Title: Chapter 15: Investing Through Mutual Funds
1Chapter 15 Investing Through Mutual Funds
2Objectives
- 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.
3Objectives
- 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.
4Investing Through Mutual Funds
MUTUAL FUND . . .
- open-end investment company combining funds of
investors who have purchased shares in a
diversified portfolio of securities.
5What 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
6Figure 15.1
7Three 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
16-3
8Reasons 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
9Reasons for Investing Through Mutual Funds
- Dispense profits to investors
- Investors expect dividend income
- Investors expect price appreciation
10Closed 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
11Net Asset Value
- portfolio market value - liabilities
- the number of shares outstanding
- Offer price NAV sales commission
12Objectives of Mutual Funds
- Current income
- Long-term growth
- Growth and income
- Balanced
13Classification of Mutual Funds
- Common stock
- Balanced
- Bond
- Specialty
- Money market
14Classification of Mutual Funds
- Aggressive growth
- Growth
- Value
- Growth and income
- Small company
- Sector
- Global/international
- Index
COMMON STOCK
15Unique Benefits of Mutual Funds
- Recordkeeping/reporting
- Easy purchase and sale
- Automatic reinvestment
- IRS-qualified tax-sheltered retirement
- Withdrawal plans
- Collateral for loans
16Costs of Investing Through Mutual Funds
- Hidden fees
- Deferred load
- Redemption
- 12b-1
- Disclosure of Fees
- Which is better, load or no-load?
17Management 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. -
18Load 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
19Management Fees and Other Charges
- Management fee
- charged yearly (.25 - 1) based on a percentage
of the funds asset value - Contingent 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
20Strategies 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
21Strategies for Selecting a Mutual Fund
- 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
22When 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