Mutual Funds Mr. Sullivan Building Wealth

What is a Mutual Fund?  Mutual Funds offer an alternative to investing in individual stocks.

What is a Mutual Fund?  A mutual fund is a collection of shareholders’ money that is invested by professional fund managers in an assortment of different securities, such as stocks or bonds.

Mickey, Donald, and Pluto don’t have the time research investment ideas on their own. They collectively pool their money together and give it to a mutual fund investor.

What is a Mutual Fund?  This investor (and his team) research various ideas and invest Mickey, Donald, and Pluto’s money.

Ownership($10,000 Investment)  Mickey Invests $2,000  Mickey owns 20%  Donald Invests $5,000  Donald owns 50%  Pluto Invests $3,000  Pluto owns 30%

$10,000’s has been invested  The mutual fund company decides that there will be 200 shares, and each share will be worth $50.  This brings the total to $10,000 Mickey owns 40 shares ($2,000 /$50=40 shares) Donald owns 100 shares ($5,000/$50= 100 shares) Pluto owns 60 shares ($3,000/$50= 60 shares)

Investment performance  The mutual fund advisors have done a nice job selecting stocks to invest!  The stocks they selected have increased in value.

Investment performance  The $10,000 investment has doubled to $20,000.  The value of each share doubled from $50 to $100.

Investment performance  Mickey40 $100=$4,000  Donald100 $100=$10,000  Pluto60 $100=$6,000

Advantages of investing in mutual funds  Professional Management  Instant diversification  Tailored Investment Objectives

Advantages of investing in mutual funds  Liquidity  Minimal Risk  (Highly Regulated)  Easy to track your progress and easy to trade

Net Asset Value  The price of a mutual fund’s shares is determined by its NAV, or net asset value.  Total Portfolio Value-Liabilities Shares=NAV

Net Asset Value  Lets say you’ve invested in a mutual fund with a total investment portfolio value of $50 million. It’s liabilities are $5 million, and it has issued 9 million shares.  Plug those numbers into the NAV equation to figure out the value of each share:

Net Asset Value  $50,000,000 (Value)-$5,000,000 (Liabilities)  9,000,000 (Shares)  =$5 per share

Net Asset Value  At the end of each business day, mutual fund managers calculate the Net Asset Value of the fund.

Prospectus  Investing in a mutual fund can help you reach a variety of financial goals.  Each mutual fund has a specific objective, described in its annual prospectus.  A prospectus is a document containing all vital information about the fund.

Disadvantages of Mutual Funds  High Fees  Pay taxes on your gains  Thousands of funds to choose from

Mutual Fund Activity  Six Mutual Funds  $3,000 to invest  300/$10 per share  Must select 3 of the six funds  May invest in all 6  Calculate your value one year later

Mutual Fund Breakdown Value Blend Growth Large Mid Small

Growth Funds  Growth funds- Growth funds invest in stocks that are likely to appreciate in value an pay no dividend.  ( Hewlett-Packard, Microsoft, Apple, Google )

American Growth Fund  Fund Size: $146,000,000,000  Expense Ratiox.71%  Annual Fees$1,036,000,000

Value Funds  Value funds invest in stocks that seem to be undervalued or overlooked. (Toyota?)  These stocks tend to be “good bargains” and sell at low prices.  Ideal for more conservative investors who want to avoid risk.  Warren Buffett uses this investment style

Other Stock Funds  Blend Funds- Contain both growth and value stocks  Sector funds- Invest in stocks from one specific industry, such as oil. These funds may be much more risky!!!  International funds- International funds invest in stocks from overseas companies and are often viewed as the highest risk  Political Stability  Currency Fluctuation  Foreign Markets

Target-Date Funds  You select the date which you wish to retire. The fund gradually realigns itself to become more conservative the closer you get to retirement.  Every month you buy shares of a 2055 mutual fund. The closer the fund gets to the year 2055, the more conservative it gets to match your needs.

Other ways to categorize stock funds  Many times funds are grouped according to size of the companies they invest in.  Large-cap$8 billion  (Exxon Mobile$300 billion)  Mid-cap$1 to $8 billion  ( Associated Bank $2 billion)  Small-capUnder $1 billion  (99 Cent Only Stores$1 Billion)

Bond Funds  Researching and investing in a variety of bonds takes lots of time and effort.  Bond funds are a great way to invest in bonds.  Bond funds work the same way stock mutual funds do, expect that shareholders’ money is pooled to invest in a variety different bonds, rather than stocks.

Bond Funds  Charge fees to have investment professionals invest your money.  Provides a steady stream of income for people. (Many retired people like it for this reason)

Bond Fund Factors  Rate at which your money grows  Average maturity of the bonds in the fund  Credibility ratings of the bonds in the fund

Bond Fund Category  Short Term- Bonds mature within a year  Intermediate- Bonds mature in 1 to10 years  Long-Term- Bonds mature in 10 to 30 years

Bond Fund Categories  Government Funds  Municipal Funds  Corporate Funds  Junk Bond Funds

Balanced Funds  Balanced Funds invest in both stocks and bonds.  Combination of stock growth and bond income in one mutual fund.  Lower returns than stock funds, but “safer”  Even though they are balanced, may not be 50/50

Money Market Mutual Funds  One of the most conservative investments you can make  Fund invests in a variety of securities that offer high returns over the short term  Value of the fund stays at $1  The return is about 1% higher than a savings account

Index Funds  Index funds are a unique type of stock mutual fund that copy the performance of a particular stock market index, such as the Standard and Poor’s 500 (S&P 500) or the Nasdaq 100.  The index fund purchases all the stocks listed on that particular index, in the same percentages as the index.  Much cheaper to invest because it takes a much smaller staff to manage an index fund.  Many times its done by a computer. (No research)

Spiders, Diamonds, and Cubes  SpiderSPY  Invests in the 500 stocks of the S&P  DiamondDIA  Invests in the 30 Dow Stocks  CubeQQQQ  Invests in the Nasdaq

Mutual Fund Company’s  Fidelity  T. Rowe Price  Vanguard

Other Places to Invest  Scottrade  Sharebuilder  E*Trade

Where NOT to trade mutual funds  Bank representatives  Insurance Agents  Financial Planners

Why?  Often times they are required to “push” certain funds, regardless of your individual needs.  Get paid a higher commission for selling you certain funds that may not be right for you.

Load vs. No Load Mutual Funds  Load mutual funds charge 5.75% to invest  If you invest $10,000 in a load mutual fund, they will charge you $575 to invest in this fund.  No-Load Mutual funds charge no fees to get in and out. They simply charge roughly $10 to buy and sell.

Load Mutual Funds  A Shares  Front End Sales Load  B Shares  Back End Sales Load  C Shares  Level-Load

Load Mutual Funds  A Shares-Charge you a fee when you enter the fund.  $10,000 investment $575  You invest $9,425  No sales charge when you exit the fund

Load Mutual Fund  B Shares- Back End Sales Fee- Pay a fee when you exit the mutual fund.  Buy $10,000 in a mutual fund. All $10,000 is invested. However, when you sell out, they can charge you as much as 8%.  If your mutual fund grows to $12,000, they can charge you $960.

Load Mutual Funds  C- SharesLevel Load  No fee to enter, no fee to exit. However, there are extremely high annual fees!

Load Mutual Funds  A SharesLike Riding a Bus- Pay when you get on and ride as long as you’d like!  B SharesLike Riding a Taxi- Free to get in, but you pay when you leave.  C SharesLike Hitch-Hiking- Free to get on and free to get off, however, extremely dangerous!

 American Funds Worksheet

Load vs. No Load  Never, ever, ever ever….. Invest in Load Mutual Funds

Load vs. No Load  Study after study shows that No-Load Funds perform just as well as load funds.  Why pay the sales fee if you don’t have to?

Discussion Questions  What does socially responsible investing mean to you?  Would you invest in mutual funds that don’t support the same ideals and principals as you, if there was a greater potential for a higher return?

Head of the Class  1. Kent wants to learn as much as possible about the mutual fund he’s thinking of investing in. Which of the following is the best place he could go for detailed information? a. The Newspaper b. A trade magazine c. The funds prospectus d. The Fund’s web site

Head of the Class  2. The price of a mutual fund’s shares is determined by A. Net Asset Value B. Investment Portfolio Value C. Liabilities D. Outstanding Shares

Head of the Class  3. Teri decided to invest in a few different mutual funds rather than put all her investment dollars into one or two individual stocks. A stock in or of her mutual funds went bust, but since her money was spread out, Teri wasn’t significantly affected. What advantage of mutual funds does Teri’s situation illustrate? a. Liquidity b. Professional Money Management c. Convenience d. Diversification

Head of the Class  4. A mutual fund that has no limit on the number of shares it can issue or the amount of money it can hold is called a(n) a. Growth fund b. Stock fund c. Closed-end fund d. Open-end fund

Head of the Class  5. A fund that invests in stocks that tend to be undervalued or overlooked is called a a. Value fund b. Growth fund c. Blend fund d. Sector fund

Head of the Class  6. Which is the following is not an important variable of a bond fund: a. The amount of time you spend researching the bonds in the fund b. The rate at which your money grows c. The average maturity of the bonds in the fund d. The credibility ratings of the bonds in the fund

Head of the Class  7. Mutual funds that contain both stocks and bonds are known as a. Exchange-traded funds b. Balanced Funds c. Money Market Funds d. Blend Funds

Head of the Class  8. Which of the following is the best place to buy shares in a mutual fund: a. Fidelity Investments b. Main Street Local Bank c. Good Hands Insurance d. Mike Jones, Financial Planner

Head of the Class  9. Fees for buying and selling mutual funds are known as a. NAV’s b. ETF’s c. Expense Ratio d. Loads

Head of the Class  10. John decides to buy mutual funds through a financial planner. John pays no commission when he enters, but he will pay a commission when he sells the mutual fund. Which fund did John purchase?  A. A Shares  B. B Shares  C. C Shares  D. No Load Funds