1 Chapter 15 – Mutual Funds Pool money from investors with similar objectives and purchase a diversified portfolio run by a professional manager –Shares issued to investors –Fluctuate with value of portfolio –Investments broadly or narrowly diversified Nearly $8 trillion assets; ½ families own

2 Advantages Diversification through pooling Professional management Minimum transaction costs Liquidity – open-end funds will buy back Flexibility – 8,600 funds; different goals

3 Disadvantages Lower performance than market – expenses Costs vary- load fees, management, 12-b1 Risk – not all funds truly safe (junk bonds) Can't avoid market risk Trade frequently causing short-term gains

4 Open-End Funds Stand ready to issue new shares or buy back outstanding shares at Net Asset Value on a daily basis. NAV = value of all assets, less liabilities divided by number of shares –Current value of investments determine value of each share –Open-end funds are largest type

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6 Other Types of Funds Closed-end – has fixed number of shares –Traded between investors; not sold back to mgr –Value may be above or below NAV Unit trusts – fixed pool of investments, often bonds. –Passively managed; bonds held to maturity Real Estate Investment Trusts (REIT's) –Equity, mortgage, and hybrid funds

7 Costs of Mutual Funds Load charges – sales commissions on shares –4% to 6% to 8.5% when you buy or –Back-end loads – paid when sold; sliding scale No-load funds – no sales charge –Deal directly with management company rather than broker –No-load funds perform as well as load funds

8 Other Fees Management Fees – about 1% of assets –Paid to “pick the winners”; but low correlation Expenses – no limit but should = actual cost –For administrative, trading, shareholder service –Affected by turnover ratios 12b-1 marketing fees – range from zero to 1% –Advertising and promotion expense paid by fund

9 Types of Funds and Objectives Money market mutual funds (MMMF's) Stock funds – many types and objectives Balanced funds – stocks and bonds for steady income and moderate growth Asset allocation – switch between stocks and bonds depending on market outlook Bond funds – income over growth –High to low quality; municipal bond funds

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11 Mutual Fund Services Automatic investment or withdrawals Reinvestment of dividends and interest Can wire transfer funds Phone switching between funds Check writing on MMMF's - $250 min Bookkeeping services and tax reporting

12 Buying a Mutual Fund Determine your goals Find fund to meet objectives; prospectus Evaluate fund's performance and costs –Past performance does not predict future –Fund doing well one year might not next year Sources of info – Morningstar is best

13 Buying a Mutual Fund Key Questions to ask 1.Investment goals 2.Investment strategy 3.Risks and returns 4.Fees and expenses 5.Investment manager 6. Buying shares 7. Selling shares 8. Distributions & taxes 9. Services

14 Prospectus Goals and strategies Manager's experience Performance over last ten years Fees, expenses and turnover ratios Shows assets in portfolio