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Investing Through Mutual Funds


Investing Through Mutual Funds Objectives Identify why people invest in mutual funds. Distinguish among the four major objectives of mutual funds. – PowerPoint PPT presentation

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Title: Investing Through Mutual Funds

Investing Through Mutual Funds
  • 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.

  • Describe the various charges and fees associated
    with investing in mutual funds.
  • Explain how to select a mutual fund in which to
  • Recognize valid reasons for selling a mutual fund

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

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

Mutual Funds
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

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.

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

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).

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.

Reasons for Investing Through Mutual Funds
  • Dispense profits to investors
  • Investors expect dividend income
  • Investors expect price appreciation

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

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

Objectives of Mutual Funds
  • Current income
  • Long-term growth
  • Growth and income
  • Balanced

Classification of Mutual Funds
  • Common stock
  • Balanced
  • Bond
  • Specialty
  • Money market

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

Costs of Investing Through Mutual Funds
  • Management fees
  • Loan funds
  • No-load funds

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

Load vs. No Load Funds
  • Load Fund
  • pay a commission to a sales agent when you buy
  • usually 3-8
  • No Load Fund
  • no sales charge paid
  • purchased directly from theinvestment company
  • usually have an 800 number you can call

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.

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
  • 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.

Classification of Mutual Funds
  • 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
  • Socially responsible funds avoid investing in
    companies that produce harmful products.

Classification of Mutual Funds
  • 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).

Classification of Mutual Funds
  • Long-term U.S. bond funds U.S. Treasury and U.S.
    zero-coupon bonds with maturities gt than 10
  • 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.

Classification of Mutual Funds
  • 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.

Strategies for Selecting a Mutual Fund
  • Match goals
  • Locate sources of comparative performance data
  • Financial press (i.e. Wall Street Journal,
  • Magazines (i.e. Fortune, Kiplingers)
  • Specialized mutual fund publications

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
  • Exchange privileges allow you to move your money
    from one fund to another within the fund family
    with little or no charge.

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
  • Evaluate any mutual fund before buying or selling
  • Consider managed funds vs. indexed funds

Other Sources of Fund Information
  • Mutual fund prospectus tells the funds objective
  • 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.

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

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