A recent survey of wealthy American investors found that more than half believe U.S. markets are riskier than international markets. That's a reversal of traditional thinking and a sign that investors may be taking potential problems in overseas markets too lightly."

Along with specific countries, sector allocation is something investors may not be heeding closely enough in their international fund, said Jeffrey Kleintop, chief market strategist at LPL Financial Services. He said a fund that concentrates too heavily on the BRIC countries (Brazil, Russia, India, China) could be presenting a fairly sizeable risk for that investor, given the sectors involved.

'They've been an interesting area to invest in recently, but when you take a look at commodities exposure there, energy and materials make up 50% of the market cap of those countries. You're making a pretty big bet on the continuation of the bull market for commodities...that's a risk you may not be aware of.'

Conversely, some international funds may be lacking in exposure to certain sectors, Kleintop said. 'Most international markets are more value-oriented than those here in the U.S. For example, looking at the EAFE (Europe, Australasia, Far East) Index, that only has one-third the weighting of technology we have in the S&P 500, half the weighting we have in health care. We would consider those to be growth sectors from a style perspective."

The opportunity is fading for your fund manager to offset capital gains from selling winners in the fund portfolio with losses from having sold losers during the market tumble earlier in the decade.

'The last four years, we have been on a tax holiday of sorts, and the party is over,' said Tom Roseen, senior research analyst at fund tracker Lipper, a unit of Reuters.

The stock market advance since late 2002, combined with higher interest rates and increased dividend payments by many companies, swelled the amount of capital gains and income distributions paid by mutual funds to their investors.

Moreover, the turnover of portfolios, as active managers buy and sell in an effort beat market benchmarks, has increased.

As a result, Lipper, in a 114-page report issued this week, estimates that taxable-mutual-fund investors, who hold funds outside tax-deferred savings accounts, such as IRAs and 401(k)'s, saw a 56 percent increase in taxes from 2005 to 2006, to $23.8 billion.

Most mutual fund investors reinvest income and capital gains. But they still must pay the tax, even though they have a buy-and-hold investment strategy, Roseen said. So-called tax loss carry-forwards from the years of the market slide are being used up or expiring, he noted. They expire seven years after the date of the sale."

Mutual fund investing may offer several benefits for individual investors. For starters, funds are managed by experienced, full-time money managers. They research market and economic trends, and then use the information they gather to make decisions about buying, holding or even selling securities to enhance returns.

Another distinct advantage is diversification, one of the basic tenets of successful investing. By spreading your money over a number of investments, a mutual fund doesn't depend on any one investment for your return. And on the other side of the coin, the impact of one poor performer on your entire portfolio is also reduced.

Mutual funds also offer several convenient features, such as automatic reinvestment, systematic payments and no-cost exchanges. If you choose to, you can automatically reinvest any dividends and capital gains (profits) to purchase more mutual fund shares. Mutual funds can also provide you with monthly or quarterly automatic withdrawals."

The mutual fund industry is a survival-of-the-fittest world where management companies frequently kill off their weakest offspring by merging them into their best and healthiest issues. So when one of the industry's biggest players announces plans to merge two issues into sister funds, it's no big deal.

Unless the funds have an annualized average return of more than 21 percent over the last five years, are leaders in their respective asset categories and are being merged into funds with slightly lesser results and different investment objectives. And that's precisely what Fidelity Investments is doing in its recently announced decisions to merge Fidelity Nordic (FNORX) into Fidelity Europe (FIEUX) and Fidelity Advisor Korea (FAKAX) into Fidelity Advisor Emerging Asia (FEAAX).

The move is interesting for investors because observers believe it may be a sign of things to come, with management companies opting for less specialization and more economies of scale. Investors may also take it as a sign that there's little reason to go for extreme niche offerings."