Chapter 13 Investing in Mutual Funds1233

7/28/2019 Chapter 13 Investing in Mutual Funds1233

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Chapter 13Investing inMutual Funds

Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin


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Investing in Mutual Funds

1. Explain the characteristics of mutual

fund investments.

2. Classify mutual funds by investmentobjective.

3. Evaluate mutual funds.

4. Describe how and why mutual funds

are bought and sold.

Chapter Objectives

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Objective 1Explain the Characteristics of Mutual Fund

Investments

Mutual Fund = an investment vehicleoffered by investment companies to those

who wish to: Pool money

Buy stocks, bonds, and other financial securities

Have buy/sell decisions made by a fund

manager

Many mutual funds chosen for inclusion inretirement account investments

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Investment Company

Pools the money of many investorsits shareholders to invest in a varietyof securities

Employs the fund manager who iscompensated for selecting securities

appropriate to the funds stated

objective Financial Intermediary

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Why Investors Purchase

Mutual Funds

Professional management

Who is the funds manager?

How has the fund performedunder the current managers?

Diversification

Investors funds are used to purchase avariety of investments

Risk reduction

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Characteristics of Funds

Closed-end funds Fixed number of shares

Trade like shares of common stock

Actively managed

Exchange-traded Funds Invests in securities contained in a specific

securities index Open-end mutual funds

Shares issued and redeemed on demand

Actively managed

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Closed-End Funds

Fixed number of shares issued when the

fund is organized

Shares traded on stock exchanges

Trade price set by supply & demand

Most sell at a discount relative to their

net asset value Discount is sometimes substantial

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Exchange Traded Funds

Invests to replicate the composition of aspecific securities index

Performance mirrors index performance

Low management fees Trade on exchanges throughout the day

like stock

Prices determined by supply and demand

Can be sold short and traded with limitorders

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Net Asset Value

Net asset value (NAV):Assets under Management (AUM)

The current market value of the assets

held by the fund

Net Assets = AUM - Liabilities

NAV calculated at the close of

trading

gOutstandinShares

Net Assets

NAV

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Open-End Funds

Open-end funds 90% of all funds Shares issued and redeemed by the

investment company at the request of

investors Investors free to buy and sell shares at the

net asset value (NAV)

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Costs: Load Funds vs. No-Load Funds

Load Fund Sometimes called an A fund

Commission (sales charge) up to 8.5%

Average = 3 to 5%

Paid every time shares purchased

Purchased through brokerage firms or

registered representatives Salespeople prepared to explain the fund and

help determine if it meets the investors

financial goals

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No-Load Fund

No up-front sales charge

No salespeople Investor deals directly with the investment

company via 800 numbers or web sites, or

from discount brokers

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Contingent deferred sales charge (CDSC)

Back-end load

B fund

Redemption fee

Charged upon withdrawal of funds (1-5%)

Generally decreases on a sliding scaledepending on the number of years sharesare held

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Costs: Management Fees andOther Charges

Management fee Charged yearly (.25%-1.5% average) based

on a percentage of AUM

12b-1 feesAnnual fee to defray advertising and

marketing costs

Cannot exceed 1% of AUM per year

Expense ratio Total expenses associated with the

management fees and operating costs of the

fund13-14


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Typical Mutual Fund Fees

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Objective 2Classify Mutual Funds by Investment

Objective

Long-termFunds

Stock Funds Bonds Funds Other Funds

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Stock Funds

Long-term

Funds


Growth

Equity income

Price growth vs.

Dividend Income

Aggressive Growth

Socially responsible

Invest in socially

responsible firms

Economic SectorsSector funds

Company Size

Regional

Index funds Match index holdings

% U.S. vs.International

Small-cap

Mid-cap

Global

International

Large-cap

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Bond Funds

Long-term Funds


High-yield

Intermediate

Corporate bonds

Intermediate U.S.

Gov't bonds

Long-term

corporate bonds

Long-term U.S.gov't bonds

Municipal bonds

Short-term

corporate bonds

Short-term

U.S.gov't bonds13-18


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Other Funds

Long-termFunds


Money Market Funds

Asset Allocation Funds

Balanced Funds

Lifecycle Funds

Fund of Funds

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A Family of Funds

One investment company manages agroup of mutual funds Each fund has a different financial

objective

Exchange privileges allow movement fromone fund to another within the family withlow or no charge

Fidelity Investments http://personal.fidelity.com/products/funds/mutual_funds_overview.shtml.cvsr

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http://personal.fidelity.com/products/funds/mutual_funds_overview.shtml.cvsrhttp://personal.fidelity.com/products/funds/mutual_funds_overview.shtml.cvsrhttp://personal.fidelity.com/products/funds/mutual_funds_overview.shtml.cvsrhttp://personal.fidelity.com/products/funds/mutual_funds_overview.shtml.cvsr


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Objective 3Evaluate Mutual Funds

Managed Funds vs. Index Funds

Managed fund a fund managermakes all decisions regarding what

securities are included in the fundsportfolio

Index fund securities held by the

fund replicate those contained in aspecific index like the S&P 500

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Sources of Fund Information

1. Internet websites provide current values http://finance.yahoo.com

www.businessweek.com

www.morningstar.com

www.smartmoney.com

2. Check fund companies Internet sites

www.troweprice.com

www.vanguard.com

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http://finance.yahoo.com/http://www.businessweek.com/http://www.morningstar.com/http://www.smartmoney.com/http://www.troweprice.com/http://www.vanguard.com/http://www.vanguard.com/http://www.troweprice.com/http://www.smartmoney.com/http://www.morningstar.com/http://www.businessweek.com/http://finance.yahoo.com/


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Sources of Fund Information

3. Professional Advisory Services

Lipper Analytical Services

Morningstar, Inc. Value Line

Mutual fund newsletters

Available in libraries and frombrokerage firms

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Mutual Fund Prospectus

Fund objective(s)

Statement describing the risk factors

Description of the funds past performance

Statement describing the type of investments in thefunds portfolio

Information about dividends, distributions and taxes

Information about the funds management

Information about limitations or requirements for the

fund Procedure to buy or sell shares

Services provided to investors

Turnover ratioof the funds investments

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Other Sources of Fund Information

Mutual fund annual report Performance, investments, assets & liabilities

Financial Publications

Business Week, Forbes, Kiplinger'sPersonalFinance and Money

Business Weeks mutual fund surveyincludes:

Funds overall rating compared to all other funds,and to funds in the same category

Fund size, sales charge and expense ratio

Historical returns for the past ten years

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Objective 4Describe How and Why Mutual Funds are

Bought and Sold

The Mechanics of a Mutual FundTransaction

Open an account: $250 to $3,000 and up depending on the fund

family and the fund

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Return on Investment

3 Ways to Make Money on Mutual Funds

Income Dividends

Earnings paid from dividend and interest income

Taxed as ordinary income

Capital Gains Distribution Distributions when the fund buys and sells

securities

Taxed as long-term gains

Capital Gains (or Losses)

Capital gains (or losses) when you sell shares at aprice different than price you originally paid

Taxed as short- or long-term gains13-27


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Purchase Options

* Investor may deal with one company, get one statement,yet have a choice of a wide variety of funds

*

No Load Fund Management Co.

Load Authorized Agent

Fund Type

Closed End

Exchange Traded

Open EndFund

Supermarket*

Purchase From

Stock exchange or Over-the-counter

market

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Purchasing Open-End Fund Shares

Regular account transactions Easiest Simply buy shares in amount and when desired

Voluntary savings plans

Allows for smaller than usual purchases on arecurring basis

Contractual savings plans Require regular purchases over a specified period

Reinvestment plans Automatically reinvests dividends and capital gains

in the fund

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Closed-end funds & exchange-tradedfunds

Traded on stock exchanges and in the over

the counter market

Sold like common stock shares

Open-end fund Shares sold to the fund sponsoring

company

Withdrawal Options

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1. Withdraw a fixed dollar amount each period

until account exhausted

2. Liquidate or sell off a certain number of

shares each period3. Withdraw a fixed percentage of asset growth;

principal untouched

4. Withdraw all income dividends and capitalgains distribution; principal untouched

Mutual Fund Withdrawal Options

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END OF CHAPTER 13

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Additional Video

Mutual Fund Awards BusinessWeek and S&Ps Best Fund Picks(Instructors see the notes section for directions.)

SYNOPIS: Helpful information about how BusinessWeek andStandard & Poors evaluate mutual funds is provided in this video.

In addition, specific funds that are highly rated in the BusinessWeeksurvey are recommended.

1. Explain why investors still need to evaluate mutual funds whenthere is a professional manager or team of managers that choosethe investments for a mutual fund.

2. What factors did BusinessWeek and Standard & Poors use toevaluate mutual funds? Would these same factors help youevaluate a mutual fund for your investment portfolio?

3. Specific small-cap, technology, and growth funds were described inthis video. How would you research one of these funds todetermine if the fund could help you obtain your investment goals?
http://feedroom.businessweek.com/index.jsp?auto_band=x&rf=sv&fr_story=FEEDROOM189661http://feedroom.businessweek.com/index.jsp?auto_band=x&rf=sv&fr_story=FEEDROOM189661

Chapter 13 Investing in Mutual Funds1233

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