1. Investing Through Mutual Funds

2. Objectives Identify why people invest in mutual funds.
Distinguish among the four major objectives of mutual funds.
Classify mutual funds by portfolio.
List the unique benefits of mutual funds.

3. Objectives
Describe the various charges and fees associated with investing in mutual funds.
Explain how to select a mutual fund in which to invest.
Recognize valid reasons for selling a mutual fund investment.

4. Investing Through Mutual Funds
open-end investment company combining funds of investors who have purchased shares in a diversified portfolio of securities.

5. What is a Mutual Fund? A pool of money
Managed by a professional investor
Manager works for an investment firm
Each fund has a specific objective
Over 6,000 funds to choose from

6. Figure 15.1

7. Three Reasons Why People Purchase Mutual Funds
Diversification
funds of many investors are pooled and used to purchase a variety of investments
Professional management
who is the fund’s manager?
managers can change
Convenience
phone
mail
16-3

8. Reasons for Investing Through Mutual Funds
New/more types of funds
Few or no sales charges
Some performed better than common stock
Widespread marketing
Selection is easier

9. Reasons for Investing Through Mutual Funds
Dispense profits to investors
Investors expect dividend income
Investors expect price appreciation

10. Closed and Open End Funds
Closed end fund (10% of funds)
limited number of shares issued initially
then can only purchase shares from another investor willing to sell theirs
Open end fund (90% of funds)
no limitations on the number of shares the investment company can issue
shares are issued and redeemed by the investment company

11. Net Asset Value portfolio market value - liabilities
the number of shares outstanding
Offer price = NAV + sales commission

12. Objectives of Mutual Funds
Current income
Long-term growth
Growth and income
Balanced

13. Classification of Mutual Funds
Common stock
Balanced
Bond
Specialty
Money market

14. Classification of Mutual Funds
Aggressive growth
Growth
Value
Growth and income
Small company
Sector
Global/international
Index
COMMON STOCK:

15. Unique Benefits of Mutual Funds
Recordkeeping/reporting
Easy purchase and sale
Automatic reinvestment
IRS-qualified tax-sheltered retirement
Withdrawal plans
Collateral for loans

16. Costs of Investing Through Mutual Funds
Management fees
Loan funds
No-load funds

17. Costs of Investing Through Mutual Funds
Hidden fees
Deferred load
Redemption
12b-1
Disclosure of Fees
“Which is better, load or no-load?”

18. Load vs. No Load Funds Load Fund
pay a commission to a sales agent when you buy shares
usually 3-8%
No Load Fund
no sales charge paid
purchased directly from the investment company
usually have an 800 number you can call

19. Management Fees and Other Charges
charged yearly ( %) based on a percentage of the funds asset value
Contingent deferred sales load
charged upon withdrawal of funds (1-6%)
decreases with time held
12b-1 fees
fee to defray advertising and marketing costs of the fund

20. Strategies for Selecting a Mutual Fund
Match goals
Locate sources of comparative performance data
Financial press (i.e. Wall Street Journal, Barron’s)
Magazines (i.e. Fortune, Kiplinger’s)
Specialized mutual fund publications

21. Strategies for Selecting a Mutual Fund
Interpret comparative performance information over time
Long-term/short-term performance
Size of fund
Fund performance in up/down markets
Read prospectuses and annual reports

22. When To Sell Fund performs poorly compared with similar funds
Perception of economic trends indicates business cycle will smooth out soon
Fund grows too rapidly or becomes too large
Fund taken over by new manager
Investment goals become more conservative
Need cash