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