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Ch. 18 PowerPoint Slides


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  • 1. Chapter Eighteen Mutual Funds
  • 2. Overview
    • A mutual fund is a pooled investment portfolio with many different investors (shareholders) managed by a professional manager.
    • There are over 8000 mutual funds managing over $12 Trillion in assets as of November 2007.
    • Mutual funds account for just under 20% of total household financial assets and approximately 50% of people own mutual funds.
    • Approximately 55% of mutual fund assets are held in stock market mutual funds.
  • 3. Advantages/Disadvantages of Mutual Funds
    • Diversification
    • Professional Management
    • Time Savings
    • Selection
    • Performance
    • Expenses
  • 4. Structure of Mutual Funds
    • Open-End Mutual Fund
    • Closed-End Mutual Fund
    • Exchange Traded Fund (ETF)
  • 5. Mutual Fund Objectives
    • Money Market Mutual Funds
    • Bond Funds
    • Equity Funds
    • Hybrid Funds
    • Specialty Funds
    • International Funds
  • 6. Mutual Fund Expenses
    • Load Charges – A fee charged at the time of purchase designed to compensate sales agents.
    • Expense Ratios – An annual charge (taken daily) to cover the costs of managing the mutual fund and to generate a profit for fund management.
    • 12b-1 fees – An annual fee taken from the fund to compensate sales agents and provide services for shareholders.
    • Share Classes
      • Class A – Front-end load charge and may have small 12b-1 annual fee.
      • Class B – No front-end load, higher annual 12b-1 charges, and a Contingent Deferred Sales Load (declining back-end load charge). Typically convert to A shares after 6-8 years.
      • Class C – No front-end load, higher annual 12b-1 charges, does not convert to A shares.
    • Estimating true cost of various expenses – See handout and spreadsheet.
  • 7. Information on Mutual Funds
    • Yahoo Finance
    • Moneycentral
    • Value Line
    • Prospectus
    • Fund Families
  • 8. Hedge Funds
    • According to, it is estimated that hedge funds managed $2.7 trillion as of the end of the third quarter in 2007.
    • Less regulated than mutual funds and can use more specialized (and sometimes risky) strategies.
    • Typically have significantly higher expenses.
    • Restricted to high net worth individuals and institutions.
  • 9. Homework
    • Q 1-5, 11, 13, 15-16
    • P 1-2, 4, 8, 10
    • You are planning to invest $200 per month into one of three mutual funds. Mutual Fund A has a 5% load charge and a 0.5% annual expense ratio. Mutual Fund B has no load charge and a 1.25% annual expense ration. Mutual Fund C has no load charge and a 0.5% annual expense ratio. If your investment horizon is 4 years and you anticipate a 9% rate of return (compounded monthly), what is the total cost (in $) for each of the 3 funds. What if your investment horizon is 35 years?
    • Discuss under what types of investor horizons class A shares would be preferred to class C shares for a mutual fund investor? How about a situation where class C shares might be preferred?
    • Explain how a fund with low turnover may be better than a fund with high turnover.
    • Consider a strategy where an investor reallocates his wealth each year to put 20% of his investment portfolio into each of the top 5 performing mutual funds from the previous year. Is this likely to be an effective strategy? Explain.
    • Explain the difference between a hedge fund and a mutual fund.