Q. We underestimated the cash we would need in purchasing our new home, and associated costs. We do not qualify for a home equity loan in Texas, but are approaching the need for approximately $15,000 to go toward home improvements. I have narrowed the options to the following three:

1.) Sell mutual fund shares at depressed prices, although it would still generate capital gains in excess of 50% of the proceeds,

2) Borrow on a Platinum Visa at 9.75%, or

3) Borrow from my 401k, at 10.5%. My 401k loan would come from my cash balance in the account, and it permits repayment in installments even if I lose my job.

Which source of money would be preferable? We plan to repay any loan in one year or less. We have no debt other than our mortgage, which consumes less than 15% of our monthly take home pay. We are in the 28% tax bracket.

---C.D., Dallas (by e-mail)

  

A. Use your credit card. Here's why. First, eliminate the 401k loan. You should only borrow from a 401k plan in "hardship" situations. This isn't a hardship situation; it's a convenience situation. Second, if you pay 20 percent taxes on 50 percent of the mutual fund shares you redeem, it will cost you 10 percent of your money. Worse, it will take the entire amount out of the market and it may never get back.

The cost of borrowing on your credit card, however, could be much less than 9.75 percent of the amount borrowed because your intention is to pay off the loan in a year or less.

  

Q. With returns sinking, what are the mutual fund managers doing to earn their income? A year or so ago, I watched the Kaufmann fund go into the basement (including my contribution) while those guys were paid millions for managing the fund during the same period. Last year another well-known fund that I invest in lost almost 30 percent over the calendar year. My 401k, which I could adjust only quarterly, ended with the same results. They stood buy and watched both go down, down, down.

Where were the "managers" during this time?

My question to you: if someone is investing in mutual funds and his "managers" don't make reasonable moves, what options does he have, excluding legal action, of course? Do we just go with the 50/50 stock index fund/bonds fund program you suggest and trust that all will be well when retirement occurs?

---G.M., by e-mail

  

A. Let's start by recognizing that money managers are always between a rock and a hard place. If they decide that stocks are overpriced and move to cash, professional financial advisors will chide them because they aren't picking stocks. Others will say that they don't want to pay them for sitting on cash. Still others will say they don't want to lose exposure to opportunity. The punishment can be terrible.

How terrible?

When Foster Freiss, manager of Brandywine fund, felt the market was overpriced in 1997 and put nearly half his $8.4 billion fund in cash, investors rewarded him by taking their money out. By the end of 1998, the fund was down to $4.9 billion in assets. Much the same happened a few years earlier when Jeff Vinik, then portfolio manager for Fidelity Magellan fund, decided to move a hefty portion of the portfolio to bonds.

Basically, fund managers are told to invest in an asset class and stay invested, regardless of price levels. If they wander the professional advisors who help people manage their portfolios say the fund is suffering from "style drift" or just not doing its job.

What it means for you and me is that someone other than a fund manager needs to decide asset allocation. It can be a professional advisor, a stockbroker, or a set of rules that you follow.