Choosing a Mutual Fund

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Choosing a Mutual Fund

  1. 1. Mutual Fund Surfing
  2. 2. Choosing a Mutual Fund <ul><li>Look at the objective of the fund. </li></ul><ul><li>It should match your objective. </li></ul><ul><li>Common types of funds: </li></ul><ul><li>Growth </li></ul><ul><li>Balanced </li></ul><ul><li>Index </li></ul><ul><li>Sector </li></ul><ul><li>International </li></ul>
  3. 3. <ul><li>Examine long-term return record. </li></ul><ul><li>5 year and 10 year annualized return </li></ul><ul><li>Morningstar overall return rating </li></ul><ul><li>Performance is compared to other MFs in the same broad investment class. </li></ul><ul><li>High = top 10%, Above Average = Next 22.5%, Average= Middle 35%, Below Average = Next 22.5%, and Low = Bottom 10% </li></ul><ul><li>High is best return rating, low is worst </li></ul>
  4. 4. <ul><li>Look at risk. </li></ul><ul><li>Morningstar Risk Rating </li></ul><ul><li>Compares risk of fund to other MFs in its broad investment class </li></ul><ul><li>Low= top 10 percent (least risky), Below Average = Next 22.5%, Average = Middle 35%, Above Average = Next 22.5%, High = Bottom 10% </li></ul><ul><li>Low is best risk rating, high is worst </li></ul>
  5. 5. <ul><li>Examine the portfolio of the fund </li></ul><ul><li>% in stocks </li></ul><ul><li>% in most heavily weighted sector </li></ul><ul><li># of stock holdings </li></ul><ul><li>Turnover % 200% = new set of stocks every six months (100%/200% = .5 year). If turnover was 20%, it would take five years for the fund to have a complete new set of stocks (100%/20% = 5) </li></ul>
  6. 6. <ul><li>Look at the fees charged by the fund. </li></ul><ul><li>Load charges (Load and no-load funds) </li></ul><ul><li>Redemption fees </li></ul><ul><li>12 b-1 fees </li></ul><ul><li>Expense ratio = Expenses/assets under management </li></ul><ul><li>Expense projections for 3, 5, 10 years </li></ul>
  7. 7. <ul><li>Determine minimum initial investment and minimum subsequent investment. </li></ul><ul><li>These need to fit your budget. </li></ul>
  8. 8. <ul><li>Check current manager’s tenure. </li></ul><ul><li>Need to determine if he (she) is responsible for the return record. </li></ul>
  9. 9. <ul><li>Check services offered </li></ul><ul><li>Reinvestment of dividends </li></ul><ul><li>Automatic investment </li></ul><ul><li>IRAs </li></ul><ul><li>Fund switching (within a fund family) </li></ul>
  10. 10. Net Asset Value <ul><li>Assets = $100,000,000 </li></ul><ul><li>Liabilities = 7,000,000 </li></ul><ul><li>Net assets = 93,000,000 </li></ul><ul><li>93,000,000/15,000,000 = $6.20 NAV </li></ul><ul><li>NAV = True worth of a share </li></ul><ul><li>NAV is figured daily at close of the market. </li></ul>
  11. 11. <ul><li>No load funds can be bought at their NAV. </li></ul><ul><li>Load funds are bought at NAV + load. </li></ul><ul><li>Example: $6.20 NAV + $.25 load = $6.45 </li></ul><ul><li>$6.45 called offer price </li></ul><ul><li>Shares in a MF can be bought directly from the MF (and sold directly to the MF). </li></ul>
  12. 12. Sources for MF Information <ul><li>Morningstar ( www.morningstar.com ) on the Web </li></ul><ul><li>Noted for star ratings </li></ul><ul><li>Overall star rating considers both risk and return. </li></ul><ul><li>A historical rating </li></ul><ul><li>Five Stars: top 10% </li></ul><ul><li>Four Stars: next 22.5% </li></ul><ul><li>Three Stars: middle 35% </li></ul><ul><li>Two Stars: next 22.5% </li></ul><ul><li>One Star: bottom 10% </li></ul>
  13. 13. Non-Web Sources of Information on Mutual Funds <ul><li>Money </li></ul><ul><li>Business Week </li></ul><ul><li>Wall Street Journal </li></ul>

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