Copyright  2002 by Harcourt, Inc. All rights reserved. CHAPTER 13: INVESTING IN MUTUAL FUNDS Clip Art  2001 Microsoft Corporation. All rights reserved.

13-2 Copyright  2002 by Harcourt, Inc. All rights reserved. INVESTORS pool their money and Mutual Fund Basics Clip Art  2001 Microsoft Corporation. All rights reserved.

13-3 Copyright  2002 by Harcourt, Inc. All rights reserved. INVESTORS pool their money and buy shares in the MUTUAL FUND. ABC XYZ MUTUAL FUND Mutual Fund Basics Clip Art  2001 Microsoft Corporation. All rights reserved.

13-4 Copyright  2002 by Harcourt, Inc. All rights reserved. INVESTORS pool their money and buy shares in the MUTUAL FUND. ABC XYZ MUTUAL FUND FUND MANAGER selects and purchases a variety of investment instruments. Mutual Fund Basics Clip Art  2001 Microsoft Corporation. All rights reserved.

13-5 Copyright  2002 by Harcourt, Inc. All rights reserved. Advantages of Mutual Funds:  Diversification — risk is lowered; one share buys a slice of everything in the fund.  Professional management — pay someone else to make investing decisions.  Financial returns — relatively attractive returns over the long term.  Convenience — easy in & out, small outlays, help with record keeping.

13-6 Copyright  2002 by Harcourt, Inc. All rights reserved. Disadvantages of Mutual Funds:  No choice in securities selection— if you don’t agree with choices, you must change funds.  No control of sale of securities within fund—timing of sales has tax implications for investor.

13-7 Copyright  2002 by Harcourt, Inc. All rights reserved.  Open-End Investment Companies (mutual funds) –Dominant type of investment company; shares purchased from and sold back to company. –New shares issued as money flows in. –Net Asset Value (NAV) is the current market price of all securities owned by the fund (less any liabilities) divided by the number of shares outstanding. Types of Investment Companies:

13-8 Copyright  2002 by Harcourt, Inc. All rights reserved. –Operate with a fixed number of shares outstanding. –All trading is done between investors on the open market. –Shares frequently trade at a discount or premium to net asset value.  Closed-End Investment Companies

13-9 Copyright  2002 by Harcourt, Inc. All rights reserved. –Typically structured as index funds. Spiders based on S&P 500 Diamonds based DJIA Qubes based on Nasdaq 100 –Trade on listed exchanges like closed-end funds. –Number of shares outstanding can be increased or decreased, depending on demand.  Exchange-Traded Funds

13-10 Copyright  2002 by Harcourt, Inc. All rights reserved. –Usually sold by brokerage houses. –Investors purchase a share in an unmanaged pool of investments. –No trading of securities within the portfolio once the trust assets have been purchased. –Tend to have relatively high transaction costs and yearly fees.  Unit Investment Trusts

13-11 Copyright  2002 by Harcourt, Inc. All rights reserved. –Closed-end investment companies whose trust assets are limited to real estate investments. –Offer a more diverse and marketable way to invest in real estate. –Equity REITs invest in properties; mortgage REITs invest in mortgages; hybrid REITs invest in both.  Real Estate Investment Trusts (REITs)

13-12 Copyright  2002 by Harcourt, Inc. All rights reserved. Mutual Fund Cost Considerations:  Loads = sales commissions –Front-end load funds (or simply "load funds") charge a commission when shares are purchased. –Low-load funds charge commissions of 1–3% when shares are purchased. –Back-end load funds charge a commission when shares are sold.

13-13 Copyright  2002 by Harcourt, Inc. All rights reserved.  12(b)-1 Fees — annual fees for marketing and promotion.  Management Fees — annual fees charged by all funds to pay the fund manager.  No-Load Funds — no fee to purchase or redeem shares and low or no 12(b)-1 fees.

13-14 Copyright  2002 by Harcourt, Inc. All rights reserved. –Total sales charges and fees cannot exceed 8 1/2 %. –Of this amount, 12(b)-1 fees cannot exceed 1%. –Funds cannot call themselves “no- load” if their 12(b)-1 fees exceed 0.25%.  Maximum allowable fees:

13-15 Copyright  2002 by Harcourt, Inc. All rights reserved. –Funds are required to disclose all fees in their prospectus. –Even no-load funds can have high annual expense ratios and/or 0.25% 12(b)-1 fees. –Fees affect your return, and annual fees will be collected regardless of the performance of the fund.  Keep Track of Fees!

13-16 Copyright  2002 by Harcourt, Inc. All rights reserved. Types of Funds  Growth  Aggressive Growth  Value  Equity-Income  Balanced  Growth & Income  Bond  Money Market  Index  Sector  Socially Responsible  International  Asset Allocation

13-17 Copyright  2002 by Harcourt, Inc. All rights reserved.  Automatic Investment Plan — mutual fund periodically drafts money from investor's bank account.  Automatic Reinvestment Plan — fund earnings and distributions automatically reinvested in additional shares of fund.  Regular Income — fund automatically pays out to investor predetermined amount periodically. Services Offered by Mutual Funds:

13-18 Copyright  2002 by Harcourt, Inc. All rights reserved.  Retirement Plans — funds set up and administer retirement plans for self- employed individuals.  Conversion Privileges — allow shareholders to easily move from one fund to another within the fund family.

13-19 Copyright  2002 by Harcourt, Inc. All rights reserved. Making Mutual Fund Investments Selecting a Mutual Fund:  Match the fund's objectives with your investment objectives.  Consider your tolerance for risk and your investment time horizon.  Read the prospectus!

13-20 Copyright  2002 by Harcourt, Inc. All rights reserved.  Check the fees charged.  Consider the fund's longer-term returns as well as its shorter-term returns.  Refer to Exhibit 13.9 concerning mutual fund facts every investor should know. Clip Art  2001 Microsoft Corporation. All rights reserved.  Assess the fund's services.

13-21 Copyright  2002 by Harcourt, Inc. All rights reserved. Mutual Fund Performance :  Returns consist of : 1) dividend/interest income earned by the fund assets; 2) realized capital gains distributions from sale of assets within the fund; 3) change in mutual fund's share price.  Past performance reveals success of fund managers but does not guarantee future returns!

Copyright  2002 by Harcourt, Inc. All rights reserved. THE END!