How a (SRI) Mutual Fund Works An Interview with Jerome Dodson Jerome Dodson is president of the Parnassus Fund. He was formerly president and co-founder of Working Assets Money Fund. He was interviewed for CUE by Rob Baird. CUE: What is a mutual fund? DODSON: A mutual fund is a registered investment company. The term "mutual fund" is just a nickname. It is registered with the Securities Exchange Commission (SEC). It is a way for investors to pool their resources to get professional management. If you buy shares in the investment company, that entitles you to a percentage of its profits or income. The mutual fund invests the proceeds from the sale of its shares in shares of other securities, whether it's stocks or bonds. CUE: Mutual funds are very popular. What advantages do they have over other investments? DODSON: The advantage is for smaller investors. By that I mean under $100,000. The reason people like them is that first of all you get diversification. Say you had $10,000 to invest and you wanted to spread it out over 20 different stocks. If you divide 20 into $10,000 you have $500. You generally can't get a round lot, it's just too small. A round lot is 100 shares, and it is difficult to buy fewer than 100 shares, and you would be charged a higher commission. You have more safety in a mutual fund because it is diversified. Professional management is the second advantage. Most people don't enjoy making investment decisions about specific companies. They would like to turn it over to a third party who has enough information. CUE: What actually happens to my money when I send it to a mutual fund? DODSON: You make out your check to the fund, and it goes to the transfer agent. In the case of the Parnassus Fund, we are small so we are our own transfer agent. In a lot of cases they will have a bank or computer company as the servicing agent. They open the envelope and deposit your check at a custodian bank. Every mutual fund has to have a custodian bank to hold its securities and cash. The fund never actually has your money, it really goes to the custodian bank, which handles everything. The fund provides the management. The fund manager gives instructions to the bank to put the money in stocks, bonds, money market instruments, or keep it in cash. CUE: How do you receive earnings from the fund? DODSON: Usually they are paid out once or twice a year. You get capital gains and income dividends. They are usually automatically reinvested to buy more shares in the fund or you can take it out in cash. CUE: There are many different types of funds. What are the different funds trying to accomplish? DODSON: The three major types are a stock mutual fund, a bond mutual fimd, and a money market mutual fund. Originally they were all stock funds or equity; you were a part owner in the companies you invested in. If you invested in a mutual fund and it invested in 20 companies, then the mutual fund shareholder was part owner of all 20 companies. They are the most aggressive investors. They take a reasonable amount of risk to get a much higher return. Another type is the bond fund. This is for people who just want income. They don't want capital gains or to take many risks. This fund will invest in corporate bonds, U.S. government bonds, or Ginnie Maes, the Government National Mortgage Association, which supports housing. In essence you are lending money to the corporation or the govermnent. The third type is the money market fund. It is similar to putting money in the bank—^you can take it out any time. The interest varies. A couple of years ago it was 15 to 16 percent and now it is down to 5 or 6 percent. They just buy short-term money market instruments like certificates of deposits in banks or commercial paper [short-term loans] from corporations. CUE: There are a lot of mutual funds now; what would convince me to choose one over another? DODSON: The three reasons are past performance, the investment philosophy, and the manager. For past performance you look at how the fund has done in the past few years, up to five years.
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