Personal Finance
Fin 235
Mutual Fund Basics

A. What is a Mutual Fund?
1. A pooling of investor capital to purchase a well
diversified group of stocks and/or bonds
2. Securities may be from a single national market or
may be diversified across numerous international
markets.
3. Shares typically sell at their Net Asset Value (NAV)
4. Funds may be open-end or closed-end
a. Open-End: Issuer buys and sells on a continuous basis
b. Closed-End: Issuer sells once. Then shares will trade in
secondary markets; e.g. NYSE, OTC, etc.
Mutual Fund Basics

B. No-Load Funds
1.
2.
No Load funds do not charge sales fees.
Fund managers are compensated by management fees
C. Load Funds
1.
2.
3.
Charge sales commissions on purchases or sales of shares.
Sales charges discourage frequent trading (which imposes
additional expenses on funds.
Contingent Fees: a function of how long shares are held.
D. 12-b1 Fees
1.
Imposed to cover marketing expenses
Why Mutual Funds?

A. Mutual Funds allow small investors to hold well
diversified portfolios of securities with a very small
amount of capital.
B. Mutual Funds provide small investors with a wide
variety of investment objectives
Exchange Traded Funds

A. Why ETF’s?
1. Many mutual funds have minimum hold periods
2. ETF’s can be traded like stocks – most are very liquid
3. ETF’s provide a similar variety of investment
objectives similar to mutual funds.
Mutual Fund Classifications

A. Objectives
1.
2.
3.
Capital Appreciation
Income
Index
B. Stock Funds
1.
2.
3.
4.
5.
6.
Aggressive Growth: small cap, large cap, value
Income
Global: investing in foreign companies
Index: tracking a particular index – S&P 500
Sector: Chemicals, Transports, Real Estate, etc.
Country Funds: Canada, UK, France, Japan, etc.
Specialized Funds

A.
B.
C.
D.
Asset Allocation: Cash, Stocks, Bonds, International
Balanced Funds: stocks and bonds
Fund of Funds: hold shares in other mutual funds
Life Cycle: changing riskiness of investments as
investors get older.
E. Money Market Funds: a place to park your capital
when not invested ion the market – earn interest.
Selecting a Mutual Fund

A. Advisory Services
1.
2.
3.
4.
Lipper Analytical Services
Morningstar, Inc.
Value Line
Financial Publications
a.
Quarterly performance rankings
B. Mutual Fund Prospectus
1. Everything you need to know about the fund
2. Must provide on request and to all new buyers.
Mutual Fund Transactions

A. Typical Transactions
1.
Dividends
a.
b.
c.
2.
Capital Gains
a.
3.
4.
5.
Purchase additional shares
Hold in money market
Remit to investor
Same as Dividends.
Dividends and Capital Gains distributions taxed as
ordinary income to investor.
Regular monthly purchases: 401(k), 403(b), IRA
Withdrawals: checks sent directly to investor.
Homework

A. Do The Math: 1 (a, b, c)
B. Be Your Own Personal Financial Planner
1. 1- Your Mutual Fund Preferences (w/s 61)
2. 3 – Calculating Mutual Fund Returns (w/s 63)