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Chapter 16: Investing Through Mutual Funds

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Title: Investing in Mutual Funds Author: Family and Consumer Sciences Last modified by: Jerry Basford Created Date: 4/4/1998 9:11:24 PM Document presentation format – PowerPoint PPT presentation

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Title: Chapter 16: Investing Through Mutual Funds


1
Chapter 16 Investing Through Mutual Funds
2
Objectives
  • 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.

3
Objectives
  • 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.

4
Investing Through Mutual Funds
MUTUAL FUND . . .
  • open-end investment company combining funds of
    investors who have purchased shares in a
    diversified portfolio of securities.

5
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

6
Figure 15.1
7
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

16-3
8
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

9
Reasons for Investing Through Mutual Funds
  • Dispense profits to investors
  • Investors expect dividend income
  • Investors expect price appreciation

10
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
    company

11
Net Asset Value
  • portfolio market value - liabilities
  • the number of shares outstanding
  • Offer price NAV sales commission

12
Objectives of Mutual Funds
  • Current income
  • Long-term growth
  • Growth and income
  • Balanced

13
Classification of Mutual Funds
  • Common stock
  • Balanced
  • Bond
  • Specialty
  • Money market

14
Classification of Mutual Funds
  • Aggressive growth
  • Growth
  • Value
  • Growth and income
  • Small company
  • Sector
  • Global/international
  • Index

COMMON STOCK
15
Unique Benefits of Mutual Funds
  • Recordkeeping/reporting
  • Easy purchase and sale
  • Automatic reinvestment
  • IRS-qualified tax-sheltered retirement
  • Withdrawal plans
  • Collateral for loans

16
Costs of Investing Through Mutual Funds
  • Hidden fees
  • Deferred load
  • Redemption
  • 12b-1
  • Disclosure of Fees
  • Which is better, load or no-load?

17
Management 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.

18
Load 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

19
Management 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

20
Strategies 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

21
Explanatory Notes
  • f-Previous days quotation
  • g-footnotes x and s apply
  • j-footnotes e and s apply
  • p-distribution costs apply, 12b-1
  • r-redemption charge may apply
  • s-stock split or dividend
  • t-footnotes p and f apply
  • v-footnotes x and e apply

22
Strategies 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

23
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
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