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  1. 1. Chapter 4 Appendix Mutual Fund Evaluation Term Project
  2. 2. <ul><li>A small man – anyone with a portfolio of, say, under $100,000 – is unlikely to do as well investing his own money as he can do in a no-load fund </li></ul><ul><li>- Paul Samuelson </li></ul>
  3. 3. Outline <ul><li>Introduction </li></ul><ul><li>Classification of mutual funds </li></ul>
  4. 4. Introduction <ul><li>A mutual fund is an existing portfolio of assets into which someone may invest directly </li></ul><ul><ul><li>Facilitates diversification </li></ul></ul>
  5. 5. Introduction (cont’d) <ul><li>Mutual funds are extremely popular investment vehicles for both the small and the large investor </li></ul><ul><ul><li>Many institutions place a substantial part of their money with mutual funds </li></ul></ul><ul><ul><li>By the end of 2000, about 8,300 mutual funds with assets totaling $6.9 trillion </li></ul></ul>
  6. 6. Classification of Mutual Funds <ul><li>Open-end versus closed-end </li></ul><ul><li>Net asset value versus market value </li></ul><ul><li>Load versus no-load </li></ul><ul><li>Management fees </li></ul><ul><li>Buying mutual fund shares </li></ul><ul><li>Mutual fund objectives </li></ul>
  7. 7. Open-End Versus Closed-End <ul><li>There are two types of investment companies : </li></ul><ul><ul><li>Open-end funds : </li></ul></ul><ul><ul><ul><li>May grow in size as new investors open accounts </li></ul></ul></ul><ul><ul><ul><li>May grow in size as existing investors add to their accounts </li></ul></ul></ul><ul><ul><ul><li>Have no set number of shares outstanding </li></ul></ul></ul><ul><ul><ul><li>Buy back their shares from investors ( redemption ) </li></ul></ul></ul>
  8. 8. Open-End Versus Closed-End (cont’d) <ul><li>There are two types of investment companies (cont’d): </li></ul><ul><ul><li>Closed-end funds : </li></ul></ul><ul><ul><ul><li>Have a fixed number of shares that trade like shares of common stock </li></ul></ul></ul><ul><ul><ul><li>Are unmanaged portfolios of stock with each share representing partial ownership of the portfolio </li></ul></ul></ul><ul><ul><ul><li>May trade on an exchange </li></ul></ul></ul><ul><ul><ul><li>Can be sold to other investors </li></ul></ul></ul>
  9. 9. Net Asset Value Versus Market Value <ul><li>You buy and sell an open-end fund based on its net asset value </li></ul><ul><ul><li>Open-end fund: equals the fund’s assets minus its liabilities divided by the number of shares currently existing in the fund </li></ul></ul><ul><ul><li>Closed-end fund: trades at market-determined portfolio prices that may be more or less than the net asset value </li></ul></ul>
  10. 10. Load Versus No-Load <ul><li>Load funds : </li></ul><ul><ul><li>Have a sales charge associated with the purchase of new shares </li></ul></ul><ul><ul><ul><li>A commission split between: </li></ul></ul></ul><ul><ul><ul><ul><li>A mutual fund salesperson </li></ul></ul></ul></ul><ul><ul><ul><ul><li>An investment firm </li></ul></ul></ul></ul><ul><ul><ul><ul><li>A national distributor </li></ul></ul></ul></ul><ul><ul><ul><li>Typically ranges between 1.0% and 8.5% </li></ul></ul></ul>
  11. 11. Load Versus No-Load (cont’d) <ul><li>No-load funds : </li></ul><ul><ul><li>Have no sales charge </li></ul></ul><ul><ul><li>Shares are bought and sold at net asset value </li></ul></ul>
  12. 12. Examples of Exchange-Traded Funds
  13. 13. Management Fees <ul><li>Management fees include: </li></ul><ul><ul><li>Postage costs </li></ul></ul><ul><ul><li>Clerical time </li></ul></ul><ul><ul><li>Commissions on the underlying assets </li></ul></ul><ul><ul><li>Redemption fee </li></ul></ul><ul><ul><ul><li>A fee to pay redemption expenses, ranging between 1% and 2% </li></ul></ul></ul>
  14. 14. Management Fees (cont’d) <ul><li>Management fees include (cont’d): </li></ul><ul><ul><li>Management fee </li></ul></ul><ul><ul><ul><li>Paid to fund manager </li></ul></ul></ul><ul><ul><ul><li>Taken directly from the fund’s assets </li></ul></ul></ul><ul><ul><ul><li>Averages about 0.5% of fund’s total assets </li></ul></ul></ul>
  15. 15. Buying Mutual Fund Shares <ul><li>Fund prospectus outlines: </li></ul><ul><ul><li>The fund’s purpose </li></ul></ul><ul><ul><li>The management team </li></ul></ul><ul><ul><li>The mailing address and phone number </li></ul></ul><ul><ul><li>The fund’s intended investment activity </li></ul></ul><ul><li>Funds also provide descriptive brochures and a letter to inquiries </li></ul>
  16. 16. Buying Mutual Fund Shares (cont’d) <ul><li>New account application asks for: </li></ul><ul><ul><li>Name, address, tax ID </li></ul></ul><ul><ul><li>Investor’s choice of shareholder options: </li></ul></ul><ul><ul><ul><li>Dividend reinvestment </li></ul></ul></ul><ul><ul><ul><li>Automatic monthly investment </li></ul></ul></ul><ul><ul><ul><li>Systematic withdrawal </li></ul></ul></ul><ul><ul><ul><li>IRA designation </li></ul></ul></ul><ul><ul><ul><li>Telephonic fund switching option </li></ul></ul></ul>
  17. 17. Mutual Fund Objectives <ul><li>The fund objective is the type of investment anticipated: </li></ul><ul><ul><li>Capital appreciation and growth funds seek appreciation in the value of shares </li></ul></ul><ul><ul><li>Income funds seek current income from fixed-income securities and from dividends </li></ul></ul><ul><ul><li>Growth and income funds seek a combination of income and capital appreciation </li></ul></ul>
  18. 18. Mutual Fund Objectives (cont’d) <ul><li>The fund objective is the type of investment anticipated (cont’d): </li></ul><ul><ul><li>Balanced invest in growth and income securities </li></ul></ul><ul><ul><li>Bond funds invest in debt only </li></ul></ul><ul><ul><li>Money market funds seek stability of principal through investment in short-term debt instruments </li></ul></ul>
  19. 19. Mutual Fund Objectives (cont’d) <ul><li>The fund objective is the type of investment anticipated (cont’d): </li></ul><ul><ul><li>Tax-free funds invest in municipal securities that are free from federal and sometimes state taxes </li></ul></ul><ul><ul><li>Special-purpose funds may focus on a particular industry or region </li></ul></ul>