So, What’s In Your Mutual Fund?

Detail of a stack of chocolate by André Karwath via Wikimedia Commons under Creative Commons Attribution-Share Alike 2.5 Generic license.Did you ever get one of those boxes of chocolates that has a sample of all different kinds of chocolate?  You’ve got your truffle, you got your cherry, you got your coconut, you got your hazelnut… then you take a bite of that one chocolate.*  You know the one – it’s the one with the nasty center.  There always seems to be that one, horrible chocolate in a sample box.  And, if you’re anything like me, you bit into the icky one because you didn’t read the little chocolate map on the back of the lid.  Sure, with chocolates, it’s no big deal.  You can just subtly remove the offending chocolate from you mouth (or do a dramatic spit-take, whichever you prefer) and cleanse your palate with a new chocolate.  But, what if you bite into a bad investment?

Think back to the last time you looked at your investment options available in, say, your 401(k).  You probably had a page that broke down investments by category.  You had your cash/money market funds, you had your bond funds, you had your balanced funds, you had your growth funds, and so on.  Each of these mutual funds are like a sampler of chocolate – there’s a variety of investments inside each fund, and sometimes the investments aren’t what you may think they are.

Let’s take a look at an example – PIMCO Total Return Fund.  I’m “picking on” them today because it’s very common to see PIMCO Anything Fund offered as a bond option in many 401(k)s.  So, your average “Joe” says, “Hey a bond mutual fund, I bet that is made up of bonds, and maybe a little cash and perhaps some other stuff.”  But, is that really the case?

The smart way would be to find out just what is in PIMCO Total Return Fund.  Happily, PIMCO has a document on its website that fits the bill perfectly – the PIMCO Total Return Fund Summary Prospectus.  So, we mosey on over there and start to inspect the summary prospectus.

Pull quote from "PIMCO Total Return Fund Summary Prospectus" published 7/31/2011

So, PIMCO Total Return is something you will frequently categorized as “Bonds,” but look at what the summary prospectus says:

…at least 65% of its total assets in a diversified portfolio of Fixed Income Instruments of varying maturities, which may be represented by forwards or derivatives such as options, futures contracts, or swap agreements. [emphasis mine]

There it is.  This fund has ample portions of non-bond holdings.  Not only does it have plenty of non-bond holdings, it has lots of what most people would think of as weird stuff.  Suspicious stuff.  Things you hear about on the news along with the words “collapse,” “bankruptcy,” and “failure.” Scary stuff.

This is a super example of a chocolate that someone may not want to bite into, and wouldn’t have if they had read the summary prospectus.  Remember, it’s not that the underlying investments are “bad” or “good,” it’s that the underlying investments are, for most people, unknown, and worse – most people don’t know what should be in their portfolio.

So, don’t let your investments leave a bad taste in your mouth.**  Know what you need to have, and know what’s in your investments.

No chocolate samplers were harmed in the making of this blog post, despite my wishes to the contrary.

* You can tell by the italics that I have a deep feeling of betrayal when I bite into a nasty chocolate.

** Oh, you thought you knew how I was going to tie in this chocolate/investment thing together, but BAM!  It was all for the pun.

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