Q: In early 1992, I invested $5,500 in a health care mutual fund with a 4 percent commission load. Shortly after I invested, the fund's value really took a slide. My last statement shows my account to be worth $4,050. My broker says this is a long-term investment and that I should be patient. Do you agree with this advice, or would it be better to redeem my fund shares and invest in some other manner?
A: I'm inclined to go along with the broker. Mutual fund investments should always be for the long term. If you panic over short-term price fluctuations, you shouldn't invest in mutual funds or stocks.
You were hit with a double whammy _ the load and the Clinton scare on drug and other health-care stocks such as your fund holds.
That 4 percent commission charge took $220 off the value of your investment right off the top. As a result, your $5,500 bought fund shares with $5,280 net asset value.
Next, health-care stocks and mutual funds holding them slid in price as investors worried about what effects the Clinton administration's proposals would have on earnings of companies in health care and related industries.
Lipper Analytical Services, which tracks mutual fund performance, reports that health and biotechnology funds were down an average of 12.84 percent last year and 14.11 percent in the first quarter this year.
Although you might feel you walked into a buzz saw, you should realize that most drug companies and many other health-care firms are well-managed and have good prospects. Assuming your mutual fund has chosen its investments well, its per-share price should come back up.
Q: Why does a mutual fund's per-share net asset value invariably go down when the fund declares a dividend? My fund's NAV drops shortly before I receive my monthly dividend.
I have been led to believe that dividends are paid out of a mutual fund's earnings. Does management deplete some of the fund's holdings to pay a dividend? Is this mere coincidence or a management ploy?
A: The word "ploy" connotes a devious act, which is certainly not the case here. A fund's dividend declaration and drop in per-share NAV is more than coincidence. It's a natural and necessary thing.
Indeed, a mutual fund does pay dividends out of its earnings. Those earnings are the dividends and interest the fund collects on securities it holds in its investment portfolio.
As the fund collects dividends and interest, that money is added the fund's assets. It's not put aside in some separate pot, from which the fund pays dividends.
The dividends and interest the fund receives increase the fund's assets and, proportionately, per-share NAV. That figure is the fund's total net assets divided by the number of shares outstanding _ owned by you and other investors.
Then, when the fund declares a dividend, its per-share NAV is lowered by the amount of that dividend.
Why? Because the fund will pay the dividend to its shareholders, thereby reducing the fund's total net assets _ and its per-share NAV.
William Doyle welcomes written questions, but will be able to give answers only through the column. Address questions to William Doyle, King Features Syndicate, 235 E 45th St., New York, N.Y. 10017.