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Mutual funds that were hot last year continue to be despite a rough start to 2014 for stocks

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NEW YORK, N.Y. - Hearts raced faster as stock markets around the world stumbled in January, but that didn't stop investors from plugging more money into mutual funds.

For a seventh straight month, investors put more cash into mutual funds than they withdrew, according to Lipper. Funds that invest in a mix of U.S. stocks attracted $10.6 billion, for example. That was despite the worst start for the Standard & Poor's 500 index since 2010.

To be sure, January is historically the month when savers are most inclined to put money into mutual funds. It's their first opportunity to invest in individual retirement accounts in the new tax year. But a look at which individual funds were attracting -- and bleeding -- the most dollars last month illustrates several trends that took hold last year. Among them:


The most popular fund last month was Vanguard's Total Stock Market Index fund, which took in $3.1 billion in net investment, according to Morningstar. It's not a big surprise. It was the third-most popular fund of 2013, attracting $17.5 billion. It is also the largest mutual fund, with $302 billion in assets at the end of January.

It's participating in a broader tide of dollars flowing to index mutual funds. Such funds try to mimic a broad market index rather than beat it. Vanguard's Total Stock Market Index fund tracks an index that covers nearly every stock that trades on the New York Stock Exchange and Nasdaq, from small companies like cupcake bakery Crumbs Bake Shop to giants like Apple.

Because index funds don't research individual investments, they charge lower fees. Vanguard's Total Stock Market Index fund has an expense ratio of 0.17 per cent, which means that $17 of every $10,000 invested in the fund is used to pay manager salaries and other operating costs each year. The average expense ratio for the category is 1.11 per cent.

The Total Stock Market Index fund also is benefiting from increased interest in target-date retirement funds. These are funds built for people who don't want to worry about how to divvy up their retirement savings among stocks, bonds and cash. When investors are far away from retirement, target-date funds automatically keep most of their accounts in stocks. As their retirement date comes closer, the funds automatically shift more assets toward bonds.

The Total Stock Market Index fund is a major part of Vanguard's target-date fund lineup. For example, Vanguard's target-date fund for people retiring in 2045 has 63 per cent of its $12.5 billion in assets in the Total Stock Market Index fund.


Demand has been strong for foreign stock funds: They attracted a total of $17.4 billion in net investment in January, more than any other category. It was the same story last year, when investors deposited a net $146.2 billion, triple what they invested in U.S. stock funds. Investors are looking to diversify their stock investments and get them more in line with the overall world's makeup.

The Oakmark International fund attracted $1.5 billion in net investment last month, for example. That's even though it is mostly closed to new investors.

European stocks have also been a particularly strong lure for investors, as the region moves further away from its debt crisis. Europe ranked as the most attractive stock market among the more than 2,000 professional investors at the Goldman Sachs Global Macro conference in Asia earlier this month. It was the "default option of choice," Goldman Sachs strategists wrote in a report.


Rising interest rates would knock down bond prices, and that's making investors worry. The yield on the 10-year Treasury note is close to 2.76 per cent, up from 2.01 per cent a year ago.

Unconstrained bond funds pitch themselves as ways to protect from the risk of rising rates. That's because they can invest in exotic corners of the bond market, and some even make investments that profit when bond prices fall. The risk, though, is that many of these unconstrained funds own bonds that carry a higher risk of default, analysts say.

Last month, Goldman Sachs Strategic Income fund was the second-most popular fund, attracting $2.4 billion. Morningstar classifies it as a "nontraditional bond fund," and the category as a whole drew $4.1 billion in net investment. That compares with the $6.1 billion withdrawn from intermediate-term bond funds last month. Intermediate-term bond funds are the largest category of bond funds and would be hurt by rising interest rates.

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