Chapter 15 Overheads


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Chapter 15 Overheads

  1. 1. Chapter 15: Investing Through Mutual Funds
  2. 2. Objectives <ul><li>Identify why people invest in mutual funds. </li></ul><ul><li>Distinguish among the four major objectives of mutual funds. </li></ul><ul><li>Classify mutual funds by portfolio. </li></ul><ul><li>List the unique benefits of mutual funds. </li></ul>
  3. 3. Objectives <ul><li>Describe the various charges and fees associated with investing in mutual funds. </li></ul><ul><li>Explain how to select a mutual fund in which to invest. </li></ul><ul><li>Recognize valid reasons for selling a mutual fund investment. </li></ul>
  4. 4. Investing Through Mutual Funds <ul><li>open-end investment company combining funds of investors who have purchased shares in a diversified portfolio of securities. </li></ul>MUTUAL FUND . . .
  5. 5. What is a Mutual Fund? <ul><li>A pool of money </li></ul><ul><li>Managed by a professional investor </li></ul><ul><li>Manager works for an investment firm </li></ul><ul><li>Each fund has a specific objective </li></ul><ul><li>Over 6,000 funds to choose from </li></ul>
  6. 6. Figure 15.1
  7. 7. Three Reasons Why People Purchase Mutual Funds <ul><li>Diversification </li></ul><ul><ul><li>funds of many investors are pooled and used to purchase a variety of investments </li></ul></ul><ul><li>Professional management </li></ul><ul><ul><li>who is the fund’s manager? </li></ul></ul><ul><ul><li>managers can change </li></ul></ul><ul><li>Convenience </li></ul><ul><ul><li>phone </li></ul></ul><ul><ul><li>mail </li></ul></ul>16-3
  8. 8. <ul><li>New/more types of funds </li></ul><ul><li>Few or no sales charges </li></ul><ul><li>Some performed better than common stock </li></ul><ul><li>Widespread marketing </li></ul><ul><li>Selection is easier </li></ul>Reasons for Investing Through Mutual Funds
  9. 9. <ul><li>Dispense profits to investors </li></ul><ul><li>Investors expect dividend income </li></ul><ul><li>Investors expect price appreciation </li></ul>Reasons for Investing Through Mutual Funds
  10. 10. Closed and Open End Funds <ul><li>Closed end fund (10% of funds) </li></ul><ul><ul><li>limited number of shares issued initially </li></ul></ul><ul><ul><li>then can only purchase shares from another investor willing to sell theirs </li></ul></ul><ul><li>Open end fund (90% of funds) </li></ul><ul><ul><li>no limitations on the number of shares the investment company can issue </li></ul></ul><ul><ul><li>shares are issued and redeemed by the investment company </li></ul></ul>
  11. 11. Net Asset Value <ul><li>portfolio market value - liabilities </li></ul><ul><li>the number of shares outstanding </li></ul><ul><li>Offer price = NAV + sales commission </li></ul>
  12. 12. Objectives of Mutual Funds <ul><li>Current income </li></ul><ul><li>Long-term growth </li></ul><ul><li>Growth and income </li></ul><ul><li>Balanced </li></ul>
  13. 13. <ul><li>Common stock </li></ul><ul><li>Balanced </li></ul><ul><li>Bond </li></ul><ul><li>Specialty </li></ul><ul><li>Money market </li></ul>Classification of Mutual Funds
  14. 14. <ul><li>Aggressive growth </li></ul><ul><li>Growth </li></ul><ul><li>Value </li></ul><ul><li>Growth and income </li></ul>Classification of Mutual Funds <ul><li>Small company </li></ul><ul><li>Sector </li></ul><ul><li>Global/international </li></ul><ul><li>Index </li></ul>COMMON STOCK:
  15. 15. <ul><li>Recordkeeping/reporting </li></ul><ul><li>Easy purchase and sale </li></ul><ul><li>Automatic reinvestment </li></ul><ul><li>IRS-qualified tax-sheltered retirement </li></ul><ul><li>Withdrawal plans </li></ul><ul><li>Collateral for loans </li></ul>Unique Benefits of Mutual Funds
  16. 16. Costs of Investing Through Mutual Funds <ul><li>Management fees </li></ul><ul><li>Loan funds </li></ul><ul><li>No-load funds </li></ul>
  17. 17. Costs of Investing Through Mutual Funds <ul><li>Hidden fees </li></ul><ul><ul><li>Deferred load </li></ul></ul><ul><ul><li>Redemption </li></ul></ul><ul><ul><li>12b-1 </li></ul></ul><ul><li>Disclosure of Fees </li></ul><ul><li>“ Which is better, load or no-load?” </li></ul>
  18. 18. Load vs. No Load Funds <ul><li>Load Fund </li></ul><ul><ul><li>pay a commission to a sales agent when you buy shares </li></ul></ul><ul><ul><li>usually 3-8% </li></ul></ul><ul><li>No Load Fund </li></ul><ul><ul><li>no sales charge paid </li></ul></ul><ul><ul><li>purchased directly from the investment company </li></ul></ul><ul><ul><li>usually have an 800 number you can call </li></ul></ul>
  19. 19. Management Fees and Other Charges <ul><li>Management fee </li></ul><ul><ul><li>charged yearly (.25 - 1%) based on a percentage of the funds asset value </li></ul></ul><ul><li>Contingent deferred sales load </li></ul><ul><ul><li>charged upon withdrawal of funds (1-6%) </li></ul></ul><ul><ul><li>decreases with time held </li></ul></ul><ul><li>12b-1 fees </li></ul><ul><ul><li>fee to defray advertising and marketing costs of the fund </li></ul></ul>
  20. 20. <ul><li>Match goals </li></ul><ul><li>Locate sources of comparative performance data </li></ul><ul><ul><li>Financial press (i.e. Wall Street Journal, Barron’s) </li></ul></ul><ul><ul><li>Magazines (i.e. Fortune, Kiplinger’s) </li></ul></ul><ul><ul><li>Specialized mutual fund publications </li></ul></ul>Strategies for Selecting a Mutual Fund
  21. 21. <ul><li>Interpret comparative performance information over time </li></ul><ul><ul><li>Long-term/short-term performance </li></ul></ul><ul><ul><li>Size of fund </li></ul></ul><ul><ul><li>Fund performance in up/down markets </li></ul></ul><ul><li>Read prospectuses and annual reports </li></ul>Strategies for Selecting a Mutual Fund
  22. 22. <ul><li>Fund performs poorly compared with similar funds </li></ul><ul><li>Perception of economic trends indicates business cycle will smooth out soon </li></ul><ul><li>Fund grows too rapidly or becomes too large </li></ul><ul><li>Fund taken over by new manager </li></ul><ul><li>Investment goals become more conservative </li></ul><ul><li>Need cash </li></ul>When To Sell