Buying a newly created mutual fund can be risky because it has no track record, and past performance is an important criterion in investing. A good rule is to buy funds that have outperformed their peers in three of the last five years.
But a solid history is only one thing that investors give up in buying a new fund. Often "new funds combine the worst of all worlds: less than top-of-the-line service, high expenses and inexperienced management," said Don Phillips, vice president of Morningstar Inc., a fund research group in Chicago.Still, the fund industry spares no expense in hyping new offerings. Full-page advertisements trumpet funds' arrivals. A sponsor may even absorb part of a new fund's initial expenses to make it more competitive.
But investors who look behind the hype can find plenty of reasons to avoid new funds.
For one thing, it can take time for sponsors to get the bugs out of a fund's operating system - to make sure that telephone systems work properly and monthly statements are mailed on time. Also, new funds are often expensive because their fixed costs are spread over a small pool of money.
The overriding factor, however, is the fund manager's experience or lack of it. Information about the manager's investing philosophy or style may be hard to get, or the experience may not be applicable to managing a mutual fund.
That said, there are exceptions to every rule. Sometimes a new fund is not really unpredictable because its manager has a long track record with a similar fund. Or the manager's role may not matter much, as in the case of index funds.
And small size can sometimes be an advantage, as with funds that invest in small companies. Finally, a quick decision to invest is the only choice with a fund company that has a reputation for closing out new investors when the funds reach a certain size.
What is more, the fund industry has evolved so rapidly in the last decade that investors who automatically exclude funds without five-year track records cut themselves off from nearly half of all the funds on the market.