Chapter 4 Appendix
Mutual Fund Evaluation Term
Project
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A small man – anyone with a portfolio of, say,
under $100,000 – is unlikely to do as well
investing his own money as he can do in a
no-load fund
- Paul Samuelson
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Outline
 Introduction
 Classification
of mutual funds
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Introduction
 A mutual
fund is an existing portfolio of
assets into which someone may invest
directly
• Facilitates diversification
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Introduction (cont’d)
 Mutual
funds are extremely popular
investment vehicles for both the small and
the large investor
• Many institutions place a substantial part of
their money with mutual funds
• By the end of 2000, about 8,300 mutual funds
with assets totaling $6.9 trillion
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Classification of Mutual Funds
 Open-end
versus closed-end
 Net asset value versus market value
 Load versus no-load
 Management fees
 Buying mutual fund shares
 Mutual fund objectives
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Open-End Versus Closed-End
 There
are two types of investment
companies:
• Open-end funds:
– May grow in size as new investors open accounts
– May grow in size as existing investors add to their
accounts
– Have no set number of shares outstanding
– Buy back their shares from investors (redemption)
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Open-End Versus Closed-End
(cont’d)
 There
are two types of investment
companies (cont’d):
• Closed-end funds:
– Have a fixed number of shares that trade like shares
of common stock
– Are unmanaged portfolios of stock with each share
representing partial ownership of the portfolio
– May trade on an exchange
– Can be sold to other investors
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Net Asset Value Versus
Market Value
You buy and sell an open-end fund based
on its net asset value

•
Open-end fund: equals the fund’s assets
minus its liabilities divided by the number of
shares currently existing in the fund
•
Closed-end fund: trades at market-determined
portfolio prices that may be more or less than
the net asset value
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Load Versus No-Load
Load funds:

•
Have a sales charge associated with the
purchase of new shares
– A commission split between:
•
•
•
A mutual fund salesperson
An investment firm
A national distributor
– Typically ranges between 1.0% and 8.5%
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Load Versus No-Load (cont’d)
No-load funds:

•
Have no sales charge
•
Shares are bought and sold at net asset value
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Examples of
Exchange-Traded Funds
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Management Fees
Management fees include:

•
•
•
•
Postage costs
Clerical time
Commissions on the underlying assets
Redemption fee
–
A fee to pay redemption expenses, ranging
between 1% and 2%
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Management Fees (cont’d)
Management fees include (cont’d):

•
Management fee
–
Paid to fund manager
–
Taken directly from the fund’s assets
– Averages about 0.5% of fund’s total assets
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Buying Mutual Fund Shares
Fund prospectus outlines:

•
•
•
•

The fund’s purpose
The management team
The mailing address and phone number
The fund’s intended investment activity
Funds also provide descriptive brochures
and a letter to inquiries
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Buying Mutual Fund Shares
(cont’d)
New account application asks for:

•
•
Name, address, tax ID
Investor’s choice of shareholder options:
–
–
–
–
–
Dividend reinvestment
Automatic monthly investment
Systematic withdrawal
IRA designation
Telephonic fund switching option
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Mutual Fund Objectives
The fund objective is the type of
investment anticipated:

•
•
•
Capital appreciation and growth funds seek
appreciation in the value of shares
Income funds seek current income from
fixed-income securities and from dividends
Growth and income funds seek a combination
of income and capital appreciation
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Mutual Fund Objectives
(cont’d)
The fund objective is the type of
investment anticipated (cont’d):

•
•
•
Balanced invest in growth and income
securities
Bond funds invest in debt only
Money market funds seek stability of
principal through investment in short-term
debt instruments
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Mutual Fund Objectives
(cont’d)
The fund objective is the type of
investment anticipated (cont’d):

•
Tax-free funds invest in municipal securities
that are free from federal and sometimes state
taxes
•
Special-purpose funds may focus on a
particular industry or region
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