The Growth of the Mutual Fund Industry
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Transcript of The Growth of the Mutual Fund Industry
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The Growth of the Mutual Fund Industry
Mutual Fund Statistics
• Almost 1 in 2 U.S. households invest in the stock market directly or through mutual funds
• Over 8,000 mutual funds
• Over $7 trillion of assets
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Why Learn About Mutual Funds?
To choose investments in a retirement plan
To invest an insurance or divorce settlement
To get started as a new investor
To build a portfolio
To invest a year-end bonus or tax refund
To put what you read & hear in perspective
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What is a Mutual Fund?
A mutual fund is: a portfolio of stocks, bonds, or other
securities collectively owned by many investors managed by a professional
investment company
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Mutual Funds Make Money in Two Ways
Current income (dividends or interest earned on the portfolio investments)
Capital gains (selling securities that have gone up in value)
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How the Investor Makes Money
Income distribution (dividends and interest that are passed on to investors)
Capital gains (an increase in a fund’s value)
Combination = total return
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Forms of Mutual Fund Companies
Open-end: issues and redeems shares at any time
Closed-end: trades like a stock andissues a fixed number of shares
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What Is Net Asset Value (NAV)?
The NAV is the price your fund pays you per share when you sell.
Value of fundNumber of shares = NAV
Example: $52,500,000 3,500,000 = $15 per share
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Why Mutual Funds vs. Individual Securities? Individual securities:
– Require time and expertise to analyze
– Usually have higher transaction costs
– Offer less probability of adequate diversification
– OK if:
• you have stock-picking expertise
• you have $20-30K to buy 10-20 stocks
• you are buying Treasuries
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Advantages of Mutual Funds
1) Full-time, professional management
2) Reduced risk through diversification
3) Earn competitive returns
4) Small $ amount needed to start
5) Retain ready access to your money
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More Advantages of Funds
6) Inexpensive way to invest
7) Convenience
8) Automatic withdrawal plans available
9) Lower incidence of bankruptcy and
fraud
10) Monitoring fund investments is easy
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Disadvantages of Mutual Funds
Funds follow market declines
No guaranteed rate of return
Unwanted taxable distributions
Record-keeping for tax purposes can be difficult
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The Mutual Fund Marketplace
Stock funds
Bond funds
Money market funds
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Types of Funds by Investment Objective
Growth
Income
Growth & income
Capital preservation
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Match Your Goal to the Right Fund Categories with a growth objective
Growth
Aggressive growth
Small cap
Specialty (Sector)
International
Global
Index
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Match Your GoalCategories with an Income Objective
Income
Corporate bond
Municipal bond
High-yield (junk)
bond
Government bond
GNMA
Global bond
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Match Your GoalFunds with Growth & Income
Objective
Equity-income
Growth & income
Balanced
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Match Your Goal Funds with a Preservation
of Capital Objective
Taxable money market
Tax-free money market
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Match Your GoalFunds with All Four Objectives
Lifestyle
Asset allocation
Fund of funds
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Risk and Return Relationship The higher the level of risk, the higher the
expected return» Sector » Aggressive Growth» International» Growth» Stock Index» Lifestyle» Growth & Income» Equity-Income» Balanced» Income» Bond» Money Market
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Mutual Fund Costs
Sales charges/loads• Sales commissions
Operating expenses• Management fees
• Marketing costs
• Overhead expenses
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Types of Funds by Sales Charge
No-load -- No sales commission
Load -- 4%-8.5% commission
Back-end load -- Declining 6%-1%
Low-load -- 1%- 3%
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Mutual Fund Operating Expenses
Management and administrative fees
12b-1 fee for marketing and distribution
Redemption fee
CHECK OVERALL EXPENSE RATIO
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Mutual Fund Economics
Costs and Fees A Shrs B Shrs C Shrs
Sales Load 5.5% None None
Redemption Fee None 0.5% None
Marketing Fee .25% .75% 1.00%
Management 1.30% 1.15% 1.20%
Annual Expense 1.55% 1.90% 2.20%
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Avoid Above-AverageExpense Ratios
Stock funds > 1.4%
Bond funds > 1.00%
Money market funds > 0.5%
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Seven Steps to Finding the Right Fund
1) Identify type of fund that matches goal
2) Do more reading
3) Research specific funds
4) Determine selection criteria
5) Get and read the prospectus
6) Make your purchase
7) Establish a schedule to buy more
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Step 1 -- Identify Types of Funds That Will Help You Reach Your Goals
Focus your search
Begin building your portfolio
Establish an asset allocation strategy
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Step 2 -- Do More Reading
Mutual Funds For Dummies - Eric Tyson
Guide To Successful No-Load Investing - Sheldon Jacobs
The Right Way To Invest In Mutual Funds - Walter Updegrave
Bogle on Mutual Funds and Common Sense on Mutual Funds - John Bogle
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Step 3 -- Research Specific Funds
Personal finance publications
Business newspapers
Mutual fund trade associations
Library references
Fund-provided information
Professional advisors
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Personal Finance Publications
Money
Kiplinger’s Personal Finance
Forbes
Business Week
Smart Money
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Newspapers & Trade Associations
The Wall Street Journal
Barron’s
The New York Times
USA Today
Investment Company Institute
Mutual Fund Education Alliance
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Library & Fund-Provided Info
Morningstar
Value Line
Lipper Analytical
Annual reports
SAI
Prospectus
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Internet Sites
<www.morningstar.com>
<www. networth.galt.com>
<www. brill.com>
<www. ici.org>
<www. mfea.com>
<www.sec.gov/mfcc/mfcc-int.htm>
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Step 4 -- Determine Your Selection Criteria
Fund objective (relative to your goal)
Cost to purchase (no-load vs. load)
Fund fees/expense ratio
Investment minimum
Manager tenure
Performance (1, 3, 5 years)
Longevity
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Step 5 -- Get a Prospectus for Each Fund from:
Mutual fund families
Mutual fund supermarkets/networks
Full-service & discount brokers Financial planners
Banks Internet
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Step 6 -- Make Your Purchase
By mail
Local investment center
Toll-free 800 number for assistance
Through a broker or financial planner
On-line
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Step 7 -- Continually Buy More
Use a dollar-cost-averaging system--
Investing a fixed number of dollars, e.g.,
$50 or $100, at periodic intervals,
usually monthly or quarterly
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Dollar-Cost-Averaging
Month Amount Invested Share Price Shares Purchased Cumulative Value
January $150 $30 5 $150.00
February $150 $30 5 $300.00
March $150 $25 6 $400.00
April $150 $25 6 $550.00
May $150 $20 7.5 $590.00
June $150 $15 10 $592.50
July $150 $15 10 $742.50
August $150 $15 10 $892.50
September $150 $20 7.5 $1,340.00
October $150 $25 6 $1,825.00
November $150 $30 5 $2,340.00
December $150 $30 5 $2,490.00
TOTAL $1,800 $280 83 $2,490.00
Average Cost $21.69 per share Average Price $23.33
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Final Hints:
Invest for your goals
Research funds carefully with a questioning attitude
Review progress quarterly, comparing “apples with apples”
Read your mail
Keep excellent records
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Take These Action Steps
Make a list of long- and short-term financial
goals and match them with an appropriate
mutual fund Learn about mutual fund choices available
through your employer’s retirement plan
Decide on your selection criteria
Identify specific mutual funds that match your
investment goals
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Take These Action Steps
Call at least three mutual fund organizations for a prospectus.
Do follow-up research and compare at least three mutual funds using Morningstar or Value Line.
Complete a mutual fund application and make an investment.