Mutual Funds

Defined A mutual fund is a collection of stocks that a group of investors pool their money together to invest in.

Objective Mutual funds are made up of many stocks, or holdings. The types of holdings that make up the fund defines it’s investment objectives. Often times a 3 X 3 grid is used to describe the objective.

Objective Large Company Size Medium Small ValueGrowth

Risk These objectives are designed to match the tolerance of investors. Risk tolerance is how comfortable the investor is with the ups and downs of the market. A person with a low risk tolerance would want to invest in a mutual fund of large companies who’s values grow steady over time.

Diversification Mutual funds allow the investor to diversify their investments into different size companies. – Large Cap Mutual Funds – Mid Cap Mutual Funds – Small Cap Mutual Funds

Diversification Buy purchasing one mutual fund, the investor is buying small parts of many companies. The following slide illustrates the top 10 holdings of the American Beacon Large Cap Value A (ALVAX) mutual fund as of July 26, This mutual fund is made up of 184 different companies.

American Beacon Large Cap Value A

Management Investment managers use the money to buy and sell shares of stock within the mutual fund on behalf of the investors.

Performance Mutual funds are managed based on how well they perform based on time periods of – 1 year – 3 year – 5 year – 10 year They are measured against other funds and indices such as the Dow Jones Industrial Average.

Grades Based on the a mutual funds performance they are given a rating based on the Morningstar Rating system. Morningstar rates each fund 1 to 5 stars with the top 10% in each category receiving 5 stars. A fund has to be in existence for more than three years to be considered for a rating.

Buying Mutual Funds An investor may purchase mutual funds through – Fund companies – Online – Financial Advisor – Retirement Plans Shares of mutual funds are purchased by their Net Asset Value (NAV).

Buying Mutual Funds When buying mutual funds there may be costs. – Loads Sales fees expressed as percentages at the purchase (front load) or sell (back load) of the fund – Fees Annual fees charge to the investor for administrative costs