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
MUTUAL FUND . . .
open-end investment company combining
funds of investors who have purchased
shares in a diversified portfolio of securities.
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 People
Purchase 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
Reasons for Investing Through Mutual
Funds
 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
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
Classification of Mutual Funds
 Common stock
 Balanced
 Bond
 Specialty
 Money market
Classification of Mutual Funds
COMMON STOCK:
 Aggressive growth
 Small company
 Growth
 Sector
 Value
 Global/international
 Growth and income
 Index
Unique Benefits of Mutual Funds
 Recordkeeping/reporting
 Easy purchase and sale
 Automatic reinvestment
 IRS-qualified tax-sheltered retirement
 Withdrawal plans
 Collateral for loans
Costs of Investing Through Mutual
Funds
 Hidden fees
 Deferred load
 Redemption
 12b-1
 Disclosure of Fees
 “Which is better, load or no-load?”
Management Fees and Other
Charges
One-time sales load fees
12b-1 fees
•Cannot exceed more than 1% of the funds assets per
year
•For a fund to be classified as no-load these fees cannot
exceed more than 0.25% of the funds assets per year.
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
Strategies for Selecting a Mutual
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
When To Sell
 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