20 Best Mutual Funds

The perfect choices for company owners only -- and how to profit from them

Business owners, here's a wake-up call too important to ignore: it's time to start saving for your family's financial future. The way to begin is by recognizing two hard realities.

One, you can't count on your company to grow quickly enough -- or become profitable soon enough -- to help you cope with life's financial hurdles: sending the kids to college, supporting aged parents, saving for retirement, or whatever your particular challenges are. That means you need an alternative to the game plan that begins, "When I earn $10 million by taking my company public, I'll be able to . . . "

Two, as a business owner, your financial profile is so completely different from most other people's that you cannot simply follow the same old, same old you may read about in personal-finance magazines or guidebooks. Your biggest investment -- the one in your company -- is both illiquid and highly risky, the worst of all worlds. You need to develop a personal-finance strategy for your family that helps you deal with those problems while offering an upside potential. That's not easy to find, but it can be done.

Mutual funds are a good place to start because they offer you the opportunity to diversify quickly into a range of investments. For a business owner who may have little interest in -- and who certainly has little time to devote to -- learning the ins and outs of the investment world, mutual funds provide easy access to the ideas of some pretty savvy portfolio managers. They are a relatively safe way to get your feet wet in the sometimes choppy waters of stock and bond markets, because portfolio managers can hedge against the kind of volatility we witnessed this summer, in a way that individual investors with limited resources usually cannot.

There are thousands of funds, running the gamut from those that specialize in different types of stocks or bonds or overseas investments to various combinations of the three. With a universe that vast, you have plenty of choices. But too many options can also be confusing. And it's risky to choose any fund just because it has a good recent record -- especially if you haven't first taken into account your own special needs as a business owner.

The Inc. 20
To guide you in your search, we've put together Inc.'s first-ever list of the 20 best mutual funds for entrepreneurs. It's a list you won't find anywhere else -- fine-tuned for the special needs of business owners, with some help from financial experts who understand just how different Inc.'s readers are from the general population when it comes to investment needs.

For help in developing the list, we turned to a 12-year-old company that understands entrepreneurship firsthand. Morningstar Inc. is a Chicago-based research firm and Inc. 500 company in the business of providing comprehensive coverage of more than 7,000 mutual funds for institutional and individual investors.

Morningstar screened its database for stellar mutual funds that met the magazine's five-point criteria:

1. Low minimum investments. Saving money is tougher for most business owners than it is for people with steady paychecks. So we eliminated funds whose investment thresholds were so high that only the best-established entrepreneurs could hope to enter them. Some of the funds listed here will accept initial investments of just $50 to $100 if you're willing to commit to a monthly investment schedule.

2. Low volatility. Because as business owners, most of you already have all the risk you can handle in your companies, our goal was to look for funds for which the chances of monthly downturns would be rare. (That way, if a worst-case scenario unfolds, as it sometimes does, and you need to cash in a mutual-fund investment to raise money for your business, you'll be less likely to experience an investment loss.) The funds we have chosen have historically held up well during periods of market volatility. All the funds listed below have Morningstar risk ratings below 1.00. (The 1.00 rating represents the average monthly downside risk experienced by funds in their particular category: the lower the number, the lower the risk.)

3. Unrestricted participation. Believe it or not, some of the best mutual funds are available only to residents of certain states or to people who belong to certain religious, work, or other organizations. The Inc. 20 are open to anyone with an interest in investing.

4. Low or no load. In the world of mutual funds, load means fee. And although it's not always true that funds charging their customers the lowest fees produce the best overall results, one fact is undeniable: when you don't have too much money to invest, it's crazy to waste some of it on fees. There are great mutual funds with bare-bones fees.

5. Top five-year-performance records. Often mutual-fund lists focus on the most recent year's hottest funds. But business owners know better than anyone that success is defined by the ability to turn in consistently good performances, year in and year out. Five years has been defined by investment experts as the best time horizon to prove a fund has long-term profit capabilities and can handle different investment cycles. The best news about our list is that our emphasis on low risk and low investment minimums hasn't required us to make sacrifices in terms of our funds' performance records.

To find out how well our top 20 performed, check two details in the list, the Morningstar rating (assigned on a score of 1 star to 5 stars, a relative rating based on how the funds balance risk and returns) and the total return annualized over five years. (Although 12-month performance records were not one of the factors we screened for, we've included them so that you'll have up-to-date information. The ending date for the five-year- and 12-month-return periods is May 31, 1996.)