Chapter 16: Investing Through Mutual Funds

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Chapter 16 Investing Through Mutual Funds
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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.

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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.

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Investing Through Mutual Funds
MUTUAL FUND . . .

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

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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

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Figure 15.1
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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

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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

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Reasons for Investing Through Mutual Funds

• Dispense profits to investors
• Investors expect dividend income
• Investors expect price appreciation

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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

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Net Asset Value

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

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Objectives of Mutual Funds

• Current income
• Long-term growth
• Growth and income
• Balanced

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Classification of Mutual Funds

• Common stock
• Balanced
• Bond
• Specialty
• Money market

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Classification of Mutual Funds

• Aggressive growth
• Growth
• Value
• Growth and income

• Small company
• Sector
• Global/international
• Index

COMMON STOCK
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Unique Benefits of Mutual Funds

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

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Costs of Investing Through Mutual Funds

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

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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.

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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

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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

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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

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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

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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

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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