Mutual Funds
Chapter 14
Pool $ from Investors
Investor A =
$1,000.
Investor C =
Investor D =
$1,000.
$1,000.
Investor E =
Investor B =
$1,000.
$1,000.
Investor F =
$1,000.
What is a Mutual Fund?
• A professionally managed group of
investments bought using a pool of
money from many investors
• Individuals buy shares in the mutual
fund
What is a Mutual Fund?
• Fund managers use this money to buy
stocks, bonds and securities
• Investment Objectives determine
the kinds of securities purchased
Family of Funds
• Variety of funds covering a whole
range of investment objectives
• Fidelity has over 175 different mutual
funds
• Advantage of using a “family fund” can trade in and out of funds within
group
• provides an opportunity to diversify
• i.e. $5,000 to invest: 25% in aggressive
stocks, 25% in growth, 50% in income
fund
Professional Fund Managers
Buy & Sell based on:
market conditions
economic conditions
trends
+ other factors
Investors share in dividends & capital
gains
Buying Mutual Funds
• Initial purchase $500 - $3,000
• Can add additional monies at any time
Advantages of Mutual Funds
• Professional Management - managers
follows the stocks and bonds
• Vanguard Health Care Fund Investor
Shares (VGHCX)
• Let’s take a look at the managers
• Management
Wellington Management Company, LLP
• Firm Description
• Founded in 1928, Wellington Management Company, LLP,
Boston, Massachusetts, is among the nation’s oldest and most
respected institutional investment managers. The firm has
advised Vanguard Health Care Fund since 1984.
• Investment Manager Biography
•
•
•
•
•
•
Edward P. Owens, CFA, Senior Vice President and Partner
Portfolio manager.
Advised the fund since 1984.
Worked in investment management since 1974.
B.S., University of Virginia.
M.B.A., Harvard Business School.
• Direct research 
Advantages of Mutual Funds
• Liquid
• Diversification - purchasing a variety of
stocks and bonds
• Low investment minimum - pooling
your money with other investors
Types of Mutual Funds
GROWTH FUND - investment goal is to buy
stocks that will increase in value over time
-- companies that reinvest profits rather than
give dividends
-- earn profits via capital gains
-- assume high risk for chance of high return
Aggressive growth fund - new or out-of-favor
companies
Other growth funds - slower, steadier rate of
growth
-- risky
Types of Mutual Funds
INCOME FUND - investment goal is to
buy securities that consistently pay
good dividends
-- companies that usually pay
dividends rather than reinvest in
company
-- invests in bonds that pay regular
interest
Types of Mutual Funds
-- looking for income rather than capital
gains
-- moderate risk
Types of Mutual Funds
GROWTH AND INCOME FUND investment goal is to earn return from
dividends + capital gains
--
moderate risk
Types of Mutual Funds
BALANCED FUND - attempts to
minimize risk by investing in a
mixture of:
stocks (preferred and common)
bonds (corporate and municipal)
-- provides both income and growth
-- low-risk
Goal: current income and long-term
growth with safety
Types of Mutual Funds
BOND FUNDS - invests in bonds to try
to achieve stable income with minimal
risk
Invests in: government
corporate
tax-exempt bonds
-- most low-to-moderate risk
-- risky if investing in junk bonds
Types of Mutual Funds
GLOBAL FUNDS purchases
international stocks and bonds as well
as US securities
Appreciate when:
> stock markets abroad are strong
> world conditions favor certain
overseas markets
Types of Mutual Funds – Global cont.
> fluctuations in currency exchange
rates
-- can be an income fund, growth fund,
aggressive growth fund, etc.
Types of Mutual Funds
INDEX FUNDS - (index is an average
of the price movements of certain
selected securities)
-- tries to match the performance of a
particular index by investing in the
companies included in that index
-- S & P 500 / Dow Jones Industrial
Average
SPY mutual funds follow S&P 500 index
Types of Mutual Funds - Index
-- risk level depends on index it is tied
to
- tied to DOW = low risk (blue
chips)
Types of Mutual Funds
MONEY MARKET FUNDS - invests in
safe, liquid securities, such at Treasury
Bills and bonds that mature in 3-6
months
-- maximum safety
Research
• Go to www.morningstar.com
• Click on “funds”
Minimum Investment Required
Minimum Investment Required
Evaluating Mutual Funds
To choose --> you must know YOUR
OWN investment objectives & risk
tolerance
Do you want income from your
investments now, or can you wait for
capital gains in the future?
Evaluating Mutual Funds
Do you need a tax-free or tax-deferred
investment to reduce your current
income taxes?
Are you comfortable with risking your
investment for a chance at big returns,
or do you prefer a safe but lower
return?
Net Asset Value (NAV)
• Prices NOT determined by what people
are willing to pay
• Prices ARE determined by NAV
• NAV = total value of a fund’s
investment portfolio minus its
liabilities, divided by the number of
outstanding shares of the fund
Net Asset Value (NAV)
NAV
Value of Portfolio - Liabilities
=
Number of Shares
$100,000 - $90,000
500
= $20
-- calculated at the END of each
business day
Prospectus
• Legal document that offers securities
or mutual fund shares for sale
Contains:
 terms
 summary of funds portfolio
investments
 objectives
 financial statements - showing past
performance
Before Buying
• Read the prospectus carefully
• Compare objectives with your own
• Compare past performance with that of
other funds
Costs and Fees
LOAD - sales fee paid for mutual
fund
FRONT-END LOAD - sales charge
paid when you buy an investment
BACK-END LOAD - sales charge
paid when you sell an investment
-- fees can range from 2 to 8% of the value of shares
purchased
NO-LOAD FUND - no sales fee (no
salesperson - direct purchase)
Costs and Fees
• Annual
Management/Administrative Fee charge to manage fund
• 1 to 1-1/2% of funds total assets
• 12b-1 Fee - charge for marketing
and distributing fund (part of expense
ratio)
Pg. 389
• Review How to Read the Mutual Funds
Listings
Direct Real Estate Investments
Real Estate - land and any buildings
on it
--> often increase higher than inflation
over time
--> least liquid
--> sometimes speculative ( possible
loss)
Direct Real Estate Investments
Commercial Property - land and
buildings that produce lease or rental
income
(office buildings, stores, hotels, apartments)
Direct Real Estate Investments
Invest DIRECTLY or INDIRECTLY
Direct - investor holds legal title to the
property
EXAMPLES OF DIRECT:
Raw Land
Vacant land / unimproved property
speculative investment - hold and sell
later for profit
must pay cash - banks unwilling to make
loans
Detached Houses
• Purchase single-family home and rent
• Bank reluctant to make loans (not
owner-occupied)
• larger down payment
• higher interest rate
Duplex
• A building with two separate living
quarters
• same responsibilities to renters as the
owner of a single-family home
Condominium
• An individually owned unit in an
apartment-style complex with shared
ownership of common areas
• Owner of condo owns the individual
apartment as well as a proportional
share of common areas, such as the
lobby, yard, and hallways
• Monthly fee for upkeep of common
areas
Recreation & Retirement Property
• Retirement - buy second home for
vacation or retirement years
• Rent property when owners are not
there
• Recreation - beach, mountain cabins,
and vacant land
• Rent the property
EXAMPLES OF INDIRECT:
• Investors appoint a trustee to hold
legal title on behalf of all the investors
in a group
• Trustee - individual or institution that
manages assets for someone else
real estate syndicates / real estate
investment trusts / mortgage pools
Real Estate Syndicates
• Group of investors who pool their
money to buy high-priced real estate
• Temporary group organized for the
purpose of raising large capital
amounts
• Organizer called = general
partner/syndicator
• Investors = limited partners
Real Estate Syndicates
Real Estate Syndicate
General Partner
Forms Partnership
Assumes Unlimited Liability
Limited Partner
$25,000
limited liability
Limited Partner
$15,000
limited liability
Limited Partner
$20,000
limited liability
Real Estate Investment Trusts
(REITS)
• Similar to a mutual fund - corporation
pools money of many individuals to
invest in real estate
• REIT makes all buy/sell decisions
• Trade on stock exchanges
• include rental properties for monthly
income / mortgages for long-term
income
Participation Certificates
• Investment in a pool of mortgages that
have been purchased by a government
agency
• “Ginnie Mae” “Freddie Mac” “Fannie
Mae”
• secure as Treasury securities
• $1,000 investment
PRECIOUS METALS
• Natural substances that people value
• Gold
• Silver
• Platinum
• Inflation causes price up when quantity
& quality remain same
Gemstones
• Precious stones
• Diamonds
• Rubies
• Saphires
• Emeralds
•  usually sold as jewelry
Collectibles
• Valuable or rare items
• Antiques
• Comic books
• Coins
• Most risky - often hard to find buyer
• Thus, illiquid
Commodities
• Futures – contracts to buy/sell
commodities or stocks
• Wheat
• Corn
• Soybeans
• Cattle
• Metals – gold, silver
Option
• Call Option – right, but not the
obligation to buy/sell commodity or
stock for a specified price within a
specified time period
• Put Option – right, to SELL
Other Investment Choices
• Investing in precious metals, gems,
futures contracts and options are all
VERY RISKY - not for novice