1. Mutual Funds: An Easy Way to Diversify
Chapter 15
Mutual Funds: An Easy Way to Diversify

2. Introduction A way of holding investments such as stocks and bonds.
Mutual fund—an investment that raises from investors, pools the money, and invests it in stocks, bonds, and other investments.
Each investor owns a share of the fund proportionate to his/her investment.

3. Why Invest in Mutual Funds?
Advantages of mutual funds:
Professional management
Minimal transaction costs
Liquidity
Flexibility
Service
Avoidance of bad brokers

4. Why Invest in Mutual Funds?
Disadvantages of mutual funds:
Lower-than-market performance
Costs
Risks
You can’t diversity away a market crash
Taxes

5. Mutual Fund-Amentals
A mutual fund pools money from investors with similar financial goals.
You are investing in a diversified portfolio that’s professionally managed according to set goals.
Investment objectives are clearly stated.

6. Mutual Fund-Amentals
As the value of the securities in the fund increases, the value of each mutual fund share also rises.
Most pay dividends or interest to shareholders.
Shareholders receive a capital gains distribution when the fund sells a security for more than originally paid.

7. Mutual Fund-Amentals Fund is set up as a corporation or trust.
Shareholders elect a board of directors.
Fund is run by a management company.
Each individual fund hires an investment advisor to oversee the fund.
Contracts with a custodian, a transfer agent, and an underwriter.

8. Table 15.2 Different Mutual Fund Costs

9. Stock Mutual Funds Aggressive growth funds Small company growth funds
Growth-and-income funds
Sector funds
Index funds
International funds

10. Balanced Mutual Funds
Tries to balance objectives of long-term growth, income, and stability
Hold both common stock and bonds and sometimes preferred stock
Aimed at those needing income to live on and moderate stability in their investment
Less volatile than stock mutual funds

11. Life Cycle and Target Retirement Funds
Mutual funds that try to tailor their holdings to the investor’s individual characteristics, such as age and risk.
Target retirement funds are managed based on when you plan to retire.

12. Bond Funds Mutual funds that invest primarily in bonds
Fluctuate in value with market interest rates
Use for small amounts of money, to keep investments liquid
Otherwise, use individual bonds where there is no professional management or fees

13. Bond Funds U.S. Government Bond Funds of GNMA Bond funds
Municipal Bond Funds
Corporate Bond Funds
Bonds and their maturities:
Short-term (1-5 years)
Intermediate-term (5-10 years)
Long-term (10-30 years)

14. Buying a Mutual Fund Step 1: Determining Your Goals
Goals and time horizon
Why are you investing?
Tax-deferred investments?
Risk tolerance

15. Buying a Mutual Fund Step 2: Meeting Your Objectives
Look at (sub)classifications and objectives.
Morningstar provides an investment style box to understand the investment style.

16. Buying a Mutual Fund Step 3: Evaluating the Fund
Where to look—sources of information
Mutual fund prospectus
Internet screening to find the right mutual fund

17. Table 15.6 What’s in a Mutual Fund Prospectus?

18. Buying a Mutual Fund Step 4: Making the Purchase
Buy direct – use phone or internet.
Buy through a mutual fund “supermarket”– such as Fidelity or Charles Schwab.