Alfred from Daytona Beach, Fla., dropped me a note, pointing out that my recent two-part quiz helped him learn about mutual funds but did...

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Alfred from Daytona Beach, Fla., dropped me a note, pointing out that my recent two-part quiz helped him learn about mutual funds but did not answer his burning question.

“I bet there are a lot of questions that don’t really teach people like me how funds work, but which might help us learn how to better work with our funds,” Alfred wrote. “Maybe you could answer one of those for me.” He’s right. Investing in funds involves more than knowing how a fund operates.

With that in mind, here are basic questions from readers who wanted to know more about funds than “what’s happening now.”

Q: “I want to put a few hundred dollars into mutual funds for my grandchildren, but my broker tells me that he can’t do it in the funds I own now. But there must be a way to open a small account. Can you tell me how to do it?”

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A: Many funds waive account minimums for accounts that are registered for children, so start by investigating the funds you currently own (your broker may not be aware of the rules, as many load funds do not normally offer low-minimum investments).

Many funds will waive account minimums simply for agreeing to make regular deposits electronically from a bank account. So even if a fund says it has a $10,000 or $25,000 minimum, call to see if the amount can be waived.

If you want to shop low-minimum funds or those that waive minimums, check the Web site of the Mutual Fund Education Alliance, In the “mutual-fund center” there, the alliance has a section on funds you can get into for $50 or less, as well as low-minimum funds.

One warning: Carrying a lot of small accounts comes at a price, typically above-average expenses.

Q: “I am a new investor, and I own three funds: two large-cap growth funds and one small-cap. I could invest a little more, and I am wondering if I should put it into the same funds or into something different. How many funds should I buy?”

A : Many life-cycle funds are designed to be a one-size-fits-all option, growing more conservative as the investor ages.

That said, the key to building a portfolio is diversification and somewhere between four and 12 funds will be the right number.

The bigger issue is that proper portfolio construction centers on buying different asset classes and never holding too many funds in one category.

Most studies show that four funds in one category — like large-cap growth — creates a “closet index fund,” where the performance tends to mimic an index for that asset type, but the costs are those of active management.

So adding additional funds makes sense, provided they cover bonds, or international stocks, or something not represented in the portfolio. If the next purchase is another large-cap growth fund, however, the diversification effect is reduced; that’s not building a portfolio, it’s assembling a collection, which can be a mistake.

Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at or Box 70, Cohasset, MA 02025-0070.