1.  2004 McGraw-Hill Ryerson Ltd. Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College Chapter 13 Investing in Mutual Funds 13-1

2.  2004 McGraw-Hill Ryerson Ltd. Learning Objectives - Chapter 13 1.Describe the characteristics of mutual funds. 2.Classify mutual funds by investment choice. 3.Evaluate mutual funds for investment purposes. 4.Describe how and why mutual funds are bought and sold. 13-2

3.  2004 McGraw-Hill Ryerson Ltd. What is a Mutual Fund? An investment chosen by people who pool their money to buy stocks, bonds, and other financial securities selected by professional managers who work for investment companies. Each investor has a right to a proportional share of the assets of the fund and any income it earns Many people choose mutual funds for their retirement account. 13-3

4.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 1 Describe the characteristics of mutual funds. 13-4

5.  2004 McGraw-Hill Ryerson Ltd. Why Investors Purchase Mutual Funds Professional management. Who is the fund’s manager? Managers can change. Diversification. Investors funds are pooled and used to purchase a variety of investments. This variety provides some safety. 13-5

6.  2004 McGraw-Hill Ryerson Ltd. Closed- and Open-end Funds Closed-end funds Shares are issued by an investment company only when the fund is originally set up After all original shares are sold you can only purchase shares from another investor Open-end 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. 13-6

7.  2004 McGraw-Hill Ryerson Ltd. Net Asset Value (NAV) (Value of the fund’s portfolio – Liabilities) Number of shares outstanding Calculated at the close of trading each day 13-7

8.  2004 McGraw-Hill Ryerson Ltd. Load Funds and No-Load Funds Load Fund. Investors pay a commission every time they buy (front-end load) or sell (back-end load) shares. Average fee is 3-5% for which an investor can get purchase advice and explanations. No Load-Fund. Investors pay no sales fee, because there are no sales people. You deal directly with the investment company via telephone, Internet or mail. 13-8

9.  2004 McGraw-Hill Ryerson Ltd. Management Fees and Other Charges Management fee Charged yearly (.25%-1% average) based on a percentage of the funds asset value Contingent deferred sales load Charged upon withdrawal of funds (1-6%) Decreases with time held Also referred to as back-end load Management Expense Ratio (MER) management fee and direct cost as it relates to fund’s value Special or Service Fees 13-9

10.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 2 Classify mutual funds by investment choice. 13-10

11.  2004 McGraw-Hill Ryerson Ltd. Classification of Mutual Funds Money Market funds Mortgage funds Bond funds Dividend funds Balanced Asset Allocation funds Equity / Common Stock funds Specialty funds International / Global funds Real Estate funds Ethical funds Segregated funds Labour Sponsored Venture Capital 13-11

12.  2004 McGraw-Hill Ryerson Ltd. Fund Families A family of funds exists when one investment company manages a group of mutual funds. Funds in the family vary in their objectives. You can move your money from one fund to another within a fund family with low or no charge. Market Timer: an individual who helps investors decide when to switch their investments from one fund to another, usually within the same family 13-12

13.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 3 Evaluate mutual funds for investment purposes. 13-13

14.  2004 McGraw-Hill Ryerson Ltd. Steps to Evaluate Mutual Funds Perform a financial checkup to make sure you are ready to invest. Obtain the money needed to purchase mutual funds. Determine your investment objectives. Find a fund with an objective that matches your objective. Evaluate, evaluate, and evaluate any mutual fund before buying or selling. 13-14

15.  2004 McGraw-Hill Ryerson Ltd. Reading a Mutual Fund Quote in the Newspaper Net asset value and asset value change. Company and fund name. Fund objective. Total return over various time periods. Ranking among funds with the same objective. Sales load or no load (NL). Percent of annual average net expenses. 13-15

16.  2004 McGraw-Hill Ryerson Ltd. Other Sources of Fund Information Mutual fund prospectus. A statement describing the risk factors. A description of the fund’s past performance. A statement describing the type of investments in the fund’s portfolio. Information about dividends, distributions and taxes. Information about the fund’s management. Limitations when choosing investments Process to buy and sell shares Service provided and cost How often investment portfolio changes 13-16

17.  2004 McGraw-Hill Ryerson Ltd. Other Sources of Fund Information Mutual Fund Annual Report Performance, investments, assets and liabilities Mutual Fund Guidebooks Financial Publications IE: Money Canadian Business Report on Business The Internet Internet search engines Investment company web pages 13-17

18.  2004 McGraw-Hill Ryerson Ltd. Learning Objective # 4 Describe how and why mutual funds are bought and sold. 13-18

19.  2004 McGraw-Hill Ryerson Ltd. Advantages of Mutual Funds Diversification Professional Management Ease of buying and selling Small amount of money required to open an account Multiple withdrawal options Distribution or reinvestment of income and capital gains Switching privileges in fund family Multiple services 13-19

20.  2004 McGraw-Hill Ryerson Ltd. Disadvantages of Mutual Funds Purchase and withdrawal costs Ongoing management fees Potential poor performance No control over capital gains distribution Complicated tax reporting issues Potential market risk with all investments Aggressive or unethical sales personnel 13-20

21.  2004 McGraw-Hill Ryerson Ltd. Mutual Fund Transactions Return on investment (may be taxable) Income dividends Capital gain distributions Sell shares at a higher price than you paid Purchase options Closed-end through the stock exchange Open-end, no-load directly from the investment company by phone or through the mail, or a sales representative Reinvestment Plan Dividends and capital gains reinvested to buy additional shares 13-21

22.  2004 McGraw-Hill Ryerson Ltd. Taxes and Mutual Funds Dividends, capital gains and gains/losses from sales of shares are taxable Companies provide statements specifying how much received Dividends receive a tax credit Capital gains are taxed as regular income with some exceptions Even if growth is reinvested, taxes are payable 13-22

23.  2004 McGraw-Hill Ryerson Ltd. Withdrawal Options Closed-end funds sold to another investor Open-end funds sold to the investment company that sponsors the fund shares redeemed at their Net Asset Value Withdraw specified, fix dollar amount until fund exhausted Sell certain number of shares over period Withdraw fixed percentage of asset growth Withdraw all asset growth, leave principal untouched 13-23