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
Mutual Funds
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
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Why Investors Purchase Mutual Funds
 Professional management.
 Who is the fund’s manager?
 Managers can change.
 Be aware of the scandal involving late
trading.
Diversification.
 Investors funds are used to purchase a
variety of investments. This variety
provides some safety.
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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
Closed- and Open-End Funds
 Closed-end funds (7% of funds).
 Shares are issued by an investment company only
when the fund is organized.
 After all original shares are sold you can purchase
shares only from another investor who is willing to
sell.
 Traded on exchanges and over-the-counter.
 Open-end funds (91% of funds).
 Shares are issued and redeemed by the investment
company at the request of investors.
 Investors can buy and sell shares at the net asset
value (NAV).
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Exchange-Traded Funds
 Invests in the stocks contained in a
specific stock market index, like the
Standard and Poor’s 500 stock index.
 Performance of shares in the fund tend to
mirror the performance of the index.
 Low management fees since there is less
need for decisions made by a portfolio
manager.
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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
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
 Management fees
 Loan funds
 No-load funds
Costs of Investing Through Mutual
Funds
 Hidden fees
 Deferred load
 Redemption
 12b-1
 Disclosure of Fees
 “Which is better, load or no-load?”
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
 Contingent deferred sales load (back-end
load) (Class B shares).
 Charged upon withdrawal of funds (1-5%).
 Generally decreases on a sliding scale depending
on the number of years shares are held.
 Management fee.
 Charged yearly (.5%-1.25% average) based on a
percentage of the funds asset value.
 12b-1 fees (Class C shares).
 Annual fee to defray advertising and marketing
costs of the fund.
 1% or less of a fund’s assets per year.
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Classification of Mutual Funds
 Stock funds.
 Aggressive growth funds buy stocks in small, fastgrowing companies.
 Equity income funds invest in stock of companies
with a long history of paying dividends.
 Growth buy stock in companies with higher-thanaverage revenue and earnings growth.
 Global funds buy stock in companies in the U.S.
and other countries, while international funds buy
stock only in companies outside the United States.
 Index buys stocks that mirror an index.
 Large-cap funds invest in companies with
capitalization of $5 billion or more.
 Mid-cap funds buy stock in companies whose
capitalization is between $1 and $5 billion.
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Classification of Mutual Funds
(continued)
 Regional funds buy stock in companies in a
specific region of the world.
 Sector funds buy stock in companies in a
particular industry such as biotechnology.
 Small-cap funds buy stock in lesser-known
companies with a capitalization of less than 500
million.
 Socially responsible funds avoid investing in
companies that produce harmful products.
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Classification of Mutual Funds
(continued)
 Bond funds.
 High-yield (junk) bond funds buy corporate
bonds that are higher risk and higher yield.
 Index bond funds invest in a sampling of
bonds included in an index.
 Intermediate corporate bonds (5-10 years).
 Intermediate U.S. bond funds buy treasury
notes with maturities of 5-10 years.
 Long-term corporate bonds (> 10 years).
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Classification of Mutual Funds
(continued)
 Long-term U.S. bond funds: U.S. Treasury and
U.S. zero-coupon bonds with maturities > than
10 years.
 Municipal bonds: Invest in municipal bonds
that provide investors tax-free interest income.
 Short-term U.S. bond funds invest in
U.S.Treasury issues of 1-5 years.
 Short-term corporate bond funds: Investment
grade bonds with maturities of 1-5 years.
 World bond funds buy bonds of foreign
companies and governments.
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Classification of Mutual Funds
(continued)
 Other funds.
 Asset allocation funds: invest in various asset
classes, such as stocks, and bonds, with
precise amounts within each type.
 Balanced funds: Invest in both stocks and
bonds, with the primary objectives of
conserving principal, providing income as well
as growth.
 Money market funds: Invest in CD’s,
government securities, and other safe
investments.
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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
Families of Funds
 A family of funds exists when one
investment company manages a group of
mutual funds.
 Each fund in the family has a different
financial objective.
 Exchange privileges allow you to move
your money from one fund to another
within the fund family with little or no
charge.
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Steps to Evaluate Mutual Funds
 Are you ready to invest in mutual funds?
 Determine your risk tolerance.
 Determine your investment objectives.
 Obtain the money you need invest.
 A fund’s objective should match your
investment objective.
 Evaluate any mutual fund before buying
or selling (www.morningstar.com)
 Consider managed funds vs. indexed
funds
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Other Sources of Fund Information
 Mutual fund prospectus tells the funds
objective and:
 A statement describing the risk factors.
 A description of the fund’s past performance.
 A statement describing the type of investments in
the fund’s portfolio.
 Information on how to open an account.
 Dividends, distributions and taxes.
 Information about the fund’s management.
 The process for investors to buy or sell shares.
 Services provided to investors.
 The turnover ratio of the fund’s investments.
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Mutual Fund Transactions
 You can open an account from $250 to
$3,000 and up depending on the fund &
family.
 Open-end, no-load directly from
the investment company by phone, mail,
online, or from a discount broker.
 Closed-end or exchange-traded funds
are purchased through a broker; traded
on stock exchanges and over-thecounter.
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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