Q.   I have about $600,000 in my company 403(b) plan, all invested in Fidelity Magellan. We have recently switched to the Vanguard family and have several choices there. One of the choices is the Vanguard 500 Index Fund. I am 58 and am looking at retiring at 62, if possible. I still plan to work after 62, but not at the same pace.

Would it be advantageous to switch from Magellan to the index?

I know that the index fund has management fees that are much lower and that tax treatment is better. Otherwise, I have $150,000 in various individual stocks, own my own home, and have no debt. Would you advise a change or just ride it out with Magellan?

---B.J., by e-mail

  

A. At this point you are facing a lot more decisions than choosing one fund over another, but lets start with the either/or decision. Having the Vanguard 500 Index fund as your core investment is the better bet because most funds fail to beat the index over the long term. In the last ten years, Magellan has beaten the index 4 times and lost to it 6 times. Magellan was behind the index at the end of the third quarter but was recently slightly ahead. Betting on Magellan is the equivalent of betting 'against the house.'   So I'd put my bet on the index fund.

Whatever you decide, it probably won't make a great deal of difference in your retirement because Magellan and the Vanguard 500 Index are so large and have been neck and neck for so many years.

Tax treatment of the two funds, by the way, is a matter of indifference when they are held within a qualified plan because no taxes are paid until withdrawal. If you were holding the two funds in a taxable account, however, Vanguard 500 Index would have grown to a greater value than Magellan over the last 15 years due to its higher tax efficiency.

The larger issue for you, as you enter retirement, is to develop a real portfolio--- one in which you have several different kinds of investments, not just one investment in one fund.

  

Q. I have been confused about what to do with some money I recently withdrew from mutual funds that is earmarked for my kids' college funds. Someone suggested 3-month Treasury bills, for instance. Or Treasury mutual funds. In a recent column of yours you mentioned the Monterey PIA Short-Term Government fund. As I researched this, I also came across some PIMCO funds that looked good as well.

I compare them all using Morningstar's rating service.

My question is this: The Monterey fund has the lowest expense ratio at 0.30 percent but the year-to-date yield is 6.88 percent. The PIMCO Real Return A fund has expenses of 0.94 percent with a yield of 10.17 and PIMCO Real Return D has expenses of 0.75 percent and a yield of 9.65.

Now I'm confused! How much of an impact does the expense ratio make--- would it wipe out the difference between funds?

  My other thought is to simply put some of the money in an S&P Index Fund. What should I do?

---J.L., by e-mail

  

A. There are two unrelated but crucial distinctions to make in comparing mutual funds. The first is to make certain that you don't confuse the "yield" of the fund--- the interest income received--- with the "total return" of the fund. The total return is the return from interest plus (or minus) the return from changes in value of the underlying bond portfolio.

If you use the trailing total return of a fund to judge its potential you will be misleading yourself into high expectations. Why?   Because bond funds show high returns as interest rates fall.

That can change in a heartbeat, however, if the economy revives and borrowing demand climbs. Interest rates would rise and bond values would decline.

  The second distinction is about how fund shares are distributed. Today, a fund company can have a single fund that is sold in three or four ways. Each way has a different price structure. Mutual fund "A" shares are traditional front-end commission funds that have lower expense ratios. "B" shares and "C" shares eliminate the front-end load by substituting a fee in the expense ratio, which lowers the total return compared to "A" shares.

As a practical matter, bond fund expenses should be watched even more closely than equity fund expenses.

My suggestion: look for a simple, pure no-load fund with relatively low expenses such as Vanguard Total Bond Market Index or Vanguard GNMA. You might also consider iSavings Bonds because the income is competitive and tax deferred.