7204955 mutual-funds-ppt
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7204955 mutual-funds-ppt 7204955 mutual-funds-ppt Presentation Transcript

  • A Presentation on Mutual Funds
  • Questions to start with
    • What is a mutual fund?
    • How does one compute the net asset value (NAV)?
    • What expenses and charges might a mutual fund investor face?
    • What does research on mutual fund performance tell about fund expenses, portfolio turnover, and returns?
  • Questions to start with
    • What is a good procedure for determining which mutual funds to purchase?
    • When might it be appropriate to sell shares in a mutual fund?
    • What are the similarities between mutual funds and some other managed investments?
  • Mutual Fund Growth
    • Mutual funds have become very popular investment vehicles.
    • Nearly $7 trillion in total assets in 2000 vs $13 trillion in NYSE in 2002.
    • Total assets have grown 600% since 1990.
  • What is a mutual fund?
    • Mutual funds are open-end investment companies.
    • The fund sells shares to the public and invests the proceeds in a pool of funds, which are jointly owned by the fund’s investors.
  • Computing Net Asset Value
    • For investors, the performance of their investment depends on what happens to the fund’s per share value, or net asset value (NAV).
    • NAV= Market Value of Assets – Liabilities
    • Number of Shares Outstanding
    • NAV 1 =NAV 0 +All Incomes-All Distributed
    • Example : NAV 0 =Rs.100, Distributed 1) Net Realized Gains=Rs.2 and 2) Net Investment Income=Re.1.
    • NAV 1 = Rs.100-Rs.2-Re.1=Rs.97
  • Mutual Fund Management
    • Most funds are started by investment management companies who hire the fund manager to make investment decisions.
      • Fidelity, Vanguard, etc.
    • Usually offer many different funds and allow investors to switch between funds.
    • Funds (open-end) sell additional shares to those who want to invest, redeem shares at the NAV (less any fees) to those who want to sell their shares.
  • Why invest with mutual funds?
    • Liquidity
      • Funds buy and sell their own shares quickly, even if fund investments are illiquid
    • Diversification
      • Small minimum investment buys a typically well-diversified investment
    • Professional management and record-keeping
      • Expertise and services
  • Why invest with mutual funds?
    • Choice and flexibility
      • Families of funds offer a variety of investments to match investor needs
    • Indexing
      • Some funds track a broad market index which insures that investors will earn the “market return”
      • Increasingly popular mutual fund alternative
  • Mutual Fund Drawbacks
    • Active trading contributes to high costs which lower fund returns
    • Tax consequences can be a disadvantage
      • Tax impacts of asset trading are passed through to investors
      • Tax bill can be large even when the NAV falls
  • Mutual Fund Returns
    • Three sources of return:
    • Income distributions (ID)
      • Bond interest, stock dividends
    • Capital gain distributions (CGD)
      • Realized gains/losses from selling assets
    • Changes in NAV (  NAV)
      • From unrealized gains/losses from assets
  • Mutual Fund Returns
    • Return = (ID + CGD –Payments +  NAV)/Beg.NAV
    • Ex. NAV 0 =Rs.35,NAV 1 =Rs.35.2, Net Realized Gain Rs.2, Net Investment Income =Rs..5. Return= (2+.5+35.2-35)/35=7.714%
    • Most mutual funds allow investors to either receive distributions in cash or to reinvest in additional shares.
  • Types of Mutual Funds
    • Funds can be classified according to the type of security in which they invest
      • Stock Funds
      • Taxable Bond Funds
      • Municipal Bond Funds
      • Stock and Bond Funds
      • Money Market Funds
  • Common Stock Funds
    • Most popular type of fund
    • Wide variety with different objectives and levels of risk
      • Growth
      • Industry or sector funds
      • Geographic areas
      • International or Global
      • Equity Index funds
  • Taxable Bond Funds
    • Generally seek to generate current income with limited risk
    • Can vary by maturity
      • Short-term, Intermediate-term, Long-term
    • Can vary by type of bond
      • Government
      • Corporate
      • Mortgage-backed
      • International/Global
      • Bond Index funds
  • Municipal Bond Funds
    • Provide investors with income exempt from Federal taxation
    • Often concentrate on single states to avoid state income taxation as well
  • Stock and Bond Funds
    • Seek to provide a combination of income and value appreciation.
    • Different names
      • Balanced funds (60% equity+40% of debt securities) Goal: to conserve principal, by maintaining a balanced portfolio of both stocks and bonds
      • Blended funds: Mutipurpose funds(e.g., balanced target maturity, convertible securities that invest in both stocks and bonds
      • Flexible funds: Flexible income, flexible portfolio, global flexible and income funds, that invest in both stocks and bonds
  • Money Market Funds
    • Provide safe, current income with high liquidity
    • Invest in money market securities
      • T-bills, Bank CD’s, Commercial paper, etc.
    • NAV stays at Re.1; income either paid out or reinvested daily
    • Provide an alternative to bank deposits, but not FDIC insured
  • Mutual Fund Innovations
    • Life-stage funds
      • Offer different mixes of securities based on the age of the investor
    • Supermarket funds
      • Offer a wide variety of funds with “one-stop” fund shopping
      • Transfer services between funds
      • Expenses/fees can be high
  • Mutual Fund Prospectus
    • Must be available to investors and should be review by investors.
    • Contains:
      • Fund’s investment objective
      • Investment strategy
      • Principal risks faced by investors
      • Recent investment performance
      • Expenses and fees
      • Lots of other detailed information
  • Mutual Fund Expenses and Considerations
    • Loads
      • Commission to the broker to financial advisor who sold the fund to the investor
      • For load funds, the offer price is the fund’s NAV plus the load (while no-load funds are sold at their NAV)
      • Ex. 4% load with NAV Rs.96, buy at Rs.100
      • Load range from around 3% (low-load) to 8.5%
    • 12b-1 Fees: pay to the distributor (.25%-.75% )+ .25% servicing charge in some cases)
      • Fees deducted from the asset value of the fund to cover marketing expenses
      • An alternative to loads
    • Offering Price= NAV/(1-load %).
      • Investing Rs.1,000 in a load MF with 7% and expected return of 10%,
      • Rs.value=1000(1-.07)(1.10)=1023 (2.3% growth)
      • Investing Rs.1,000 no load MF with 8% return and 2% redemption fee,
      • Rs.value=1000(1-0)(1.08)(1-.02)= 1058.4 (5.84% growth)
      • Rs.35.4 Difference
  • Mutual Fund Expenses and Considerations
    • Deferred Sales Loads
      • Redemption charges when fund shares are sold (rather than when purchased)
      • Often high (5-7%) if shares are sold within the first year, but then fall over time, perhaps even disappearing eventually
    • Share Classes
      • Many funds offer several different classes of shares (A-B-C) with different fee structures
      • Best choice usually depends of investment horizon
  • Mutual Fund Expenses and Considerations
    • Management Fees
      • Fees deducted from the fund’s asset value to compensate the fund managers
      • Some adjust fees according to the fund’s performance
    • Expense ratio
      • Adding all fees and calculating expenses as a percentage of the fund’s asset
  • *Mutual Fund Expenses and Considerations
    • Portfolio Turnover
      • Not an explicit cost, but very important determinant of shareholder returns
      • Trading costs rise with turnover
      • In order for high turnover to pay off, fund managers must be successful in their active trading strategies
    • Sources of Information
      • Wall Street Journal, Business Week
      • Morningstar
        • Fund history, tax efficiency, risk analysis
  • Holding Period for a Portfolio
    • Portfolio Turnover
    • Holding Period = 12 months/(Portfolio Turnover%)
    • Ex Turnover 125%=>12/1.25=9.6 month
  • Mutual Fund Return and Risk Performance
    • Return Performance
    • On a risk-adjusted basis, the average stock fund under-performs market averages
    • While portfolio managers seem to out-perform the market before expenses, net returns are below the market index
    • Some above-average performers over short time horizons, but such performance is not generally sustained (just luck?)
    • These results help to explain the growing popularity of index funds
  • Mutual Fund Return and Risk Performance
    • Risk Performance
    • While returns are not consistent, risk is
    • Objectives lead to strategies that lead to varying degrees of investment risks
    • Return is positively related to the level of risk
    • Risk is therefore an important consideration
  • Mutual Fund Return and Risk Performance
    • Fees and expenses: Do higher fees pay off?
    • Investment performance is no better (and perhaps worse) for load funds vs. no-load
    • Expenses lower returns in predictable ways – lower expense funds give better returns
    • Turnover affects returns in several ways, including taxes – high turnover means more short-term realized gains
    • Tax efficiency is an important consideration – after-tax returns may be 30-40% less than pre-tax
    • Mutual Fund Investment Strategies
    • Choose in funds consistent with your objectives, constraints, and tax situation.
    • Consider index funds for a large portion of your fund portfolio.
    • When possible, invest in no-load funds with below-average expense and turnover ratios.
    • Invest at least 10-20% in international or global funds.
    • Own funds in different asset classes and consider life-cycle investing.
    • Mutual Fund Investment Strategies
    • If you actively manage your portfolio, consider the past year’s “hot funds.”
    • Do not attempt to time the market; timing strategies add little except costs and risk.
    • Use dollar cost averaging by investing a set dollar amount each month.
    • Avoid investing money shortly before the capital gain distribution dates (prospectus).
    • Do not own too many funds. You will get average returns with high expenses.
  • When should you sell a mutual fund?
    • Personal considerations
      • Portfolio rebalancing points due to life cycle considerations
        • Be aware of the quick trigger, selling on the first dip in NAV; think long-term
        • Be aware of capital gains with selling fund shares
    • Fund considerations
      • Change in portfolio manager
      • Change in investment style
      • Fund is growing “too large” or “too fast”
      • Persistent bad performance.