Chapter © 2010 South-Western, Cengage Learning Investing in Mutual Funds, Real Estate, and Other Choices Investing in Mutual Funds 14

© 2010 South-Western, Cengage Learning SLIDE 2 Chapter 14 Lesson 14.1 Investing in Mutual Funds GOALS Discuss mutual funds as an investment strategy. Explain how to buy and sell mutual funds.

© 2010 South-Western, Cengage Learning SLIDE 3 Chapter 14 Evaluating Mutual Funds A mutual fund is a professionally managed group of investments bought using a pool of money from many investors. Individuals buy shares in the mutual fund. The fund managers use this pooled money to buy stocks, bonds, and other securities. The kinds of securities they buy depend on the fund’s stated investment objectives.

© 2010 South-Western, Cengage Learning SLIDE 4 Chapter 14 Advantages of Mutual Funds Professionally managed Liquid Diversified Require only a small minimum investment

© 2010 South-Western, Cengage Learning SLIDE 5 Chapter 14 Risk and Return Pyramid Money Market Funds Income Funds Growth and Income Funds Growth Funds Higher risk/higher return potential Lower risk/lower return potential

© 2010 South-Western, Cengage Learning SLIDE 6 Chapter 14 Mutual Fund Risk Investment Goals Growth funds - buy stocks that will increase in value over time. Income funds - produce current income in the form of interest or dividends. Growth and income funds - to earn returns from both dividends and capital gains. Balanced fund - both growth and income but tries to minimize risk by investing in both stocks and bonds instead of stocks alone.

© 2010 South-Western, Cengage Learning SLIDE 7 Chapter 14 Money market funds - invests in safe, liquid securities, such as Treasury Bills and bonds that mature in less than a year. Global funds - purchases international stocks and bonds as well as U.S. securities. Mutual Fund Risk Investment Goals

© 2010 South-Western, Cengage Learning SLIDE 8 Chapter 14 Mutual Fund Risk Investment Goals Index funds - tries to match the performance of a particular index by investing in the companies included in that index. Index - an average of the price movements of certain selected securities. Investors use indexes as benchmarks for comparison to judge how well their investments are doing.

© 2010 South-Western, Cengage Learning SLIDE 9 Chapter 14 Buying And Selling Mutual Funds To choose the mutual fund that is right for you, you must know your own investment objectives and risk tolerance. Do you want income from your investments now, or can you wait for capital gains in the future? Do you need a tax-free or tax-deferred investment to reduce your current income taxes? Are you comfortable with risking your investment for a chance at big returns, or do you prefer a safe but lower return?

© 2010 South-Western, Cengage Learning SLIDE 10 Chapter 14 NAV= Value of Portfolio – Liabilities Number of Shares Net Asset Value The net asset value tells you the market price for a share of a mutual fund. The NAV is the total value of a fund’s investment portfolio minus its liabilities, divided by the number of outstanding shares. Video

© 2010 South-Western, Cengage Learning SLIDE 11 Chapter 14 The Prospectus The prospectus is a legal document that offers securities or mutual fund shares for sale. It must contain the following: The terms A summary of the fund’s portfolio of investments The fund’s objectives Financial statements showing past performance

© 2010 South-Western, Cengage Learning SLIDE 12 Chapter 14 Costs and Fees If you buy a mutual fund through a broker, you will likely have to pay a sales fee, called a load. Front-end load – paid when you buy Back-end load – paid when you sell No-load fund – buying directly from the company

© 2010 South-Western, Cengage Learning SLIDE 13 Chapter 14 The Mutual Fund Company Page 306 You have no guarantees that a mutual fund will make money or that the mutual fund company itself will not fail. To reduce these risks, choose a mutual fund company that has the following characteristics: It has been in business for 20 or more years It has a solid track record of returning good solid returns to investors It is a large company that manages investments for millions of investors It is a well-known company that is highly respected among investment advisers and experts It exists both in brick-and-mortar and in cyberspace It is customer friendly and responsive to customer questions and needs It provides customers with easy-to-read statements and reports and offers daily online access Video