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 The Standards Standard 4.0 Investigate opportunities available for saving and investing. 4.3Evaluate methods of investing. b.Mutual funds SLIDE 2 Chapter 14

© 2010 South-Western, Cengage Learning SLIDE 3 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 Rule of 72 How many years will it take to double your money? 72 / interest rate = years to double Ex. $5,000 investment at 6% 72 / 6 = 12 yrs. SLIDE 4 Chapter 14

© 2010 South-Western, Cengage Learning SLIDE 5 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 6 Chapter 14 Advantages of Mutual Funds Professionally managed Liquid Diversified Require only a small minimum investment initial monthly

© 2010 South-Western, Cengage Learning SLIDE 7 Chapter 14 Mutual Fund Risk Growth funds Income funds Growth and income funds Money market funds Global funds Index funds

© 2010 South-Western, Cengage Learning SLIDE 8 Chapter 14 Growth Funds A growth fund is a mutual fund whose investment goal is to buy stocks that will increase in value over time. Growth stocks – reinvest dividends Can be aggressive with more risk Emerging stocks

© 2010 South-Western, Cengage Learning SLIDE 9 Chapter 14 Income Funds An income fund is a mutual fund whose investment goal is to produce current income in the form of interest or dividends. Income stocks Low to moderate risk Pays capital gain distributions

© 2010 South-Western, Cengage Learning SLIDE 10 Chapter 14 Growth and Income Funds A growth and income fund is a mutual fund whose investment goal is to earn returns from both dividends and capital gains. Moderate risk A balanced fund is a mutual fund that seeks both growth and income but attempts to minimize risk by investing in a mixture of stocks and bonds rather than stocks alone.

© 2010 South-Western, Cengage Learning SLIDE 11 Chapter 14 Money Market Funds A money market fund is a mutual fund that invests in safe, liquid securities, such as Treasury Bills and bonds that mature in less than a year. Focus on low risk Used to store money until used like a CD

© 2010 South-Western, Cengage Learning SLIDE 12 Chapter 14 Global Funds A global fund is a mutual fund that purchases international stocks and bonds as well as U.S. securities. Higher risk Political unrest Currency manipulations Some more aggressive than others

© 2010 South-Western, Cengage Learning SLIDE 13 Chapter 14 Index Funds An index fund is a mutual fund that tries to match the performance of a particular index by investing in the companies included in that index. Risk varies by index ex. Dow’s blue chip stocks An index is 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 14 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 15 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 16 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. Calculated at the end of the day.

© 2010 South-Western, Cengage Learning SLIDE 17 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 Fees and expenses A summary of the fund’s portfolio of investments The fund’s objectives Financial statements showing past performance

© 2010 South-Western, Cengage Learning SLIDE 18 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 Can be on reinvestment dividends Back-end load Paid when you sell Typical range 2-8% front or back No-load fund Other fees do apply to all

© 2010 South-Western, Cengage Learning SLIDE 19 Chapter 14 The Mutual Fund Company You have no guarantees To reduce the risks 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

© 2010 South-Western, Cengage Learning SLIDE 20 Chapter 14 Assignment Find a mutual fund traded under SMG rules for each fund type Find the NAV Find the overall rate of return Find the 1yr, 5yr and 10y rate of return