Signs That Your Sweet Fund Is About to Turn Sour

And you can find plenty of ways to tell that a style is overblown or played: Everyone will be talking about that category. Every article is hot on the idea. And a fund is taking in new money faster than it can invest it.

You can easily track the funds and styles that are attracting the most investor cash. You don't need up-to-the-minute data -- just enough to follow the trends. Financial Research Corp. releases monthly data on fund inflows on its Web site at www.frcnet.com. You can see the funds that are taking in the most money, which are the ones you probably want to stay away from.

Pimco's (PTTDX Quote)Total Return bond fund was the best-selling fund for December and all of last year -- possible proof that the bull market in bonds is over.

Too Much Money, Too Few Ideas

Too much money can also wreck an individual fund's performance. A manager who is running a fund that has taken in a lot of cash might be forced to buy more stocks and larger stocks just to put that dough to work. And that can quickly change the style and makeup of a fund. A fund might be forced to take bigger positions in the stocks it already owns, which can ratchet up the risk.

A flood of new cash can be particularly damaging to a small-cap fund. Smaller companies have fewer shares that trade. A manager running a fund that's overloaded with money can't put enough cash in any one stock to make a difference in the fund's performance. And buying too many shares in any one tiny stock can produce dramatic swings in the stock's price, which can hurt the fund's returns.

You can keep an eye on a fund's assets to gauge how much money is coming in the door. You can also watch a fund's cash position. If that percentage is significantly higher than where it was a year ago, the manager might be having some trouble putting new money to work. And if the number of stocks the fund owns begins to multiply, that's another tipoff that the fund could turn from a leader into a laggard.