Chapter 6
MUTUAL INTERESTS
6.1 MUTUAL FUNDS
6.2 INVESTIGATE MUTUAL FUNDS
6.3 CHOOSE MUTUAL FUNDS
Investing In Your Future
© Thomson/South-Western
Lesson 6.1
Mutual Funds
Goals
 Describe mutual funds and explain the
advantages of mutual fund investing.
 Discuss the different types of mutual
funds.
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WHAT ARE MUTUAL FUNDS?
 an assortment of stocks, bonds and
other investments
 a shareholder owns a portion of the
fund’s entire investment portfolio
 professional fund managers manage
the fund
 shareholders obtain a share of the
profits
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MUTUAL FUND PRICES AND
NET ASSET VALUE (NAV)
 NAV = Value of Portfolio - Liabilities
Number of Shares
 calculated at the end of each business
day
 Unlike stocks, most mutual fund prices
are not determined by what people are
willing to pay for them at a given time
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WHY ARE SO MANY PEOPLE
BUYING THEM?
 Diversification
 Professional Fund Management
 Convenience
 It’s not unusual for mutual funds to hold
stocks in over a hundred different
companies.
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FAMILY OF FUNDS (Example:
Fidelity)
 If you own shares in a fund that
belongs to a family of funds, you can
transfer from one fund to another
whenever your investment needs
change.
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THE MUTUAL FUND UNIVERSE
 Mutual funds have winners and losers.
 Professional fund management does
not guarantee success.
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GOALS AND RISK
 When selecting a mutual fund, you
should:
 determine your goals
 decide the level of risk you are comfortable
with
 research the fund’s performance prior to
investing
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CATEGORIES OF MUTUAL
FUNDS
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common stock funds
balanced funds (stocks and bonds)
municipal (tax exempt) bond funds
corporate bond funds
government bond funds
money market funds
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IMPORTANCE OF COMMON
STOCK FUNDS
Stock Market funds provide the greatest
growth potential and carry the greatest risk
 aggressive growth (small companies with
high growth potential)
 long-term growth (sometimes called steadygrowth companies)
 growth and income (mixed portfolio of stocks
and bonds)
 sector funds (stocks from one industry/sector)
 international funds
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INDEX FUNDS
 index funds
 buys a little bit of everything
 invests in a representative sample of the
entire stock market
 In recent years, 90% of professionally
managed mutual funds have not
outperformed the S&P 500
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Lesson 6.2
Investigate Mutual Funds
Goals
 Describe an expense ratio and why it is
important.
 Explain where to go for information on
mutual funds.
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LIGHTEN THE LOAD
 load funds
 charge an up-front sales commission
 about 3.5% on average
 no-load funds
 do not charge a sales fee
 back-end loads
 a charge is deducted when fund shares
are sold
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ADVICE FROM A FINANCIAL
ADVISOR
 If you learn to make your own mutual
fund decisions and buy primarily noload funds, you will have more money
to invest.
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EXPENSE RATIO
 expense ratio
 expressed as a percentage of assets
deducted each fiscal year for fund
expenses
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management fees
12b-1 fees
administrative fees
operating costs
all other asset based costs
Investing In Your Future
© Thomson/South-Western
Expense Ratio
 Expense Ratios range from 0.3% to
5%.
 You should probably avoid funds with
expense ratios higher than 1.5%.
 Operating expenses have a dramatic
impact on the long-term performance of
a fund.
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IN-DEPTH INFORMATION
 In-depth information sources are a
crucial resource to consult prior to
investing in mutual funds.
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MORNINGSTAR MUTUAL
FUNDS
 evaluates a fund’s performance over a
10 year period
 one-page, compact presentation
 available on subscription basis
 www.morningstar.com
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STANDARD & POOR’S/LIPPER
MUTUAL FUND PROFILES
 contains the following information:
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industry percentages
top holdings
performance data
expenses and fees
 available by subscription
 www.lipperweb.com
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OTHER INFORMATION
SOURCES
 August issue of Forbes magazine
 www.forbes.com
 Money magazine
 survey of 2500 mutual funds
 Business Week magazine
 bwnt.businessweek.com/mutual fund/
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 BetterInvesting’s Mutual Fund
Education and Resource Center
 www.betterinvesting.org/funds
 Mutual Fund Educational Alliance
 www.mfea.com
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 Moneytalk web site
 www.bobbrinker.com
 Investing for Beginners
 www.beginnersinvest.about.com
 Brill’s Mutual Funds Interactive
 www.Brill.com
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Lesson 6.3
Choose Mutual Funds
Goals
 Find information in the Morningstar
Mutual Fund Reports.
 Analyze a mutual fund’s portfolio and
asset allocation.
 Evaluate statistical information related
to performance, fees and costs, and
risk.
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USE THE EQUITY MUTUAL
FUND CHECK LIST
 BetterInvesting Equity Mutual Fund Check
List
 how the fund invests
 what the fund invests in
 the tenure and effectiveness of current
management
 tax considerations
 what percentage of your investment is used
to pay the fund’s expenses
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WHERE TO FIND INFORMATION
 Morningstar’s Mutual Funds publication
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1,700 funds
www.morningstar.com
Equity Funds
Fixed-Income Funds
Investing In Your Future
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DETERMINE WHAT KIND OF
MUTUAL FUNDS TO CONSIDER
 Investment choices should be based on
your goals and timetables.
 bear market
 a period of declining prices
 BetterInvesting recommends that long
term investors focus on equity funds
that invest in growth companies.
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CHOOSE A GROWTH FUND
 Limiting your choice of growth funds to
those that have strong performance
comparable to the S&P 500 index in the
3-year, 5-year, and longer periods will
give you a good starting point.
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SAMPLE MORNINGSTAR
REPORT
 +/-S&P 500 figures
 measure the difference between a stock
fund’s total return (%) and the total return
of the S&P 500 index
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Important Facts
 know who will be investing your money
and know their performance history
 Turnover Rate
 how often the manager buys and sells
stocks in the portfolio
 capital gains are taxed
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Important Facts (continued)
 There has never been a proven
relationship between high expenses
and high returns.
 Past performance is never a guarantee
of future results.
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REVIEW YOUR PORTFOLIO
 You should stay current on changes
affecting your portfolio.
 Be skeptical of what you hear and read
in the financial media.
 In investing, knowledge is power.
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