1. LESSON 14.1 Investing in Mutual Funds

2. Mutual Funds What is a Mutual Fund?  Professionally managed group of investments bought using a pool of money from many investors What factor is the driving force behind the type of investments purchased for a mutual fund?  The fund’s stated investment objective? Like…..  Aggressive Growth (aggressive growth stocks)  Conservative Growth (bonds or money-market securities)

3. Facts about Mutual Funds Most Mutual Fund Companies offer a family of funds  You can purchase one type of fund like a stock fund and then later move to different fund within the fund family like a bond fund. All fund investors share in any profits made by the company’s funds Mutual Fund prices are not determined by what people are willing to pay for them (like stocks are)but are determined by the Net Asset Value

4. How do mutual fund investor’s earn money?  Through dividends  Through capital gains For most funds, you will need to make an initial purchase of $500 to $3,000 Once you buy into a fund, you can make additional purchases as often as you like. Many people make regular purchases of $50 t0 $100 a month.

5. Mutual Funds What are some advantages to buying in Mutual Funds?  You don’t have to worry about following stock and bond markets  Your investment is liquid  When you invest, you are diversifying because mutual funds purchase a variety stocks and bonds  When you have enough money to invest in more than one fund, you can further diversify by buying shares in funds with different investment objectives  You need not have a lot of money to invest  Funds allow you to invest in expensive stocks or bonds that you wouldn’t be able to afford outright.

6. Mutual Fund Risk/Return Categories Growth Income Growth and Income Money Market

7. Growth Funds Goal of Fund Manager:  Buy stocks that will increase in value over time Strategy of Fund Manager:  Select stocks in companies that reinvest all their profits rather than paying out dividends to investors  For aggressive growth, select stocks that of new or out-of-favor companies that will likely achieve above-average increases in value. (accept high risk of loss in exchange for a chance to earn high returns)  Conservative growth – select stocks of stable companies that offer gains in a slower steadier rate

8. Income Fund Goal of Fund Manager  Buy bonds that produce current income in the form of interest (investors look for income now rather than capital gains later as is seen in Growth Funds) Risk level: Low-to-moderate less risky than growth funds Tax-Exempt bonds Some income funds specialize in tax-exempt bonds

9. Growth and Income Funds Goal of Fund Manager:  Earn returns from both dividends and capital gains Strategy of Fund Manager:  Buy both growth and income stocks  Buy both stocks and bonds and therefore earn returns from current income as well as from capital gains Risk Level  Moderate (between the riskier growth funds and less risky income funds) (less risky than funds that only invest in stocks)

10. Money Market Funds Goal of Fund Manager  Provide modest current income with little risk  Preservation of principal  Provide high liquidity Strategy of Fund Manager  Invests in safe liquid securities such as Treasury Bills and bonds that mature in three weeks to six months Risk Level  Little

11. Mutual Funds of Various Risk Categories Global Funds  A fund that purchases international securities as well as U.S. securities  These funds are generally more risky than U.S. Stock Funds. Risk is dependent on type of securities it is invested in and the investment objective of the fund Index Funds  A fund that invests in stocks of a particular index (Dow Jones. NASDAQ or S&P 500)  A fund based on stocks of the DOW would be less risky that one based on stock of NASDAQ since the DOW is made up of Blue Chip stocks.

12. Facts to consider when Evaluating Funds Do you want money now from your investment Can you wait till later to earn money from future capital gains Do you need a tax-free or tax-deferred investment Can you afford to take on more risk for a chance at big returns Do you prefer a safe but lower return investment Examine the funds Prospectus Examine related costs and fees Use online resources to conduct research

13. Determining the Net Asset Value of a Fund Formula NAV – Value of Portfolio – Liabilities Number of Outstanding Shares The NAV is calculated at the end of each day since the value of the Portfolio changes as stocks and other securities are traded throughout the day

14. A Funds Prospectus Definition – A legal document that offers securities or mutual fund shares for sale What a Prospectus contains:  The terms of sale  A summary of the funds portfolio of investments  A summary of the funds objectives  Financial statements showing past performance of the fund

15. Costs and Fees Associated with Mutual Funds When you buy a mutual fund, you will likely have to pay a sales fee called a Load  Front-end load (paying a sales charge when fund is purchased)  Back-end load (paying a charge when an investment is sold)  Load can range from 2 to 8 percent of the value of shares purchased However, there are mutual funds available for sale that are no-load and you will not be required to pay a charge

16. Con’t of related Costs and Fees Mutual funds often charge an annual Management Fee (averages 1 to 1 ½ % of fund’s total assets) Mutual funds often charge a 12b-1 fee to cover costs of marketing and distributing a fund

17. Mutual Fund Research www.morningstar.com http://finance.yahoo www.mfea.com Publications:  Forbes  Fortune  Money Sites of Fund Families (examples)  Vanguard  Fidelity  Dreyfus

18. Common Fund Types/Objectives GRO – Growth BND – Bond SML – Small Company Growth G&I – Growth and Income WOR (means world)– Global MTG - Mortgage

19. NameName of sponsoring Mutual Fund Company followed by name of the fund Inv ObjThe related investment objective NAVNet Asset Value (Dollar Value of one share of the fund based on closing quotes) Offer PRice The NAV plus sales commission. (NL means no-load) NAV ChgThe gain or loss in the price for a share YTDHow much the fund has gone up or down since January 1 of the current year Total Return 26 wks The average earnings the fund has returned to investors in the last six months, stated as a percentage return on investment 4 YrsAverage earnings the fund has returned to investors for the last 4 years, stated as a percentage return on investment MUTUAL FUND LISTINGS