Mutual Funds

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Mutual Funds

• Lesson 3.1

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What are Mutual Funds?

• Its an alternative way of investing.
• Instead of buying stocks in a single company you
  buy shares in a fund which has lots of different
  stocks, bonds and other investments.

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• In other words, each shareholder owns a small
  piece of one fund that has several different
  investments in it.

Mutual Fund Owner SHOE COMPANY, SODA
POP, HEATHCARE, BANK
Stock Owner SHOE COMPANY
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• Theres 4 ways to make money with mutual funds
• Dividend Income which you reinvest
• Interest Income money paid to you
• Increases in stock prices (or decrease ?)
• Capital gains when the stock is sold the
  difference between the buying cost and the
  selling cost
• After the operating costs are taken out a portion
  of the profit is yours
• As the funds investments increase so does the
  value of your shares (net asset value)

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What are Operating Costs?

• These are costs that the company charges to
  manage the funds, such as
• Administration people who work for the funds
  (salesmen, managers, secretaries)
• Bills utilities, phones, computer internet
  access, postage, paper, rent on the building
  where they operate, etc.

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Mutual Fund Prices and Net Asset Value (NAV)

• The prices are not like stock prices. It is not
  determined by what people will pay for them.
• The NAV is the total value of a funds portfolio
  minus liabilities / of shares outstanding
• Since stocks are included in these funds and are
  traded throughout the day, the NAV is calculated
  at the end of each business day

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What? Another Formula??

• NAV Value of Portfolio Liabilities
• Number of Shares
• Value of Portfolio is the dollar amount that a
  company has in valuable items (money, buildings,
  vehicles, etc.)
• Liabilities are the debt that a company has, in
  other words, the bills it still needs to pay
• Number of Shares are the shares that people own,
  not the shares the company owns.

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Lets do an example

• Total assets of a mutual fund are
  97,594,050,000
• Total Liabilities are 0.60 of the assets
• of shares are 769,481,127
• First calculate the total liabilities
  ?97,594,050,000 .0060 585,564,300

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Plug into the formula

• NAV Value of Portfolio Liabilities
• Number of Shares
• NAV 97,594,050,000 585,564,300
• 769,481,127
• NAV 97,008,485,700
  769,481,12
• NAV 126.07
• Therefore, the Net Asset Value is 126.07 per
  share.

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Why Buy Mutual Funds?

• 1. Diversification it has a mixture of stocks,
  bonds and other investments in many companies.
  They can be as small as 12 to over 100. If one
  area (shoes) loses money, hopefully the other
  areas will not lose money and it will balance the
  rest out.

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• 2. Professional Fund Management The funds are
  managed by experienced full-time managers and
  analysts. They are paid by fees that are a part
  of the funds operating expenses.
• 3. Convenience They are easy to buy and sell.
  You can use a brokerage firm or deal with the
  mutual fund company directly. Call the company,
  request a prospectus, fill out the application
  and mail it with a check.

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• Okay, so this is easy! I pay someone to take
  care of my mutual funds, I make money and I dont
  have to do anything! Sounds good to me.

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• WRONG - Its your
• Just because your portfolio is diversified
  doesnt mean you cant loose with mutual funds

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• Just like stocks, there are winners and losers!
• You must do your homework! Do you want Fund A
  because its secure short-term income or Fund B
  because its more risk and you may earn more
  money? Do Research!

Are you a tortoise or a hare?
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Mutual Funds can be Grouped

• Examples of groupings
• Common Stock Funds
• Balanced Funds (Stocks Bonds)
• Municipal (tax exempt) bond funds
• Corporate Bond Funds
• Government Bond Funds
• Money Market Funds

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Common Stock Mutual Funds

• They carry the greatest growth potential BUT
  carry the greatest risk.
• Remember, anyone can buy common stocks
• Lets look at some of the subdivisions of common
  stock.

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Which would you choose?
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EXTRA! EXTRA!

• ANNOUNCING A NEW FUND ON THE MARKET INDEX FUNDS
• Index funds buy a little of everything in the
  stock market
• When you buy an index fund you are trying to
  profit from the general trend of the market
• Recession Good Economy