By Carole Gould; Carole Gould writes on finance from New York.

Published: April 17, 1988

MUTUAL fund investors will see some welcome changes on May 1, when new »truth in advertising» rules take effect.

Currently, mutual funds other than money market funds can compute their performance any way they choose, as long as the method does not violate Federal securities laws, which allow wide latitude. Some funds cite annual yields, others quarterly returns. Some funds sold options to increase their yields.

The wildly disparate data have made it hard for investors to compare the funds. Figuring how much the investment services would cost has been even more difficult. By law, mutual funds must disclose all fees and expenses. But those figures have often been scattered throughout dense prospectuses and buried in fine print.

The Securities and Exchange Commission finally put its foot down. The result, said Kathryn B. McGrath, director of the S.E.C.’s division of investment management, is new rules that »provide better and more accurate information to investors, to help them avoid being misled.»

The rules are far reaching, affecting what fund managers can say in both advertisements and prospectuses. But some aspects of fund shopping may remain murky for many investors, financial advisers say. The rules will clarify choices for investors, but »there’s no 100 percent perfect way to do any of this,» Ms. McGrath conceded.

One of the biggest changes will involve funds that choose to mention yields in their ads. Under the new rules, they must use a 30-day yield figure based on an industrywide formula. Yield measures income. What it does not include are declines in the underlying value of fund shares, so high yields can sometimes obscure losing investments. To take that into account, ads that cite a yield must also disclose the fund’s total return — income plus changes in the market value of the investment — for the past one, three, five and ten years.

But some investors may not know how to use the two figures, financial advisers say. »Until the non-M.B.A. investor becomes familiar with the concepts of yield and total return, it may be confusing,» said Gregory J. Nowak, a lawyer with the Philadelphia firm of Stradley, Ronon, Stevens & Young.

Indeed, now that performance data have been standardized, many people may be tempted to simply invest in the highest-yielding fund. That could be a costly mistake since top-yielding funds do not always offer the best total returns.

The reason, in many cases, is that funds may increase yields by buying riskier investments, a strategy often not fully understood, said Maria Crawford Scott, editor of the American Association of Individual Investors Journal in Chicago.

Some types of funds are managed for capital growth, not income, so their current yield is likely to be small. The payoff comes when investors sell their shares and receive the appreciation in the value of stock held by the fund.

In any event, because no one can predict the market’s path, or when fund managers will decide to cash in gains, »investors shouldn’t expect to get the advertised yield in their pocket at the end of the year,» said Arthur S. Loring, vice president and general counsel for the Fidelity Management and Research Company in Boston.

Even the new computations have their limits. Some critics say the 30-day time period is not an appropriate measure, given the lengthy maturities of some fund portfolios. In fact, experts caution investors not to be lulled into a false sense of security. While yield and performance are important parts of an investment decision, »people shouldn’t judge funds solely by those numbers, because they relate to the past,» said Susan Penry-Williams, a partner with Spengler, Carlson, Gubar, Brodsky & Frischling, a New York law firm.

Review the fund’s prospectus for clues to its future performance, experts say. The portfolio manager who earned the advertised yield may have left the fund, for instance. Perhaps more important, make sure the fund’s investment objectives match your own. Are you comfortable with the level of risk that the fund’s manager is permitted to take, as outlined in the prospectus? Does the fund offer telephone switching — the transferring of investments within a family of funds — or other services that you want?

Investors who want to project their annual income from a mutual fund investment still have to dig through the prospectus. The S.E.C. won’t permit funds to advertise their past records on distributions — the cash payouts to investors — which are computed in very different ways and often include a return of principal.

On the other hand, evaluating what the investment will cost should be much easier. The prospectus will include a new »fee table» that outlines all shareholder expenses. Mutual funds take their cut in a variety of ways: commissions when investors buy in, known as front-end sales loads; redemption fees, imposed when investors sell before a specified period, and annual expenses like management fees and 12b-1 charges. Under S.E.C. Rule 12b-1, a percentage of a fund’s assets may be used to cover marketing expenses.

To help people make comparisons, the funds must prepare an example based on an investment of $1,000 and an assumed annual growth of 5 percent. The example then shows the total projected fees and expenses if shares in the fund are sold after one, three, five and ten years.

THAT way, »the investor will be able to see exactly what he gets for every dollar he’s investing,» said Laura J. Berger, executive director of the No Load Mutual Fund Association, a trade group based in New York. However, the illustration is based on assumptions that are subject to change over the long term. For example, a 12b-1 fee is figured as a percentage of assets, so the fee increases as the fund grows. Conversely, a bond fund’s expenses may fall as costs are spread over a larger portfolio.

Furthermore, the example assumes investors pay the maximum sales charge imposed by that fund, which can range from zero to 8.5 percent of the investment. But funds often reduce the charge for investments in individual retirement accounts and other pension arrangements. Many funds scale down fees as more money is invested, frequently on a cumulative basis. As a result, »investors can’t just look at the tables,» said Matthew P. Fink, senior vice president and general counsel of the Investment Company Institute, a trade organization based in Washington.

The tables may still prompt some people to reassess their investment strategy, by highlighting the effect of steep annual expenses. Many people shy away from mutual funds with sales commissions of any kind. But for long-term investors, a fund with a low initial sales charge and low annual expenses may be a better deal than a no-load fund with higher annual expenses, Ms. Scott said.