mutual funds. objectives what is a mutual fund? how do mutual funds operate? how much does mutual...
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Mutual FundsMutual Funds
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ObjectivesObjectives
WHAT IS A MUTUAL FUND?
HOW DO MUTUAL FUNDS OPERATE?
HOW MUCH DOES MUTUAL FUND INVESTING COST?
HOW SHOULD MUTUAL FUND PERFORMANCE BE EVALUATED?
WHAT ARE OTHER TYPES OF INVESTMENT COMPANIES?
WHAT IS A MUTUAL FUND?
HOW DO MUTUAL FUNDS OPERATE?
HOW MUCH DOES MUTUAL FUND INVESTING COST?
HOW SHOULD MUTUAL FUND PERFORMANCE BE EVALUATED?
WHAT ARE OTHER TYPES OF INVESTMENT COMPANIES?
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What is a Mutual Fund?What is a Mutual Fund?
A MUTUAL FUND IS AN INVESTMENT COMPANY THAT SELLS SHARES REPRESENTING
AN INTEREST IN A PORTFOLIO OF SECURITIES.
A MUTUAL FUND IS AN INVESTMENT COMPANY THAT SELLS SHARES REPRESENTING
AN INTEREST IN A PORTFOLIO OF SECURITIES.
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Advantages of Mutual FundsAdvantages of Mutual Funds
DIVERSIFICATION
SMALLER MINIMUM INVESTMENTS
PROFESSIONAL MANAGEMENT
DIVERSIFICATION
SMALLER MINIMUM INVESTMENTS
PROFESSIONAL MANAGEMENT
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How Do Mutual Funds Operate?How Do Mutual Funds Operate?
Net Asset Value (NAV) (Total portfolio value - liabilities) / # of
sharesManagement is usually contracted to
an outside firm with fees ranging from 1/4% to 1/2% a year.
Often management companies will start many funds and will provide advisory services, etc. for them.
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Services Offered by Mutual Services Offered by Mutual FundsFunds
AUTOMATIC REINVESTMENT OF DISTRIBUTIONS
AUTOMATIC INVESTMENT PLANS CHECK WRITING EXCHANGE PRIVILEGES PERIODIC STATEMENTS
AUTOMATIC REINVESTMENT OF DISTRIBUTIONS
AUTOMATIC INVESTMENT PLANS CHECK WRITING EXCHANGE PRIVILEGES PERIODIC STATEMENTS
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Taxation of Mutual FundsTaxation of Mutual Funds
Mutual fund taxes are passed through to investors. Mutual funds are generally considered to be unfriendly from a tax standpoint.
Why?
Mutual fund taxes are passed through to investors. Mutual funds are generally considered to be unfriendly from a tax standpoint.
Why?
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Mutual Fund Fees and Mutual Fund Fees and ExpensesExpenses
LOAD CHARGESFRONT-END LOADBACK-END LOAD
EXPENSESMANAGEMENT OR ADVISORY FEESOPERATING EXPENSES
12B-1 FEE
LOAD CHARGESFRONT-END LOADBACK-END LOAD
EXPENSESMANAGEMENT OR ADVISORY FEESOPERATING EXPENSES
12B-1 FEE
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EVALUATING FEES AND EXPENSESDIFFERENCES IN ANNUAL OPERATING EXPENSES
EVALUATING FEES AND EXPENSESDIFFERENCES IN ANNUAL OPERATING EXPENSES
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
$22,000
$24,000
$26,000
0 1 2 3 4 5 6 7 8 9 10
End of Year
Inve
stm
ent
Val
ue
Fund A: Annual operating expenses equal .75%.
Fund B: Annual operating expenses equal 2%.
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Other Types of Investment Other Types of Investment
CompaniesCompanies
UNIT INVESTMENT TRUSTS
UNMANAGED PORTFOLIO OF A SPECIFIC TYPE OF SECURITY; INVESTORS PURCHASE UNITS.
CLOSED-END INVESTMENT COMPANIESMANAGED PORTFOLIO OF SECURITIES WITH A FIXED NUMBER OF SHARES OUTSTANDING.
UNIT INVESTMENT TRUSTS
UNMANAGED PORTFOLIO OF A SPECIFIC TYPE OF SECURITY; INVESTORS PURCHASE UNITS.
CLOSED-END INVESTMENT COMPANIESMANAGED PORTFOLIO OF SECURITIES WITH A FIXED NUMBER OF SHARES OUTSTANDING.
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Open-end Fund (Mutual Open-end Fund (Mutual Fund)Fund)new shares sold as demanded. company will buy back the shares at
any time.
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Closed-end Investment Closed-end Investment CompanyCompanyset number of shares / bought & sold
on exchangemarket price usually < NAV, but . . .
emerging markets funds
changes in the discount affect total return
dividend yield usually above average because of discount
must pay commission to buy or sell
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Load vs. No-loadLoad vs. No-load
most all funds obtained through brokers will have a load
load = sales feeprice = NAV + sales fee of 7 1/2% to
8%usually no redemption feeno-load funds are sold at NAV low-load funds have a fee of only
about 3%
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Tradeoffs Between Loads Tradeoffs Between Loads and Feesand Feesmany no-load funds charge up to 1
1/2% per year for managementsome low-loads do this also.all funds charge management fees of
from 1/2% to 1 1/2%.*** Read Prospectus ***
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Types of Investment Types of Investment CompaniesCompaniesCommon stock funds
growthincomeindexmixedindustry specific (health care, airlines,
etc.)ecology mindedregional funds
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Types of Funds, con’t.Types of Funds, con’t.
Balanced funds stocks and bonds percentages vary greatly See prospectus for strategy
Bond funds corporate, government, junk, capital gains
plays mixed, municipals (state specific), income
Money market funds
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Performance Performance
After expenses, most funds do not consistently beat the market
Performance figures do not take taxes into account
The funds that tend to be the best in a given year do not tend to continue to perform at the top. Why?
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Implications of Performance Implications of Performance StudiesStudiesFor investors with little money?For investors with more money?Advisability of diversification among
funds?