Chapter 15: Investing Through Mutual Funds Garman/Forgue Personal Finance Ninth Edition PPT slide...
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Transcript of Chapter 15: Investing Through Mutual Funds Garman/Forgue Personal Finance Ninth Edition PPT slide...
Chapter 15:Investing Through Mutual Funds
Garman/Forgue
Personal FinanceNinth Edition
PPT slide program prepared by Amy Forgue and Ray Forgue.
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Learning Objectives
1. Describe the features, services, and advantages of investing in mutual funds.
2. Differentiate mutual funds by investment objectives, types, and characteristics.
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Learning Objectives
3. Summarize the fees and charges involved in buying and selling mutual funds.
4. Establish strategies to evaluate and select mutual funds that meet your investment goals.
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Why Invest in Mutual Funds?
• Net Asset Value (or NAV): Per-share value of a mutual fund.
• Dividend income and capital gains– Ordinary income dividend distributions– Capital gains distributions
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Advantages of Investing Through Mutual Funds
• Diversification– Random (or nonsystematic) risk
• Affordability
• Professional management– Fund investment advisers
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Advantages of Investing Through Mutual Funds
• Liquidity
• Low transaction costs
• Uncomplicated investment choices
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Mutual Fund Disadvantages
• Performance is often lower than the market.
• Diversification may not really exist.
• Costs can be high.
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Unique Mutual Fund Services
• Convenience
• Ease of buying and selling shares
• Check writing and electronic transfers
• Distribution of or automatic reinvestment of income and capital
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Unique Mutual Fund Services
• Telephone and internet exchange privileges– Exchange (or switching, conversion, or
transfer) privilege
• Beneficiary designation
• Automatic investment
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Unique Mutual Fund Services
• Effortless establishment of retirement plans
• Multiple income withdrawal options (or systematic withdrawal plans)
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Types of Investment Companies
• Closed-End Mutual Fund
• Real Estate Investment Trust (or REIT)
• Unit Investment Trust (or UIT)
• Exchange-Traded Fund (or ETF)
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Fund Objectives, Types, and Characteristics
• Managed Funds
• Income Objective
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Fund Objectives, Types, and Characteristics
• Money Market Funds– Tax-exempt money market funds– Government securities money market
funds
• Bond funds– Bond (or fixed-income) funds
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Fund Objectives, Types, and Characteristics
• Growth objective– Aggressive growth (or maximum capital
gains) funds– Growth funds– Growth and income funds– Value funds– Sector funds
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Fund Objectives, Types, and Characteristics
• Index Funds: These funds are unmanaged.
• Growth and income objective– Growth and income funds– Equity-income funds– Socially conscious funds– Asset allocation funds– Life-cycle funds
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Fees and Charges of Mutual Fund Investing
• Shareholder Fees
• Annual Fund Operating Expenses
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Load and No-Load Funds
• Load funds always charge transaction fees.– Front-end load– Stated commission– Percentage of the amount invested
• Some no-load mutual funds assess 12b-1 fees.– 12b-1 (or distribution) fee– Trailing commissions
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Load and No-Load Funds
• Some no-load funds assess deferred load and redemption fees.– Deferred (or back-end) load– Redemption charge (or exit fee)
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Fees and Charges of Mutual Fund Investing
• Disclosure of fees in standardized expense table
• What’s best: load or no load? Low fee or high fee?
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Selecting Funds in Which to Invest
• Review your investment philosophy and investment goals.
• Eliminate funds inappropriate for your investment goals.
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Selecting Funds in Which to Invest
• Screen and compare funds that meet your investment criteria.– Fund screener (or fund screening tool)– Profile prospectus (or fund profile)
• Monitor your mutual fund portfolio.
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Selecting Funds in Which to Invest
• Use portfolio monitoring on the ‘Net.
• Check fund quotations in newspapers.– Mutual fund bid price– Mutual fund ask price
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The Top 3 Financial Missteps In Mutual Fund Investing
People slip up in mutual fund investing when they do the following:
1. Buy funds with high fees and expenses.
2. Withdraw dividends rather than reinvesting.
3. Chase performance by investing in “hot” funds.
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Good Money Habits in Mutual Funds
• Match your investment philosophy and financial goals to a mutual fund’s objectives.
• Invest only in no-load mutual funds that have low expenses and have no or a low 12b-1 fee.
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Good Money Habits in Mutual Funds
• Get the right mix of asset classes in your long-term fund investments and learn to love consistency.
• Sign up for automatic reinvestment of your mutual fund dividends.