This Saturday piece compiles our Fund Forum Q&As from throughout the week. (They appear every day around noon.) Remember, you can send your question, with your full name, to fundforum@thestreet.com.

Tuesday's Topic: Readers Suggest More Ways to Ride the Nasdaq 100

Investors seem to be truly smitten with the

Nasdaq 100

.

In

last Thursday's Fund Forum, I mentioned one mutual fund that tracks the Nasdaq 100,

Rydex OTC

. Subsequently, readers flooded me with email, mentioning two more investment options. Well, here they are.

Ranson's UIT

Ranson & Associates

offers a unit investment trust that invests in the Nasdaq 100. A unit investment trust, or UIT, is like an index fund with a finite life. A UIT will buy and hold a fixed portfolio of securities for a predetermined period of time, usually one to five years. UITs are sold through brokers, meaning that you have to pay a sales charge to purchase units, but you don't have to pay an annual management fee.

Since UITs have maturity dates, they will have offering periods, during which investors can purchase units in the trust. If you decide to purchase units in Ranson's UIT, you have two choices. One is a six-year trust with a one-year offering period; the other is a three-year trust with a six-month offering period, says Doug Rogers, Ranson's national sales manager.

When the offering period for one series ends, the firm opens a new series, effectively keeping these two vehicles open to new investment at all times. There is a $1,000 minimum investment, although that figure is lower for IRAs.

Ranson, which manages a little more than $2 billion in total UIT deposits, sells the

Nasdaq 100 Index Trust

through broker-dealers, so you can't call up the firm and make an investment directly. But if you want more information, you can visit the firm's

Web site

.

Another Alternative from the Amex

The

Nasdaq-Amex Market Group

is preparing to launch its own Nasdaq 100 investment product sometime this quarter. The new product, shares of which will trade on the

American Stock Exchange

, will be similar to the

Standard & Poor's Depositary Receipts

, or SPDRs, and the

World Equity Benchmark Shares

, or WEBS, which already trade on the Amex.

Investors will be buying into a trust that holds a portfolio consisting of Nasdaq 100 securities, and the shares will trade like stocks throughout the exchange's trading day. You should keep an eye on Amex's

Web site

for more details.

For the Love of Rydex

In the same column last Thursday, I asked readers to send me their comments on the Rydex OTC fund, and the responses were unanimously positive.

"I've been involved with Rydex since the group was started, and they do a top-notch job (long funds and short funds). The Rydex OTC fund meets its objective of matching the Nasdaq 100 (up and down)," writes

John McCorvie

.

"My experience with Rydex has been excellent, and their selection of funds is great for those who want to play the indexes on both the long and short side of the market," says

Michael Cooney

.

Wednesday's Topic: Do Mutual Funds Ever Split Their Shares?

The net asset value for the Invesco Health Sciences fund is close to $60. Do mutual funds ever consider stock splits? Are they even an option with mutual funds? -- Michael Micciche

Michael,

You could call a share split, like a name change, a cosmetic surgery procedure for the mutual fund industry.

Share splits can and do happen in the world of mutual funds. But they don't occur very often and are virtually meaningless exercises for shareholders.

A share split has no economic effect on a fund's shares. It just doubles, triples or quadruples the number of shares, thereby lowering the net asset value, or NAV. A fund's NAV, the dollar value of a single share, is based on the value of all the fund's holdings divided by the number of shares outstanding. By increasing the number of shares, a firm lowers a fund's NAV.

When a publicly traded company splits its stock, the maneuver may produce a spike in the stock's price if the market views it as a positive signal by the company. But the market does not directly influence the pricing of a mutual fund's NAV. If your fund completes a 2-for-1 split of its shares, you might wind up with double the number of shares. But your account's value will not change, and there aren't any tax implications.

"The only reason to do a share split is for marketing purposes," says Pamela Wilson, a senior partner at

Hale and Dorr

in Boston. For example, a fund with a rather lofty NAV may be off-putting to investors, particularly novice mutual fund shoppers. An abnormally high NAV may make some investors uncomfortable. In the eyes of some, lofty NAV equals expensive. A share split will simply render a more palatable, digestible number, says Wilson. That's why you will see many new funds launch at a starting NAV of about $10.

A fund company might split a fund's shares if its NAV is higher than those for the rest of the family, making for easier comparisons. Wilson says she sees it happen when a fund company wants to reduce the high NAV on an older fund to bring it in line with a group of new funds.

Here's a real-world example. In late 1997,

AIM Management

split the shares of five funds the firm had inherited from its sister company

Invesco

earlier that year. The five Invesco funds had been around for a long time, and all had NAVs of $60 or more, says an AIM spokesman. Fund shareholders received three additional shares for every share they owned in one of the funds. The lower, more familiar NAVs made the funds easier to market and were more in line with the other AIM funds, the spokesman says.

By the way, Invesco says it has no plans to split the shares of the Health Sciences fund.

When it comes down to it, the only thing that really matters is how much money you make in the fund and how little you have to give up to taxes.

Thursday's Topic: Soaring NAV Numbers Won't Enrich ProFund Holders

How did the ProFunds UltraBull fund jump over $60 in one day? This is a mutual fund! How did the firm's UltraOTC fund jump over $100 the same day? Was there some hanky-panky over the weekend? -- Christopher Barr

Christopher,

On Wednesday, many investors spied these anomalous jumps in the net asset values of

ProFunds

mutual funds. But fund shareholders shouldn't think they now have the extra bucks for big-ticket purchases.

Shareholders of the UltraOTC fund, for example, saw a 425% jump in the fund's NAV. One reader wrote to say, "I called my dad that morning and thought he had hit the big one."

The dramatic increases were the result of a 1-for-5 reverse share split effective Jan. 15. Shareholder accounts will now show one-fifth the number of shares, although account values won't change.

The timing -- at least for

TSC

readers -- couldn't have been better. I covered this topic in Wednesday's Fund Forum. A fund company will sometimes split the shares of a fund to lower its NAV, making the price more palatable to investors. A firm can also conduct a reverse share split to raise a fund's NAV.

Louis Mayberg, president of

ProFund Advisors

, says that size was indeed an issue. The funds' NAVs were small enough that rounding their prices could result in NAVs that wouldn't accurately reflect the movement in a corresponding index, particularly on days in which the market makes small moves. With the reverse split, the higher NAVs of these funds will more precisely track the performance of the indices.

For example, the NAV on the

UltraShort OTC

fund had fallen below $3. Such a low NAV can cause shareholders an additional problem: They can't buy such a low-priced fund on margin at some brokerage firms. At

Waterhouse Securities

, for example, securities, including mutual funds, priced below 4 1/8 cannot be bought on margin, says Peter Mangan, executive vice president of institutional services. With the reverse split, the UltraShort OTC fund's NAV is now comfortably resting above $13.

Mayberg says the firm points out the risks of using margin in ProFunds' Ultra funds, which are leveraged funds. That is, they create additional exposure to the market. For example, the UltraOTC fund aims to double the performance of the

Nasdaq 100

.

The move also boosted the NAVs of the

Bear

and

UltraBear

funds, whose prices were in the $6 to $8 range before the split.

But the UltraOTC fund, one of 1998's top performers, now has a NAV north of $145. Why boost the price of this fund as well? Mayberg says the firm thought it would be less confusing to execute the same reverse split for all the funds (except for the firm's money market fund).

But the maneuver

did

cause a raft of confusion. Even though the reverse split did not economically impact shareholders' accounts, I received many emails from readers on the subject. Investors were also posting messages to the

Mutual Funds Interactive

boards.

Mayberg says the firm forewarned shareholders of the reverse split in their Dec. 31 statements; however, the firm's

Web site

hadn't posted an explanation of the event by midday Wednesday. When I spoke to Mayberg yesterday, he said the firm had received about 100 emails, while on an average day it receives about 20.

Perhaps if there is a next time, everyone will be better prepared.

Friday's Topic: Why Did My Target Maturity Fund Sock Me with Such Big Gains?

American Century Benham Target Maturities Trust 2020 is a major financial irritant to me. I have been in the fund since October, and on Dec. 11 it declared a $7-plus capital-gains distribution. This is over 20% on a fund with an approximate price of $36. This is a lot of tax for me to pay for being in a zero-coupon fund for two months. I understand year-end capital-gains distributions, but in this case the investor gets nothing. The fund uses a reverse share split, which raises the fund's share price back to its predividend price. I started in this fund with 2,317 shares, and after distributions ended up with the same amount, plus a couple of percentage points of price appreciation -- and a 20% capital-gains liability! My problem is that the taxable capital gain is so much greater than the imputed interest on the bonds. The bonds are accruing interest at 5% to 6% a year. I understand the fund does some trading, but does that account for the other 15%? --Rich Schneider

Rich,

It's not as bad as you think.

Before I explain why, let me explain a bit about the kind of fund we're talking about, for readers who aren't familiar with it.

A target maturity fund attempts to mimic the performance of a zero-coupon bond. Regular bonds pay interest: for example, if you buy a bond with a 6% coupon for $1,000, its face value, the bond pays you $60 a year until it matures, at which point you get your $1,000 back. Zero-coupon bonds have no coupons (hence the name), so they pay no interest. Instead, they are priced at a steep discount to face value. For example, a $1,000 zero-coupon bond maturing in 10 years might cost $500.

Target maturity funds are designed to reach a target share price in a certain year, at which point they liquidate. Your fund aims to reach its price target of about $100 in 2020 (hence its name). The American Century target maturity funds, which invest in Treasury zeros, aim to match the performance of a Treasury zero maturing in the target year.

There are a couple of important differences, however, between owning shares of a target maturity fund and owning zeros that mature in the target year.

The first has to do with interest. Zeros don't pay it.

A target maturity fund, on the other hand, "is required by the

Internal Revenue Service

to distribute dividends based on the zeros' imputed interest," says American Century's

explanation

of how these funds work.

Imputed interest is effectively the interest you would have received if the bonds carried coupons. Whether you own zeros or target maturity fund shares, you have to pay tax on them each year.

Obviously, like any mutual fund, a target maturity fund also must distribute capital gains each year, and that's the second difference between owning target maturity fund shares and owning zeros. If you own zeros, you pay capital-gains tax only when you sell bonds for more than their imputed value. But if you're a fund shareholder and the fund has taken capital gains, you're going to pay tax on them.

Why Such a Big Distribution?

Rich, you say you are aware that most funds distribute capital gains at year-end but were blindsided by the size of the distribution on your fund. Indeed, it was a huge distribution. The fund distributed a total of $7.26 on a net asset value of $36.11. Of the total, $2.06 was the dividend and $5.20 was capital gains.

No other American Century target maturity fund distributed anywhere near that much in capital gains. So what happened?

What happened is that the fund racked up huge gains last year, and lots of investors cashed out, socking those who stayed with the capital-gains distribution.

All bonds and bond funds do well when interest rates are dropping, but zero-coupon bonds and funds do the best. So as Treasury yields headed steadily lower last year, the prices of zeros and of target maturity fund shares shot up, as you can see from this

chart of BTTTX. Consequently, many investors sold. David Schroder, the fund's manager, said that in the year ended Oct. 31, 1998, the period for which capital gains were calculated, the fund's assets dropped to $455 million from $573 million, and the number of shares shrank to 11.8 million from 19.5 million.

The large capital gain happened because the fund, which is fully invested, had to sell securities to meet redemptions when prices were high, Schroeder says. The manager says he tries to sell the highest-cost securities first in order to minimize the tax impact, "but there's only so much we can do."

Examining the Reverse Split

So, all the gains that got taken in order to let the sellers out were distributed to the remaining shareholders. Why shouldn't that upset you? For two reasons.

First, the sellers don't get to avoid paying capital-gains tax. They get taxed on their gains on their shares.

The second reason has to do with the devilishly complicated reverse share split you mentioned. No shame in this, but I think you partially misunderstand it.

When a normal mutual fund makes a distribution, its net asset value drops by the amount of the distribution. If you are reinvesting your distributions, they go to purchase additional shares at the lower, postdistribution price. Target maturity firms work the same way. If you reinvest your distributions, they go to purchase additional shares at the lower, postdistribution price.

But immediately after the distribution, a reverse share split is performed. Why? If a target maturity fund's share price dropped every time it made a distribution, the fund would never reach its target price of $100 a share. The reverse share split returns the share price to its predistribution level. Depending on whether you reinvested your dividend or took the cash, you would have either the same number of shares as before, or fewer shares.

It's easiest to understand if you think in terms of the total value of your investment.

In a regular fund, if you take your distributions in cash, the total value of your investment will be less after the distribution than before; you'll have the same number of shares at a lower price. If you reinvest, the total value will be the same after as before; you'll have more shares at a lower price.

In a target maturity fund, if you take your distributions in cash, the total value of your investment will be less; due to the reverse split, you'll have fewer shares than before -- but at the same price. If you reinvest, the total value will be the same; you'll have the same number of shares at the same price.

The fact that you have the same number of shares now as before doesn't mean the fund hasn't given you anything. It's given you your predistribution share price back. Remember, if you'd taken your distribution in cash, you'd have fewer shares now than you had before the distribution.

Cap Gains Taxes: Pay Now or Pay Later?

How does this affect you from a capital-gains standpoint? Assuming you don't intend to hold this fund till maturity, you're going to sell your shares someday, hopefully at a gain. You're paying a big tax bill this year, but that will mean a smaller tax bill when you go to sell. Here's how it works:

    You'll be taxed on the difference between the price at which you bought your shares -- your basis -- and the price at which you sell. But you're allowed to increase your basis by the same factor that was used to calculate the reverse share split. An example, courtesy of American Century: If a reverse share split leaves you with 80% of the shares you had before, you're allowed to divide your basis by 0.8. So if you bought 100 shares at $20, in the event of a 4-for-5 reverse split your basis in those shares would rise to $25 ($20 / 0.8). But obviously, the size of that factor, 0.8 in the example, depends on the size of the distribution that triggered the reverse share split. The bigger the distribution, the smaller the factor. (The bigger the distribution, the fewer shares someone who took their distributions in cash would wind up with.) The smaller the factor, the more your basis goes up when you divide by it. The reverse split BTTTX underwent on Dec. 11 was roughly at the rate of 0.8-to-1, or 4-for-5, using whole numbers. So if you bought your shares in October for about $35, your basis in them is now about $43.75. That means you'll pay less tax later.

TSC Fund Forum aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.