Mutual Funds (page 76 through 85) ACE 444

Mutual Funds (Net Asset Value) Mutual fund has 10 million shares $215 million of market valuation value (end of business day valuation of stocks) Liabilities of $15 million Net Asset Value (NAV) = $20 = (215 – 15) / 10 NAV will change day to day, with changes in market valuation

Mutual Fund Fund Management Investors Assets (Stocks, Bonds)

Open Versus Closed Funds Open-end funds – Portfolio composed of securities – Ready to sell new shares or redeem outstanding shares at the end of each business day at NAV – Number of shares can change as individuals buy and sell (may create tax liability) – Many investors have dividends reinvested in the fund so don’t see cash flow till sell

Open-end Funds Disadvantages Investors must sell at NAV at the end of each day (no intra-day trading) Some funds create taxable events even if investor do not change their position (i.e., do not take funds in or out of account)

Closed-end Fund Portfolios composed of securities Number of shares fixed and trades like a common stock Investors pay a brokerage commission to purchase fund Value may differ significantly from NAV

Taxes Tax passed on to investors Two types: – Income tax on dividend distributions – Gains or losses Investor will have tax events (on non- retirement funds) even if no money is taken out of fund (retirement accounts have tax events as well, but they are usually deferred)

Tax events will be on Dividends Gains or losses on sales of stocks by fund mangers Capital gains can be somewhat surprising because you can have sales of stock because people have exited the stock

Fees Front-end load – fee on funds into account Back-end load – fee on withdrawal of funds from the account Operating fees dedicated from yearly returns – Management – 12b-1 fee (marketing, advertizing, distribution) – Other

Vanguard 500 Index Fund Prospectus (April 29, 2009 on page 3)

Expense Ratios Example – Vanguard 500 Index --.18% – Fidelity Fund (actively managed) --.64% – Average large blend stock % Actively managed funds typically have larger expense ratios Because of fees, actively managed funds have to do better than index funds.

Fee Impact Invest $1,000 per year for 40 years Average return is 8.0% Value at end of 40 years Expense Ratio Fee..18% $266,411.64%$235, % $211,341

Management Style Passive (Index) Funds – Seek to mimic market indexes Active Funds – Seek to outperform the market by professional management

Types of Investments (Example with Stocks) Sectors Market capitalization of stocks that are followed Desired objective – Income – Blend – Growth

Style Map from Morningstar

Example of Prospectus and Web Info Vanguard 500 Index – Example of an index fund that mimics S&P 500 – See Vanguard.com Fidelity – Has one of the oldest funds on the market – See fidelity.com

Summary For personal investment, very important asset Variety of types available