My parents are retired and living on a limited income. They are a bit old-fashioned as far as their savings are concerned. They believe the best place for their money, besides in the mattress, is in CDs. I am trying to convince them to take a bit of a step up and to invest in a mutual fund. I've suggested (JAFIX) - Get Report Janus Flexible Income, but I'm a little shaky about giving them this advice. Do you think this fund would be a good choice, or do you have another suggestion? -- Suzanne Cunningham
I have another suggestion.
Nothing against Janus Flexible Income, which according to
, is the best-performing general bond fund over the 10 years ended May 31.
But the general bond fund category is for funds that don't have any quality or maturity restrictions. These are funds with prospectuses that enable them to stock up on low-quality junk bonds, which involve a high degree of credit risk, and on long-maturity bonds, which involve a high degree of interest-rate risk. In short, general bond funds are very risky bond funds.
Let's back up for a second. Your folks have never invested in mutual funds. You have exactly the right sense that they need to be eased into the world of fund investing. And you have exactly the right idea that bond funds, rather than stock funds, are the place to start. That's because bonds are less volatile than stocks. Their prices don't move as much; therefore, the share prices of bond funds don't move as much as the share prices of stock funds. If your parents have never seen
fluctuation in the value of their principal, you're going to want to start them off with as little as possible.
In fact, perhaps you should consider a money-market fund for starters. Money-market funds, as you probably know, are managed to maintain a net asset value of a dollar a share. The size of the dividend will fluctuate as short-term interest rates change, but the value of the shares won't change, and your folks can redeem them any time they want.
You should have no trouble finding a money-market fund yielding more than the CDs they are accustomed to investing in, unless they invest solely in long CDs. According to
bankrate.com, CD yields currently range from 4.02% for a three-month instrument to 5.28% for a seven-year product. The average taxable money-market fund yield as of Wednesday was 4.41%, according to money-market fund tracker
IBC Financial Data
Web site has loads of convenient sorting functions you can use to identify funds your folks might be interested in.
Janus has a few money-market funds --
Janus Money Market
Janus Government Money Market
Janus Tax-Exempt Money Market
. The tax-exempt fund only makes sense if your folks are taxed at a high enough rate. Here's a
calculator you can use to figure it out.
Whatever you do, don't pick a fund with higher-than-average expenses because that will eat into your parents' return. The median expense ratio for money-market funds, according to Lipper, is 0.75%. For Treasury-only money-market funds, it's 0.65%. For government money-market funds, it's 0.63%. And for tax-exempt money funds, it's 0.66%. Janus funds have expense ratios of 0.60%, though each is currently waiving an additional 0.10%, a common practice that relatively new funds use to boost performance. With any fund you're considering buying, find out what the expense ratio would be without expense waivers, since it's sure to rise to that level at some point.
But maybe you think your folks could handle a bit of fluctuation in the value of their principal in exchange for a somewhat higher yield than a money-market fund will pay. (That's the basic tradeoff: the higher the yield of the investment, the more the value of the principal may fluctuate.) In that case, consider steering them toward a short-maturity, investment-grade bond fund. If Janus is the company you want, they've got one for you --
Janus Short-Term Bond.
Note the differences between Janus Flexible Income and Janus Short-Term Bond, as described in the prospectus, which is downloadable from the company's Web site. Flexible Income "may own an unlimited amount of high-yield/high-risk securities, and these may be a big part of the portfolio." Short-Term Bond, on the other hand, "will normally invest at least 65% of its assets in debt securities such as corporate bonds or notes" -- investment-grade is implicit -- "or U.S. Treasury bonds, and may invest up to 35% of its assets in high-yield/high-risk securities."
Now note the differences in how the funds have performed. Over the past five years, Flexible Income's best quarter was the three months ended May 31, 1995, when it returned 8.14%. Short-Term Bond, on the other hand, never returned more than 4.67%, in the three months ended Nov. 29,1996. But while Flexible Income lost 5.22% in the three months ended April 29,1994, Short-Term Bond never lost more than 1.93% during that same period.
And if your folks had been watching the share price over those years, here's what they would have seen: Looking at month-end figures, the net asset value of Flexible Income has fluctuated between 8.75 and 10.14. The fluctuations in Short-Term Bond, though masked to a degree by the low share price, were still much smaller. Its NAV hovered between 2.84 and 2.92.
As with money-market funds, the most important thing when choosing a low-risk bond fund is to pick one with a low expense ratio. Janus Short-Term Bond is acceptable on that score after waivers, charging 0.67%, vs. a category (short investment-grade debt) median of 0.76% for no-load and front-load funds. Without the waivers, it would be 1.06%, which is a little high. A better choice might be
Vanguard Short-Term Corporate, with a 0.28% expense ratio.
Send your questions and comments, along with your full name, to
TSC Fixed-Income Forum aims to provide general bond information. Under no circumstances does the information in this column represent a recommendation to buy or sell bonds, funds or other securities.