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. Mutual Funds

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
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8. Why Investors Purchase Mutual Funds
Professional management.
Who is the fund’s manager?
Managers can change.
Be aware of the scandal involving late trading.
Diversification.
Investors funds are used to purchase a variety of investments. This variety provides some safety.
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9. 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

10. Closed- and Open-End Funds
Closed-end funds (7% of funds).
Shares are issued by an investment company only when the fund is organized.
After all original shares are sold you can purchase shares only from another investor who is willing to sell.
Traded on exchanges and over-the-counter.
Open-end funds (91% of funds).
Shares are issued and redeemed by the investment company at the request of investors.
Investors can buy and sell shares at the net asset value (NAV).
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11. Exchange-Traded Funds
Invests in the stocks contained in a specific stock market index, like the Standard and Poor’s 500 stock index.
Performance of shares in the fund tend to mirror the performance of the index.
Low management fees since there is less need for decisions made by a portfolio manager.
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12. Reasons for Investing Through Mutual Funds
Dispense profits to investors
Investors expect dividend income
Investors expect price appreciation

13. 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

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

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

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

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

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

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

20. 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

21. Management Fees and Other Charges
Contingent deferred sales load (back-end load) (Class B shares).
Charged upon withdrawal of funds (1-5%).
Generally decreases on a sliding scale depending on the number of years shares are held.
Management fee.
Charged yearly (.5%-1.25% average) based on a percentage of the funds asset value.
12b-1 fees (Class C shares).
Annual fee to defray advertising and marketing costs of the fund.
1% or less of a fund’s assets per year.
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22. Classification of Mutual Funds
Stock funds.
Aggressive growth funds buy stocks in small, fast-growing companies.
Equity income funds invest in stock of companies with a long history of paying dividends.
Growth buy stock in companies with higher-than-average revenue and earnings growth.
Global funds buy stock in companies in the U.S. and other countries, while international funds buy stock only in companies outside the United States.
Index buys stocks that mirror an index.
Large-cap funds invest in companies with capitalization of $5 billion or more.
Mid-cap funds buy stock in companies whose capitalization is between $1 and $5 billion.
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23. Classification of Mutual Funds
(continued)
Regional funds buy stock in companies in a specific region of the world.
Sector funds buy stock in companies in a particular industry such as biotechnology.
Small-cap funds buy stock in lesser-known companies with a capitalization of less than 500 million.
Socially responsible funds avoid investing in companies that produce harmful products.
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24. Classification of Mutual Funds
(continued)
Bond funds.
High-yield (junk) bond funds buy corporate bonds that are higher risk and higher yield.
Index bond funds invest in a sampling of bonds included in an index.
Intermediate corporate bonds (5-10 years).
Intermediate U.S. bond funds buy treasury notes with maturities of 5-10 years.
Long-term corporate bonds (> 10 years).
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25. Classification of Mutual Funds
(continued)
Long-term U.S. bond funds: U.S. Treasury and U.S. zero-coupon bonds with maturities > than 10 years.
Municipal bonds: Invest in municipal bonds that provide investors tax-free interest income.
Short-term U.S. bond funds invest in U.S.Treasury issues of 1-5 years.
Short-term corporate bond funds: Investment grade bonds with maturities of 1-5 years.
World bond funds buy bonds of foreign companies and governments.
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26. Classification of Mutual Funds
(continued)
Other funds.
Asset allocation funds: invest in various asset classes, such as stocks, and bonds, with precise amounts within each type.
Balanced funds: Invest in both stocks and bonds, with the primary objectives of conserving principal, providing income as well as growth.
Money market funds: Invest in CD’s, government securities, and other safe investments.
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27. 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

28. Families of Funds
A family of funds exists when one investment company manages a group of mutual funds.
Each fund in the family has a different financial objective.
Exchange privileges allow you to move your money from one fund to another within the fund family with little or no charge.
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29. Steps to Evaluate Mutual Funds
Are you ready to invest in mutual funds?
Determine your risk tolerance.
Determine your investment objectives.
Obtain the money you need invest.
A fund’s objective should match your investment objective.
Evaluate any mutual fund before buying or selling (
Consider managed funds vs. indexed funds
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30. Other Sources of Fund Information
Mutual fund prospectus tells the funds objective and:
A statement describing the risk factors.
A description of the fund’s past performance.
A statement describing the type of investments in the fund’s portfolio.
Information on how to open an account.
Dividends, distributions and taxes.
Information about the fund’s management.
The process for investors to buy or sell shares.
Services provided to investors.
The turnover ratio of the fund’s investments.
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31. Mutual Fund Transactions
You can open an account from $250 to $3,000 and up depending on the fund & family.
Open-end, no-load directly from the investment company by phone, mail, online, or from a discount broker.
Closed-end or exchange-traded funds are purchased through a broker; traded on stock exchanges and over-the-counter.
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32. 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