Chapter 4 MUTUAL FUNDS

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Chapter 4 MUTUAL FUNDS

• What is a mutual fund and how do mutual funds
  operate?
• How much does mutual fund investing cost?
• How should mutual fund performance be evaluated?
• What are the other types of investment companies?

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Understanding mutual funds

• How a mutual fund operates
• The continual sale and redemption of shares
• Net asset value

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Figure 4.1 Recent Growth in the Assets of
Mutual Funds
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Advantages of mutual funds

• Diversification
• Smaller minimum investments
• Professional management
• Professional managers run the fund

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The average mutual fund hasnt beaten the market
consistently in recent years

• Growth and development of mutual funds
• Domestic perspective
• International perspective

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Types of mutual funds

• Traditional categories
• Stock (equity)
• Bond and Income
• Money market

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Figure 4.2 Distribution of Mutual Fund
Assets by Type of Fund
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Figure 4.3 Performance of the Vanguard 500
Index fund
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Types of mutual funds Cont.

• Broader categories
• Expansion in the number of categories
• New categories based on the types of stocks owned
  and the managers investment philosophy

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Index funds

• How an index fund operates
• The popularity of index funds

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Services offered

• Automatic reinvestment of distributions
• Automatic investment plans
• Check writing
• Exchange privileges
• Periodic statements and tax documents

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Regulation and taxation

• SEC regulations
• Tax issues
• Funds are tax exempt
• Pass through income and capital gains to
  shareholders who are responsible for the taxes

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Mutual fund fees and expenses

• Load charges
• Front end loads
• Back end loads (contingent deferred sales
  charges)
• Operating expenses

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Mutual fund fees and expenses - Cont.

• What annual operating expenses pay for
• 12b-1 fees
• Standardizing fees and expenses
• Evaluating fees and expenses

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Figure 4.4 Total Expenses for Contrafund
and Heartland Value
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Figure 4.5 Differences in Annual Wealth
Due to Differences in Expenses
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Mutual fund fees Some points to remember

• Fees vary widely
• Fees can impact performance
• No evidence of a relationship between fees and
  performance

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Performance

• Evaluating historical performance
• Measuring returns
• Appropriate performance benchmark(s)
• Performance and risk

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Figure 4.6 Total Return Index for the
Weitz Value Fund
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Figure 4.7 Performance of the Weitz Value
Fund
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Assessing future performance

• Evidence that past and future performance are
  unrelated
• Evidence that past performance is a reasonable,
  though not perfect, predictor of future
  performance

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Performance and taxes

• Before versus after tax returns
• When not to buy shares of a mutual fund

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Other types of investment companies

• Unit investment trusts
• How they operate
• Types of unit investment trusts
• Index depository receipts

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Other types of investment companies Cont.

• Closed-end investment companies
• How they operate
• Example of a closed end fund
• NAV discount
• Dual purpose funds

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Figure 4.8A Germany Fund
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Figure 4.8B The Germany Fund, Inc.