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EVEN IF YOU’VE BEEN spooked by the late-trading and market-timing fund scandal that began in September 2003, think twice before dumping mutual funds. Not only do funds continue to give investors a way to invest without ponying up a bundle, but many also carry no upfront sales charge (called “no load” funds). They also have skilled management teams that put together portfolios of securities that could take weeks to do yourself. And funds continue to post good returns.

If this scandal has led you to believe the problems are industrywide, they aren’t: Of the more than 620 fund families, less than 20 were tainted as of March. Yes, some were big-name firms, but in reality, the problems touched only a fraction of the fund-family universe. “People should be wary of tarring all mutual funds,” says Andrew Clark, a senior research analyst at Lipper. “There is no evidence that [the scandal] was rampant within the industry.”

While Clark says perhaps another 20 families could wind up in the same hot water, he sees no reason for investors to bail out–unless they can’t sleep at night. “If you can’t work with a firm that has been found guilty or you think will be found guilty of some of the malpractices, take your money out,” says Clark. “But beware of [factors] like the tax consequences.”
As for performance, during the last quarter of 2003, when the problems were fresh in everyone’s minds, the average U.S. diversified fund gained 12.02 percent. And stock funds took in nearly $80 billion in new investor money–the biggest influx since the first quarter of 2000.

This Financial Services article was written by Dian Vujovich on 6/1/2005

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