961. You buy into the fund during the year 1961 at $100 per share. After you have bought, the fund sells its holdings and puts the money into other stocks. The gain is the difference between $10,000 and $100,000-$90,000. But one-fourth of this gain is a tax liability—$22,500. Theoretically the fund would pay you your proportionate share of the $90,000 capital gain—$90. Your shares would be worth $10 instead of $100, and you would have a $90 dividend on which you owed $22.50 tax—not a very good deal for you.

Without investigating into the makeup of the fund's portfolio you would not know of this hidden tax liability. This extreme example is given only to em­phasize the point. It is academic, but there are, nevertheless, different amounts of tax liability as among different funds.

On the other hand maybe the fund was a poor one, as some international funds were that invested in the wrong countries, so that when stocks in the portfolio are sold they are sold at capital losses from which you can benefit taxwise.

For certain individuals a mutual fund can be a gold mine. This is the individual whose income is at a level so great that he does not want any income at all which is taxable. He does not need money to spend, but he does want to build up his capital without paying any tax on the increase.

Theoretically he could do this by holding his stocks and never selling; but sooner or later he would be faced with a declining stock, one that say he bought for $10 which subsequently rose to $50, and then has started to slide off and has already reached $45. He would like to sell it, but he is "locked in." He will have to pay a high capital gains tax on his profit which is $35 (the $45 market price less his cost of $10). His tax would be about $9.

There is a certain group of mutual funds organized outside the United States to hold foreign securities, including Canadian securities. These companies are approved as to their financial transactions by the Securities and Exchange Commission.

For simplicity let us assume that the fund is a Canadian fund and handles only Canadian investments. It realizes large capital gains, but in Canada (as well as in England and elsewhere) capital gains are not taxable. In addition the fund pays a small tax on its dividend income, probably 15%. It pays nothing whatever out to the fund holders. They consequently have no tax to pay, and they see their investment mounting each year because the fund retains its earnings and its capital gains.

Only when the fund holder sells his shares is he liable for any tax, and then the tax is a capital gains tax at a maximum rate of 25%. Meanwhile the fund has presumably been selling out when a stock is no longer showing rises and is getting into new opportunities as they present themselves. Although trading is going on constantly the fund holder pays no tax on these operations.

It is impossible for statistics to present an accurate picture of the growth of the other countries of the world, particularly the West European countries. In the past seven years the production of France, Germany, Italy, Belgium, the Netherlands and Luxembourg has increased at three times the rate that the United States has. Here is a record of performance of the various stock markets of the world in the year 1960:

RISE OR FALL OF WORLD STOCK MARKETS 1960

United States	Fell	9%
Canada	Rose	2%
Germany	Rose	33%
Holland	Rose	25%
Italy	Rose	30%
France	Rose	7%

In the Fall of 1961 I traveled through Western Europe looking for investment opportunities, and during the trip visited with a number of bankers and financiers. The thing that impressed me the most was the economic vigor of almost every country of Western Europe. The German reconstruction is all but complete, as is the Italian. The people in these countries, plus the Low Coun­tries—Belgium and Holland, are almost fully employed. They work very long hours and seem glad of the opportunity to do so and thus earn more than they would in a shorter workday. Developing industries require investment, and those companies that are well established in Western Europe are experiencing increasing profits that are hardly being matched by American companies.

When we arrived in Munich I was not surprised to see a sharp drop in stock market prices because of the Berlin crisis. I felt at the time that this was a first rate investment opportunity if we could gamble successfully on one thing-no war over Berlin. The Germans and other Western Europeans apparently felt the same way, and European markets shortly took off again.

These are some of the funds with over 50% of their assets in foreign stocks:

FUNDS WITH OVER 50% PORTFOLIO OVERSEAS

• Electronics International Capital, 1400 Fifth Ave. San Diego, Cal. Eurofund, Inc., 14 Wall Street, New York, N. Y.
• International Investors, Inc., 67 Broad St. New York, N.Y.
• International Resources Fund, Inc., 900 Wilshire Blvd, Los Angeles, Cal.

Over and above the question of which mutual fund to pick - when looking at investing in mutual funds - is the question of whether to pick any. The mutual fund's chief advantages are diversification and expert selection of securities. If you have time, energy and some ability plus a sum of money of some magnitude to invest—say $10,000 or more—you may not feel the cost of operation and the acquisition cost of an investment com­pany are justified, and you may diversify your stock holdings yourself. If you bought all of the 30 Dow-Jones Industrial stocks ten years ago your gain would have been 239%. But only 16 of the 30 stocks equaled the 239% appreciation. One stock just about stood still, and seven appreciated less than 80%. You might have picked the poorer performers. On the other hand you might have picked the good ones.

Or you could look in the Wiesenberger Investment Company publication and see exactly what stocks investment companies hold and how many shares—for each individual company. You can buy the same things and be guided by the judgment of the fund managers and thus avoid the acquisition and operating costs. Investment companies are an excellent idea, but in practice they may not be worth their cost, particularly to the larger investor. They may on the other hand perform a real service to the smaller investor by spreading his risk and picking more wisely than he.