Mutual Fund Presentation

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Mutual Fund Presentation

  1. 1. Mutual Funds
  2. 2. 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. Advantages of Mutual Funds <ul><li>DIVERSIFICATION </li></ul><ul><li>SMALLER MINIMUM INVESTMENTS </li></ul><ul><li>PROFESSIONAL MANAGEMENT </li></ul>
  5. 5. How Do Mutual Funds Operate? <ul><li>Net Asset Value (NAV) </li></ul><ul><li>(Total portfolio value - liabilities) / # of shares </li></ul><ul><li>Management is usually contracted to an outside firm with fees ranging from 1/4% to 1/2% a year. </li></ul><ul><li>Often management companies will start many funds and will provide advisory services, etc. for them. </li></ul>
  6. 6. Services Offered by Mutual Funds <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>
  7. 7. Taxation of Mutual Funds <ul><li>Mutual fund taxes are passed through to investors. Mutual funds are generally considered to be unfriendly from a tax standpoint. </li></ul><ul><li>Why? </li></ul>
  8. 8. Mutual Fund Fees and Expenses <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>
  9. 9. <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%.
  10. 10. 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>
  11. 11. Open-end Fund (Mutual Fund) <ul><li>new shares sold as demanded. </li></ul><ul><li>company will buy back the shares at any time. </li></ul>
  12. 12. Closed-end Investment Company <ul><li>set number of shares / bought & sold on exchange </li></ul><ul><li>market price usually < NAV, but . . . </li></ul><ul><ul><li>emerging markets funds </li></ul></ul><ul><li>changes in the discount affect total return </li></ul><ul><li>dividend yield usually above average because of discount </li></ul><ul><li>must pay commission to buy or sell </li></ul>
  13. 13. Load vs. No-load <ul><li>most all funds obtained through brokers will have a load </li></ul><ul><li>load = sales fee </li></ul><ul><li>price = NAV + sales fee of 7 1/2% to 8% </li></ul><ul><li>usually no redemption fee </li></ul><ul><li>no-load funds are sold at NAV </li></ul><ul><li>low-load funds have a fee of only about 3% </li></ul>
  14. 14. Tradeoffs Between Loads and Fees <ul><li>many no-load funds charge up to 1 1/2% per year for management </li></ul><ul><li>some low-loads do this also. </li></ul><ul><li>all funds charge management fees of from 1/2% to 1 1/2%. </li></ul><ul><li>*** Read Prospectus *** </li></ul>
  15. 15. Types of Investment Companies <ul><li>Common stock funds </li></ul><ul><ul><li>growth </li></ul></ul><ul><ul><li>income </li></ul></ul><ul><ul><li>index </li></ul></ul><ul><ul><li>mixed </li></ul></ul><ul><ul><li>industry specific (health care, airlines, etc.) </li></ul></ul><ul><ul><li>ecology minded </li></ul></ul><ul><ul><li>regional funds </li></ul></ul>
  16. 16. Types of Funds, con’t. <ul><li>Balanced funds </li></ul><ul><ul><li>stocks and bonds </li></ul></ul><ul><ul><li>percentages vary greatly </li></ul></ul><ul><ul><li>See prospectus for strategy </li></ul></ul><ul><li>Bond funds </li></ul><ul><ul><li>corporate, government, junk, capital gains plays </li></ul></ul><ul><ul><li>mixed, municipals (state specific), income </li></ul></ul><ul><li>Money market funds </li></ul>
  17. 17. Performance <ul><li>After expenses, most funds do not consistently beat the market </li></ul><ul><li>Performance figures do not take taxes into account </li></ul><ul><li>The funds that tend to be the best in a given year do not tend to continue to perform at the top. Why? </li></ul>
  18. 18. Implications of Performance Studies <ul><li>For investors with little money? </li></ul><ul><li>For investors with more money? </li></ul><ul><li>Advisability of diversification among funds? </li></ul>

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