Investing Through Mutual Funds

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Investing Through Mutual Funds
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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.

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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.

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Investing Through Mutual Funds
MUTUAL FUND . . .

• open-end investment company combining funds of
  investors who have purchased shares in a
  diversified portfolio of securities.

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What is a Mutual Fund?

• A pool of money
• Managed by a professional investor
• Manager works for an investment firm
• Each fund has a specific objective
• Over 6,000 funds to choose from

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Mutual Funds
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Three Reasons Why PeoplePurchase Mutual Funds

• Diversification
• funds of many investors are pooled and used to
  purchase a variety of investments
• Professional management
• who is the funds manager?
• managers can change
• Convenience
• phone
• mail

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Why Investors Purchase Mutual Funds

• Professional management.
• Who is the funds manager?
• Managers can change.
• Be aware of the scandal involving late trading.
• Diversification.
• Investors funds are used to purchase a variety of
  investments. This variety provides some safety.

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Reasons for Investing Through Mutual Funds

• New/more types of funds
• Few or no sales charges
• Some performed better than common stock
• Widespread marketing
• Selection is easier

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Closed- and Open-End Funds

• Closed-end funds (7 of funds).
• Shares are issued by an investment company only
  when the fund is organized.
• After all original shares are sold you can
  purchase shares only from another investor who is
  willing to sell.
• Traded on exchanges and over-the-counter.
• Open-end funds (91 of funds).
• Shares are issued and redeemed by the investment
  company at the request of investors.
• Investors can buy and sell shares at the net
  asset value (NAV).

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Exchange-Traded Funds

• Invests in the stocks contained in a specific
  stock market index, like the Standard and Poors
  500 stock index.
• Performance of shares in the fund tend to mirror
  the performance of the index.
• Low management fees since there is less need for
  decisions made by a portfolio manager.

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Reasons for Investing Through Mutual Funds

• Dispense profits to investors
• Investors expect dividend income
• Investors expect price appreciation

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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 theirs
• Open 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

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Net Asset Value

• portfolio market value - liabilities
• the number of shares outstanding
• Offer price NAV sales commission

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Objectives of Mutual Funds

• Current income
• Long-term growth
• Growth and income
• Balanced

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Classification of Mutual Funds

• Common stock
• Balanced
• Bond
• Specialty
• Money market

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Unique Benefits of Mutual Funds

• Recordkeeping/reporting
• Easy purchase and sale
• Automatic reinvestment
• IRS-qualified tax-sheltered retirement
• Withdrawal plans
• Collateral for loans

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Costs of Investing Through Mutual Funds

• Management fees
• Loan funds
• No-load funds

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Costs of Investing Through Mutual Funds

• Hidden fees
• Deferred load
• Redemption
• 12b-1
• Disclosure of Fees
• Which is better, load or no-load?

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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 theinvestment company
• usually have an 800 number you can call

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Management Fees and Other Charges

• Contingent deferred sales load (back-end load)
  (Class B shares).
• Charged upon withdrawal of funds (1-5).
• Generally decreases on a sliding scale depending
  on the number of years shares are held.
• Management fee.
• Charged yearly (.5-1.25 average) based on a
  percentage of the funds asset value.
• 12b-1 fees (Class C shares).
• Annual fee to defray advertising and marketing
  costs of the fund.
• 1 or less of a funds assets per year.

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Classification of Mutual Funds

• Stock funds.
• Aggressive growth funds buy stocks in small,
  fast-growing companies.
• Equity income funds invest in stock of companies
  with a long history of paying dividends.
• Growth buy stock in companies with
  higher-than-average revenue and earnings growth.
• Global funds buy stock in companies in the U.S.
  and other countries, while international funds
  buy stock only in companies outside the United
  States.
• Index buys stocks that mirror an index.
• Large-cap funds invest in companies with
  capitalization of 5 billion or more.
• Mid-cap funds buy stock in companies whose
  capitalization is between 1 and 5 billion.

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Classification of Mutual Funds
(continued)

• Regional funds buy stock in companies in a
  specific region of the world.
• Sector funds buy stock in companies in a
  particular industry such as biotechnology.
• Small-cap funds buy stock in lesser-known
  companies with a capitalization of less than 500
  million.
• Socially responsible funds avoid investing in
  companies that produce harmful products.

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Classification of Mutual Funds
(continued)

• Bond funds.
• High-yield (junk) bond funds buy corporate bonds
  that are higher risk and higher yield.
• Index bond funds invest in a sampling of bonds
  included in an index.
• Intermediate corporate bonds (5-10 years).
• Intermediate U.S. bond funds buy treasury notes
  with maturities of 5-10 years.
• Long-term corporate bonds (gt 10 years).

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Classification of Mutual Funds
(continued)

• Long-term U.S. bond funds U.S. Treasury and U.S.
  zero-coupon bonds with maturities gt than 10
  years.
• Municipal bonds Invest in municipal bonds that
  provide investors tax-free interest income.
• Short-term U.S. bond funds invest in U.S.Treasury
  issues of 1-5 years.
• Short-term corporate bond funds Investment
  grade bonds with maturities of 1-5 years.
• World bond funds buy bonds of foreign companies
  and governments.

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Classification of Mutual Funds
(continued)

• Other funds.
• Asset allocation funds invest in various asset
  classes, such as stocks, and bonds, with precise
  amounts within each type.
• Balanced funds Invest in both stocks and bonds,
  with the primary objectives of conserving
  principal, providing income as well as growth.
• Money market funds Invest in CDs, government
  securities, and other safe investments.

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Strategies for Selecting a Mutual Fund

• Match goals
• Locate sources of comparative performance data
• Financial press (i.e. Wall Street Journal,
  Barrons)
• Magazines (i.e. Fortune, Kiplingers)
• Specialized mutual fund publications

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Families of Funds

• A family of funds exists when one investment
  company manages a group of mutual funds.
• Each fund in the family has a different financial
  objective.
• Exchange privileges allow you to move your money
  from one fund to another within the fund family
  with little or no charge.

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Steps to Evaluate Mutual Funds

• Are you ready to invest in mutual funds?
• Determine your risk tolerance.
• Determine your investment objectives.
• Obtain the money you need invest.
• A funds objective should match your investment
  objective.
• Evaluate any mutual fund before buying or selling
  (www.morningstar.com)
• Consider managed funds vs. indexed funds

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Other Sources of Fund Information

• Mutual fund prospectus tells the funds objective
  and
• A statement describing the risk factors.
• A description of the funds past performance.
• A statement describing the type of investments in
  the funds portfolio.
• Information on how to open an account.
• Dividends, distributions and taxes.
• Information about the funds management.
• The process for investors to buy or sell shares.
• Services provided to investors.
• The turnover ratio of the funds investments.

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Mutual Fund Transactions

• You can open an account from 250 to 3,000 and
  up depending on the fund family.
• Open-end, no-load directly from the investment
  company by phone, mail, online, or from a
  discount broker.
• Closed-end or exchange-traded funds are purchased
  through a broker traded on stock exchanges and
  over-the-counter.

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When To Sell

• 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