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X' MUTUAL FUNDS

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Morningstar. Lipper. C. DEFINITIONS. Fund Style ... The insurance companies issuing annuities are rated by Standard and Poors and Morningstar ... – PowerPoint PPT presentation

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Title: X' MUTUAL FUNDS


1
X. MUTUAL FUNDS
2
A. The Mechanics of Mutual Funds
  • Mutual funds pool money from many investors
  • Mutual fund investors own a part of all of the
    securities in the mutual fund pool
  • The fund manager is responsible for tracking the
    securities in the pool
  • Profits are paid in two ways
  • Income Distributions Dividends and interest
    paid by the underlying securities are
    subsequently paid to investors
  • Capital Gains Distributions Payment to
    investors of profits obtained from sales of
    securities

3
A. The Mechanics of Mutual Funds
  • Passive Funds Primarily index funds
  • Active Funds Run by a professional manager
    active funds have
  • Professional managers
  • An investment objective, and
  • An investment program designed to meet the
    investment objective

4
A. The Mechanics of Mutual Funds
  • Open and Closed End Funds
  • Open end sold by brokerage firms and by fund
    distributors, issues or purchases shares
    depending upon demand, uses client funds to buy
    or sell securities
  • Closed end raise money only once, invest in a
    variety of securities, and offer a fixed number
    of shares traded Over the Counter or on the
    market price varies with the price of the
    underlying securities and with market demand
    (discount or premium from Net Asset Value)

5
B. TYPES OF MUTUAL FUNDS
  • Stock Funds invest in equity securities, can be
    growth, value, dividend, sector, market cap, etc.
  • Bond Funds invest in Treasury bonds, municipal
    bonds, passive trading of securities, active
    trading of securities, high yield bonds,
    corporate bonds, etc.
  • Commodity Funds invest in stocks of commodities
    or in commodity futures
  • Balanced Funds contain a mix of stocks and
    bonds (generally 60 stocks, 40 bonds)

6
B. TYPES OF MUTUAL FUNDS
  • Target Date Funds change investment allocation
    as a target date approaches (ex. - 529 funds)
  • Money Market Funds cash equivalent securities
    like a savings account
  • International Funds invest in Europe, China,
    Asia, Far East, Latin America, emerging markets,
    etc.
  • Miscellaneous socially responsible funds, sin
    funds, green funds, etc.

7
C. DEFINITIONS
  • Turnover Rate the number of times per year that
    the equivalent of all of the underlying
    securities in the fund are purchased or sold
  • Volatility the historic deviation of rates of
    return above and below the average rate of return
  • Prospectus similar to a stock prospectus,
    explains fund objectives, investment strategy,
    fees, historic before and after tax returns, and
    fund risk profile

8
C. DEFINITIONS
  • Net Asset Value (NAV)
  • (market cap of fund shares accrued
  • interest accrued dividends accrued
    expenses)
  • number of fund shares
  • Premium The price of a share of a closed end
    mutual fund minus the share Net Asset Value
    exists where demand for fund shares exceeds the
    value of the underlying holdings

9
C. DEFINITIONS
  • Discount Where the shares of a closed end fund
    trade below the funds net asset value, exists
    where demand is less than the value of the
    underlying holdings
  • Liquidity The ability to get into and out
    of an investment (buy and sell) ETFs are
    generally highly liquid, mutual funds are not
  • Diversification Where a fund holds a variety of
    securities

10
C. DEFINITIONS
  • Rating An independent analysts opinion of how
    the fund has performed compared to benchmarks
  • Ranking The relative standing of a mutual fund
    compared to others with similar investment
    strategies
  • Sharpe Ratio Calculated as a funds rate of
    return the rate of return on 3 month Treasury
    bills divided by the standard deviation of fund
    returns
  • Sharpe Ratio (Fund Return 3 mo. Treasury
    Yield)
  • Standard Deviation of Fund Returns

11
C. DEFINITIONS
  • Standard Deviation The amount by which the
    annual returns of a fund vary above and below the
    funds average return
  • Rating Firms
  • Standard and Poors
  • Morningstar
  • Lipper

12
C. DEFINITIONS
  • Fund Style
  • Growth/Blend/Value Invests in growth stocks, a
    blend of growth and value stocks, and value
    stocks
  • Dividend (Yield) Invests in securities with the
    highest dividend payments
  • Contrarian Against the accepted (current trend)
    in management
  • Style Drift When a fund manager changes styles
    to make up for below market returns
  • Portfolio Overlap Where a holder of several
    mutual funds owns duplicate underlying shares of
    stock

13
D. FEES AND CHARGES
  • Fees have the greatest impact on fund returns
    other than the managers performance
  • Sales Charges (Loads)
  • Front End Load A sales charge on fund purchase,
    reduces the number of shares purchased
  • Back End Load (Redemption Fee or Contingent
    Deferred Sales Charge) Paid when shares are
    sold usually declines to 0 after 5-7 years
    designed to prevent investor churn

14
D. FEES AND CHARGES
  • Fund Classes
  • A Front end load
  • B Back end load
  • C Level load no sales charges, but higher
    fees than A or B higher annual fees and charges
    instead of front end or back end loads
  • Exchange Fees A charge for moving assets
    between different funds issued by the same group

15
D. FEES AND CHARGES
  • Early Redemption Charge Exit fee, can be 5 days
    to 1 year
  • Breakpoint A point where more money is invested
    to reduce the front end load
  • Right of Accumulation Where an investor can
    combine past and new investments to reach a
    breakpoint
  • Letter of Intent A promise by the investor to
    increase the amount invested to reach a
    breakpoint

16
D. FEES AND CHARGES
  • Other Types of Fees Total annual fees are
    quoted as an Expense Ratio must be listed in
    the fund prospectus, generally range from 0.1 to
    2.75
  • 12-b 1 Fees Marketing and distribution expenses
    limited by NASD rule to 1 of assets per year
    or less, with marketing fees at 0.75 or less
    and with shareholder services capped at 0.25 of
    assets
  • Management Fees Charge to pay the advisory firm
    that invests fund assets

17
E. MEASURING FUND RETURNS
  • Percentage change in share price (market value)
    is the measure of fund returns for closed end
    funds
  • Percentage Closing Share Price
  • Rate of Return Opening Share Price -1

18
E. MEASURING FUND RETURNS
  • Net Asset Value Value of Fund Investments
  • Number of Shares
  • Percentage Closing Net Asset Value
  • Change in NAV Opening Net Asset Value -1

19
E. MEASURING FUND RETURNS
  • Distributions Can be both interest (dividends
    and interest on investments) and capital gains
    (mutual funds gain from sale of underlying
    investments)
  • Yield Distribution per Share
  • Price per Share

20
E. MEASURING FUND RETURNS
  • Total Return Change in NAV Distributions
  • Cost of Initial Investment
  • Reported as a geometric mean, taking into account
    annual compounding of distributions
  • Must be viewed in comparison with standard
    indices or with indices of competing funds with a
    similar investing style

21
F. ANNUITIES
  • Defined as an investment contract between the
    purchaser and an insurance company, funded (money
    invested) either by a lump sum or by a series of
    scheduled payments
  • Types of Annuities
  • Fixed annuities interest rate set upon purchase
  • Variable annuities contain a selection of sub
    accounts, with the yield on the annuity varying
    depending upon the investment performance of the
    types of securities represented in the sub
    account

22
F. ANNUITIES
  • Advantages of annuities over mutual funds
  • Income taxes no income taxes are paid on
    capital gains until the annuity matures
    (presumably when the investor is retired and in a
    lower tax bracket)
  • Withdrawals from an annuity, unlike withdrawals
    from a pension plan or an IRA, can be postponed
    until after age 701/2, allowing transfer of
    wealth to heirs

23
F. ANNUITIES
  • Special types of annuities (ex. 403(B)
    annuities) are tax deferred for both
    contributions and interest
  • Annuities may contain a death benefit, which is a
    guaranteed payment upon death regardless of
    market conditions

24
F. ANNUITIES
  • Disadvantages of annuities
  • Annual fees are generally higher than mutual fund
    annual fees as a percentage of the amount
    invested
  • Surrender fees a back end load, generally
    starting at 7 for the first year, declining by
    1 per year thereafter

25
F. ANNUITIES
  • Annuity ratings
  • As an insurance product, the state of issue may
    guarantee the companys obligations, including
    annuities, in the event that the company becomes
    insolvent (goes bankrupt)
  • The insurance companies issuing annuities are
    rated by Standard and Poors and Morningstar
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