Copyright © 2001 by Harcourt, Inc. All rights reserved.

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Copyright © 2001 by Harcourt, Inc. All rights reserved.

  1. 1. CHAPTER 4 MUTUAL FUNDS
  2. 2. CHAPTER 4 OBJECTIVES <ul><li>WHAT IS A MUTUAL FUND? </li></ul><ul><li>HOW DO MUTUAL FUNDS OPERATE? </li></ul><ul><li>HOW MUCH DOES MUTUAL FUND INVESTING COST? </li></ul><ul><li>HOW SHOULD MUTUAL FUND PERFORMANCE BE EVALUATED? </li></ul><ul><li>WHAT ARE OTHER TYPES OF INVESTMENT COMPANIES? </li></ul>
  3. 3. WHAT IS A MUTUAL FUND? <ul><li>A MUTUAL FUND IS AN INVESTMENT COMPANY THAT SELLS SHARES REPRESENTING AN INTEREST IN A PORTFOLIO OF SECURITIES. </li></ul>
  4. 4. WHAT IS A MUTUAL FUND? <ul><li>ADVANTAGES OF MUTUAL FUNDS </li></ul><ul><li>DIVERSIFICATION </li></ul><ul><li>SMALLER MINIMUM INVESTMENTS </li></ul><ul><li>PROFESSIONAL MANAGEMENT </li></ul>
  5. 5. WHAT IS A MUTUAL FUND? <ul><li>RECENT GROWTH IN U.S. MUTUAL FUNDS </li></ul>1,000.0 2,000.0 3,000.0 4,000.0 5,000.0 6,000.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Net assets ($ billions) 0 50 100 150 200 250 Shareholder accounts (millions) Net Assets Shareholder Accounts
  6. 6. WHAT IS A MUTUAL FUND? <ul><li>TYPES OF MUTUAL FUNDS </li></ul><ul><li>EQUITY FUNDS </li></ul><ul><li>BOND FUNDS </li></ul><ul><li>HYBRID FUNDS (STOCKS AND BONDS) </li></ul><ul><li>INCOME FUNDS </li></ul><ul><li>MONEY MARKET FUNDS </li></ul><ul><li>INDEX FUNDS </li></ul>
  7. 7. WHAT IS A MUTUAL FUND? <ul><li>DISTRIBUTION OF MUTUAL FUND ASSETS </li></ul>0% 20% 40% 60% 80% 100% 1988 1998 Money market funds Bond & income funds Hybrid funds Equity funds
  8. 8. HOW DO MUTUAL FUNDS OPERATE? <ul><li>NET ASSET VALUE (NAV) </li></ul><ul><li>MARKET VALUE OF THE FUND’S ASSETS, MINUS LIABILITIES, DIVIDED BY THE NUMBER OF SHARES OUTSTANDING AT ANY POINT IN TIME. </li></ul>
  9. 9. HOW DO MUTUAL FUNDS OPERATE? <ul><li>SERVICES OFFERED BY MUTUAL FUNDS </li></ul><ul><li>AUTOMATIC REINVESTMENT OF DISTRIBUTIONS </li></ul><ul><li>AUTOMATIC INVESTMENT PLANS </li></ul><ul><li>CHECK WRITING </li></ul><ul><li>EXCHANGE PRIVILEGES </li></ul><ul><li>PERIODIC STATEMENTS </li></ul>
  10. 10. HOW DO MUTUAL FUNDS OPERATE? <ul><li>FEDERAL REGULATIONS </li></ul><ul><li>CURRENT PROSPECTUS </li></ul><ul><li>TYPE OF ADVERTISEMENTS </li></ul><ul><li>TYPE OF ASSETS </li></ul><ul><li>AMOUNT OF FEES </li></ul><ul><li>STATE REGULATIONS </li></ul><ul><li>REGULATE SALE </li></ul>
  11. 11. HOW DO MUTUAL FUNDS OPERATE? <ul><li>TAXATION OF MUTUAL FUNDS </li></ul><ul><li>TAXED AS REGULATED INVESTMENT COMPANIES (SUBCHAPTER M OF THE IRS CODE) </li></ul><ul><li>REQUIREMENTS ON ASSETS, INCOME, GAINS, AND DISTRIBUTIONS </li></ul><ul><li>DO NOT PAY TAXES ON INCOME OR GAINS (THEY PASS THROUGH TO SHAREHOLDERS ) </li></ul>
  12. 12. HOW MUCH DOES MUTUAL FUND INVESTING COST? <ul><li>MUTUAL FUNDS FEES AND EXPENSES </li></ul><ul><li>LOAD CHARGES </li></ul><ul><ul><li>FRONT-END LOAD </li></ul></ul><ul><ul><li>BACK-END LOAD </li></ul></ul><ul><li>EXPENSES </li></ul><ul><ul><li>MANAGEMENT OR ADVISORY FEES </li></ul></ul><ul><ul><li>OPERATING EXPENSES </li></ul></ul><ul><li>12B-1 FEE </li></ul>
  13. 13. HOW MUCH DOES MUTUAL FUND INVESTING COST? <ul><li>EVALUATING FEES AND EXPENSES </li></ul><ul><li>TOTAL EXPENSES FOR CONTRAFUND AND HEARTLAND VALUE </li></ul>$0 $20 $40 $60 $80 $100 $120 $140 $160 $180 1 year 3 years 5 years 7 years 10 years Holding Period Total Expenses Contrafund Heartland Value
  14. 14. HOW MUCH DOES MUTUAL FUND INVESTING COST? <ul><li>EVALUATING FEES AND EXPENSES </li></ul><ul><li>DIFFERENCES IN ANNUAL OPERATING EXPENSES </li></ul>$10,000 $12,000 $14,000 $16,000 $18,000 $20,000 $22,000 $24,000 $26,000 0 1 2 3 4 5 6 7 8 9 10 End of Year Investment Value Fund A: Annual operating expenses equal .75%. Fund B: Annual operating expenses equal 2%.
  15. 15. HOW SHOULD MUTUAL FUND PERFORMANCE BE EVALUATED? <ul><li>EVALUATING HISTORICAL PERFORMANCE </li></ul><ul><li>MEASURING RETURNS </li></ul><ul><li>NAV t = NET ASSET VALUE AT THE BEGINNING </li></ul><ul><li>NAV t-1 = NET ASSET VALUE AT THE END </li></ul><ul><li>DIV t-1 = INCOME AND CAPITAL GAINS DISTRIBUTED </li></ul>
  16. 16. HOW SHOULD MUTUAL FUND PERFORMANCE BE EVALUATED? <ul><li>EVALUATING HISTORICAL PERFORMANCE </li></ul><ul><li>TOTAL RETURN INDEX </li></ul><ul><li>WEITZ VALUE FUND </li></ul>1,000 2,000 3,000 4,000 5,000 6,000 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 $1000 invested in the Weitz Value fund at the beginning of 1989 was worth over $5,300 by the end of 1998.
  17. 17. HOW SHOULD MUTUAL FUND PERFORMANCE BE EVALUATED? <ul><li>EVALUATING HISTORICAL PERFORMANCE </li></ul><ul><li>AVERAGE ANNUAL RETURNS FOR </li></ul><ul><li>WEITZ VALUE FUND AND BENCHMARKS </li></ul>0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 1 year 3 year 5 year 10 year Period Ending 12/31/98 Annualized average return Weitz Value Fund Group average S&P MidCap 400
  18. 18. WHAT ARE OTHER TYPES OF INVESTMENT COMPANIES? <ul><li>UNIT INVESTMENT TRUSTS </li></ul><ul><li>UNMANAGED PORTFOLIO OF A SPECIFIC TYPE OF SECURITY; INVESTORS PURCHASE UNITS. </li></ul><ul><li>CLOSED-END INVESTMENT COMPANIES </li></ul><ul><li>MANAGED PORTFOLIO OF SECURITIES WITH A FIXED NUMBER OF SHARES OUTSTANDING. </li></ul>

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