Mutual Funds
• 1980, 5 million Americans owned mutual
funds.
• Today over 100 million Americans in 55
million households owned mutual funds.
• In November 2013, mutual fund assets
totaled $10.8 trillion.
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What is a mutual fund?
• Mutual funds combine or pool the resources
(money) of a large group of investors.
• Buy and sell decisions are made by fund
manager(s), who is paid for the service
provided.
• Investors purchase shares of the fund to invest
in it
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Investment Companies and Fund Types
• An Open-end fund is an investment company
that stands ready to buy and sell shares in
itself to investors, at any time.
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Investment Companies and Fund Types
• Net asset value (NAV) is the value of
the assets held by a mutual fund, divided
by the number of shares. In other words
it’s the price per share.
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Mutual Fund Operations
Organization and Creation
• Most mutual funds are created by investment
advisory firms (like Vanguard or Fidelity
Investments), or brokerage firms with
investment advisory operations (Waddell and
Reed).
• Investment advisory firms earn fees for
managing mutual funds.
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Mutual Fund Costs and Fees
Types of Expenses and Fees
• Sales charges or “loads”
– loads are charged on purchases 4%-7%. These
are basically commissions paid to the broker or
advisor who sold you the funds
– If you pick your own funds “No Load” funds are
better.
• Management fees:
– Usually range from 0.25% to 1.00% of the funds
total assets each year.
– Lower is better.
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Example: Fee Table
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Mutual Fund Costs and Fees
Why Pay Loads and Fees?
• You may want professional advice. Many advisors
earn their living by selling load funds and making a
commission.
• Or, you may want a specialized type of fund.
– Perhaps one that specialized in Italian
companies
– Loads and fees for specialized funds tend to be
higher, because there is little competition
among them.
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Stock Funds, I.
• Some stock funds emphasize capital appreciation (growth)
– Capital appreciation
– Growth
• Some emphasize income payouts (dividends)
– Growth and Income
– Equity income
• Some stock funds focus on companies in a particular size range.
– Small company
– Mid-cap
• Some stock fund invest internationally.
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–
–
–
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Global
International
Region
Country
Emerging markets
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Stock Funds, II.
• Sector funds specialize in specific sectors of the economy, such
as:
– Biotechnology
– Internet
– Energy
• Other fund types include:
– Index funds-don’t pick winners and losers, simply buys the
index. These funds have much lower expenses
• S & P 500
• Wilshire 2000
• Nasdaq 400
– Social conscience, or “green,” funds
– Tax-managed funds
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Bond Funds
Bonds invest in debt:
government
corporate
safety versus return
You can still lose money on bond fund
investments!
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Stock and Bond Funds
• Funds that do not invest exclusively in either stocks or
bonds are often called “blended” or “hybrid” funds.
• Examples include:
– Balanced funds
– Asset allocation funds
– Target Retirement Year funds (e.g. 2030, 2050)
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Mutual Fund Objectives:
Recent Developments, I.
• A mutual fund “style” box is a way of visually
representing a fund’s investment focus by placing the
fund into one of nine boxes:
Value
Style
Blend
Growth
Size
Large
Medium
Small
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Mutual Fund Performance
• Mutual fund performance is very closely tracked by a
number of organizations.
• Financial publications of all types provide mutual fund
data.
• www.morningstar.com has a “Fund Selector” that
provides performance information
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Mutual Fund Performance
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Mutual Fund Performance
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Mutual Fund Performance
• While looking at historical returns, the level of risk of
the various fund categories should also be considered.
e.g. Gold, Latin American, Russia
• Whether historical performance is useful in predicting
future performance is a subject of ongoing debate.
• No strong correlation between fees and performance
• Exchange Traded Funds (ETFs) are funds that are
traded on the stock exchange rather than purchased
through a broker or directly from the fund company.
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