There's No Such Thing as a Hot IPO of a Fund

Buying a mutual fund puts you less on guard than buying a used car or a so-called $10 Rolex from a guy on the street who's set up a card table. In the grand scheme of things, the fund world is well-regulated, but there are still some fairly standard tricks of the trade every fund investor should keep in mind.

Over the past month or so, we've looked at share splits -- pointless exercises sometimes used to pitch a fund as somehow "cheaper" -- and the practice of quietly boosting one fund's broker payout, thus creating a potential conflict of interest where an adviser might be tempted to sell an inferior fund for its higher payout, rather than its suitability for a client's needs. Today we're looking at another questionable play in fund marketers' playbooks: Pitching a fund's subscription offering as if it were a hot stock IPO.

In a subscription launch, a fund company provides investors with a prospectus for a new fund and offers them the chance to essentially reserve launch day shares in the month or so before it launches, usually at $10 a pop. In a way it looks like the hot stock's IPO and it's often made to feel like a hot stock's IPO, but the comparison is at best inaccurate and at worst misleading. ...