Chapter 16: Investing Through Mutual Funds

Objectives

Identify why people invest in mutual funds.

Distinguish among the four major objectives of mutual funds.

Classify mutual funds by portfolio.

List the unique benefits of mutual funds.

Objectives

Describe the various charges and fees associated with investing in mutual funds.

Explain how to select a mutual fund in which to invest.

Recognize valid reasons for selling a mutual fund investment.

Investing Through Mutual Funds

open-end investment company combining

funds of investors who have purchased

shares in a diversified portfolio of securities.

MUTUAL FUND . . .

What is a Mutual Fund?

A pool of moneyManaged by a professional investorManager works for an investment firmEach fund has a specific objectiveOver 6,000 funds to choose from

Figure 15.1

Three Reasons Why PeoplePurchase Mutual FundsDiversification

funds of many investors are pooled and used to purchase a variety of investments

Professional management who is the fund’s manager? managers can change

Convenience phone mail 16-3

New/more types of funds

Few or no sales charges

Some performed better than common

stock

Widespread marketing

Selection is easier

Reasons for Investing Through Mutual Funds

Dispense profits to investors

Investors expect dividend income

Investors expect price appreciation

Reasons for Investing Through Mutual Funds

Closed and Open End Funds

Closed end fund (10% of funds) limited number of shares issued initially then can only purchase shares from

another investor willing to sell theirsOpen end fund (90% of funds)

no limitations on the number of shares the investment company can issue

shares are issued and redeemed by the investment company

Net Asset Value

portfolio market value - liabilities

the number of shares outstanding

Offer price = NAV + sales commission

Objectives of Mutual Funds

Current income

Long-term growth

Growth and income

Balanced

Common stock

Balanced

Bond

Specialty

Money market

Classification of Mutual Funds

Aggressive growth

Growth

Value

Growth and income

Classification of Mutual Funds

Small company

Sector

Global/international

Index

COMMON STOCK:

Recordkeeping/reporting

Easy purchase and sale

Automatic reinvestment

IRS-qualified tax-sheltered retirement

Withdrawal plans

Collateral for loans

Unique Benefits of Mutual Funds

Costs of Investing Through Mutual Funds

Hidden fees

Deferred load Redemption 12b-1

Disclosure of Fees

“Which is better, load or no-load?”

Management Fees and Other Charges

One-time sales load fees

12b-1 fees

•Cannot exceed more than 1% of the funds assets per year•For a fund to be classified as no-load these fees cannot exceed more than 0.25% of the funds assets per year.

Load vs. No Load Funds

Load Fund pay a commission to a sales

agent when you buy shares usually 3-8%

No Load Fund no sales charge paid purchased directly from the

investment company usually have an 800 number you can call

Management Fees and Other Charges

Management feecharged yearly (.25 - 1%) based on a

percentage of the funds asset valueContingent deferred sales load

charged upon withdrawal of funds (1-6%)decreases with time held

12b-1 fees fee to defray advertising and marketing

costs of the fund

Match goals

Locate sources of comparative performance data

Financial press (i.e. Wall Street Journal, Barron’s)

Magazines (i.e. Fortune, Kiplinger’s) Specialized mutual fund publications

Strategies for Selecting a Mutual Fund

Explanatory Notes

f-Previous day’s quotationg-footnotes x and s apply j-footnotes e and s applyp-distribution costs apply, 12b-1 r-redemption charge may applys-stock split or dividend t-footnotes p and f applyv-footnotes x and e apply

Interpret comparative performance information over time

Long-term/short-term performance Size of fund Fund performance in up/down markets

Read prospectuses and annual reports

Strategies for Selecting a Mutual Fund

Fund performs poorly compared with similar funds

Perception of economic trends indicates business cycle will smooth out soon

Fund grows too rapidly or becomes too large Fund taken over by new manager Investment goals become more conservative Need cash

When To Sell