Chapter 15: Investing Through Mutual Funds
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.
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.
Investing Through Mutual Funds
open-end investment company combining
funds of investors who have purchased
shares in a diversified portfolio of securities.
MUTUAL FUND . . .
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
Figure 15.1
Three Reasons Why PeoplePurchase 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
New/more types of funds
Few or no sales charges
Some performed better than common
stock
Widespread marketing
Selection is easier
Reasons for Investing Through Mutual Funds
Dispense profits to investors
Investors expect dividend income
Investors expect price appreciation
Reasons for Investing Through Mutual Funds
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
Net Asset Value
portfolio market value - liabilities
the number of shares outstanding
Offer price = NAV + sales commission
Objectives of Mutual Funds
Current income
Long-term growth
Growth and income
Balanced
Common stock
Balanced
Bond
Specialty
Money market
Classification of Mutual Funds
Aggressive growth
Growth
Value
Growth and income
Classification of Mutual Funds
Small company
Sector
Global/international
Index
COMMON STOCK:
Recordkeeping/reporting
Easy purchase and sale
Automatic reinvestment
IRS-qualified tax-sheltered retirement
Withdrawal plans
Collateral for loans
Unique Benefits of Mutual Funds
Costs of Investing Through Mutual Funds
Management fees
Loan funds
No-load funds
Costs of Investing Through Mutual Funds
Hidden fees
Deferred load Redemption 12b-1
Disclosure of Fees
“Which is better, load or no-load?”
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
Management Fees and Other Charges
Management fee charged yearly (.25 - 1%) 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
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
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
Strategies for Selecting a Mutual Fund
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
When To Sell