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  • Item one: specify “identical” to what? (p436)
  • I added this slide (items 4-6 wouldn’t fit on one slide once I added the title).
  • Transcript

    • 1. Chapter Fifteen Investing Through Mutual Funds
    • 2. Learning Objectives
      • Summarize the two types of investment returns that investors expect from mutual funds.
      • Classify mutual funds by investment objectives.
      • Describe the unique features of mutual funds that make them an attractive investment.
    • 3. Learning Objectives (continued)
      • Distinguish among load and no-load mutual funds and explain how to avoid some of their numerous charges and fees.
      • Explain how to evaluate mutual funds in which to invest.
    • 4. Introduction
      • Investment Company – a corporation, trust, or partnership in which investors with similar financial goals pool their funds so as to utilize professional management and to diversify their investments in securities and other investments.
    • 5. Introduction (continued)
      • Mutual Fund – an investment company that combines the funds of investors who have purchased shares of ownership in the investment company and then invests that money in a diversified portfolio of stocks and bonds issued by other corporations or governments.
      • Portfolio – consists of a collection of securities and other investment alternatives.
    • 6. What Investors Expect from Mutual Funds
      • Closed-End Investment Company – issues a limited and fixed number of shares and does not buy them back.
      • Open-End Mutual Fund – always ready to sell new shares of ownership and to buy back previously sold shares at the fund’s current share price.
    • 7. Figure 15.1: How a Mutual Fund Works
    • 8. Investors Expect Mutual Fund Dividend Income
      • Mutual Fund Dividends – income paid to investors out of profits earned by the mutual fund from the investments it has made.
        • Mutual funds dividends represent current income to mutual fund shareholders.
    • 9. Ordinary Income Dividend Distributions
      • Ordinary Income Dividend Distributions – the fund pays out dividend income and interest it has received from securities it owns.
    • 10. Capital Gains Distributions
      • Capital Gains Distributions – represent the net gains that a fund realizes when it sells securities that were held in the fund’s portfolio.
    • 11. Investors Expect Capital Gains Through Price Appreciation
      • Mutual fund investors also expect to profit when they sell their shares.
      • Net Asset Value (NAV) – the per-share value of the mutual fund.
      • Unrealized Capital Gains – merely “paper profits” on the accounts of the mutual fund.
      • When such gains are “realized” by the mutual fund company, they are paid to fund investors as capital gains distributions.
    • 12. Mutual Funds Have Different Investment Objectives
      • Prospectus – a mutual fund’s investment objectives must be stated in this.
    • 13. Funds with an Income Objective
      • Bond Fund – aims to earn current income without incurring undue risk and to pay ordinary income dividend distributions.
      • Municipal Bond (Tax-Exempt) Fund – attempts to earn current tax-exempt income by investing solely in municipal bonds issued by cities, states, and various districts and political subdivisions.
      • Mortgage Fund – invests in mortgage-backed securities.
    • 14. Funds with a Balanced Objective
      • Balanced Funds – invest in a mixture of bonds, preferred stocks, and blue-chip common stocks.
    • 15. Funds with a Growth Objective
      • Growth Fund – seeks long-term capital appreciation by investing in the common stocks of companies whose values are expected to grow faster than usual.
      • Value Fund – specializes in growth stocks whose prices appear to be low, based on the logic that such stocks are currently out of favor and under-priced.
    • 16. Funds with a Growth Objective (continued)
      • Aggressive-Growth Fund (or Maximum Capital Gains Fund) – seeks the greatest long-term capital appreciation and incurs the greatest fluctuation in the price of its shares.
      • Small-Cap Fund (or Small-Capitalization Fund) – specializes in investing in lesser-known mid-sized companies with market capitalization of less than $1 billion that are expected to grow rapidly.
    • 17. Funds with a Growth Objective (continued)
      • Sector Fund – heavily invests in common stocks from one industry or one portion of the economy that are expected to grow, perhaps very rapidly.
      • Precious Metals and Gold Funds – seek long-term capital appreciation by investing in securities associated with gold, silver, and other precious metals.
      • Global Fund – invests primarily in growth stocks of companies listed on foreign exchanges.
    • 18. Funds with a Growth Objective (continued)
      • International Funds – hold only foreign stocks, and some such funds focus on a single country or geographic region.
    • 19. Funds with a Growth and Income Objective
      • Growth and Income Fund – objective is a combination of growth and income; invests in companies expected to show average or better growth and to pay steady or rising dividends.
      • Life-Cycle Funds – create a diversified, all-in-one portfolio for those individuals who do not wish to actively manage their own investments.
    • 20. Funds with a Growth and Income Objective (continued)
      • Socially Conscious Funds – usually invest in firms with good records on the environment, human rights and public safety.
      • Mutual Fund Funds – earn a return by investing in other mutual funds, thereby providing extensive diversification.
    • 21. Unique Features of Mutual Funds
      • Easy Purchase and Sale – after you have opened an account with a mutual fund company, you can easily buy and sell shares.
      • Check Writing and Wiring of Funds
      • Automatic Investment – Most funds allow investors to make periodic monthly or quarterly payments using money automatically transferred from their bank account to the mutual fund company.
    • 22. Unique Features of Mutual Funds (continued)
      • Automatic Reinvestment – allows for the automatic use of ordinary income dividend distributions, capital gains distributions, and interest to buy additional shares of the fund without paying any commissions.
    • 23. Figure 15.2: The Wisdom of Automatic Reinvestment
    • 24. Switching Privileges within a Mutual Fund Family
      • Switching Privilege (or Exchange Privilege) – permits mutual fund shareholders to easily swap shares on a dollar-for-dollar basis for shares in another mutual fund within a mutual fund family.
      • Exchange Fee – a small charge, typically $5 or $10 per transaction, on a transfer from one fund to another.
      • Mutual Fund Family – exists when the same management company operates a variety of mutual funds, each with its own investment objectives.
    • 25. Recordkeeping and Help with Taxes
      • Confirmation Statements – indicate the number of shares owned and the value of the holdings.
      • Consolidated Statements – report all of the investor’s holdings and transactions in the mutual fund family.
    • 26. Beneficiary Designation
      • Beneficiary Designation – enables the shareholder to name one or more beneficiaries so that the proceeds to go them without going through probate.
    • 27. Withdrawal Plans
      • Withdrawal Plans (or Systematic Withdrawal Plans) – available to shareholders who want a periodic income from their mutual fund investments.
      • You can take your funds out of a mutual fund using one of four methods:
        • By taking a set dollar amount each month.
        • By cashing in a set number of shares each month.
        • By taking the current income as cash.
        • By taking a portion of the asset growth.
    • 28. Mutual Fund Transaction Fees
      • You may be required to pay a transaction fee when you purchase and sell your mutual fund shares
      • Load funds always charge transaction fees
        • Sales Charge (or Commission or Load) – assessed by some mutual funds at the time of purchase.
        • Load Funds – mutual funds that levy sales charges.
        • Front-End Load – the commission paid to the salesperson.
    • 29. Mutual Fund Transaction Fees (continued)
      • No-Load Funds Sometimes Charge Transaction Fees
        • No-Load Fund – a mutual fund that does not assess a sales charge at the time of the investment purchase.
        • Note that the SEC allows funds to be called “no-load” if they assess a “service fee” of 0.25 percent or less when shares are purchased.
    • 30. Mutual Fund Transaction Fees (continued)
      • Deferred Load (or Back-End Load) – a sales commission that is imposed only when shares are sold.
      • Redemption Charge (or Exit Fee) – typically disappears after the investment has been held for six months or a year.
    • 31. Mutual Fund Expense Charges
      • Management Fee – an annual assessment to pay the advisors who operate the mutual fund.
      • 12b-1 Fee (or Distribution Fee) – an annual charge deducted by the fund company from a fund’s assets to pay for advertising, marketing, distribution, and promotional costs.
    • 32. Disclosure of Fees
      • Standardized Expense Table – describes and illustrates in an identical manner the effects of all of a mutual fund’s fees and other expenses projected over five years.
      • Expense Ratio – the combined percentage charged annually for expense charges including management fees, 12b-1 fees, and other expenses of the mutual fund company.
    • 33. What’s Best: Load or No-Load? Low-Fee or High-Fee?
      • Up-front load charges are costly to the investor in the short run (less than five years), whereas annual 12b-1 charges are very costly over the long run.
      • Over five-year periods, lower-cost funds always deliver returns better than those offered by higher-cost funds.
    • 34. Managed Funds or Index Funds?
      • Managed Funds – professional managers are constantly evaluating and choosing securities using a specific investment approach.
      • Index Fund – a mutual fund that simply buys and holds the stocks or bonds that constitute a market index.
      • Unmanaged Funds – managers do not evaluate and select individual securities, but rather buy and hold all the stocks in a particular index.
    • 35. How to Evaluate Mutual Funds in Which to Invest
      • Match your investment philosophy and financial goals to a mutual fund’s objectives
      • Read prospectuses and annual reports
        • Annual Report – a published summary of the financial activities of a mutual fund company for the year.
    • 36. How to Evaluate Mutual Funds in Which to Invest (continued)
      • Locate sources of comparative performance data
        • The Financial Press
        • specialized mutual fund investment publications
        • magazines that rate mutual funds
        • internet sources on mutual funds
    • 37. Figure 15.3: Balancing Risk and Returns on Mutual Funds
    • 38. Interpret Comparative Performance Information Over Time
      • Consider a fund’s volatility – volatility characterizes a security’s or mutual fund’s tendency to rise or fall in price over a period of time.
      • Consider a fund’s long- and short-term performance
    • 39. Interpret Comparative Performance Information Over Time (continued)
      • Consider the size of the fund
      • Consider fund performance in up and down markets
    • 40. Golden Rules of Investing in Mutual Funds
      • Invest only in no-load mutual funds that have a low expense ratio and also do not assess a 12(b)1 fee.
      • When choosing mutual funds, always match your investment philosophy and financial goals to a mutual fund’s objectives by gathering information about fund volatility and performance.
      • When investing for long-term goals, definitely sign up for automatic reinvestment of your mutual fund dividends.
    • 41. Golden Rules of Investing in Mutual Funds (continued)
      • If you have a defined contribution retirement plan available at work, sign up for payroll withholding to automatically forward a portion of each paycheck to a mutual fund.
      • Invest most of your “serious” money – such as that to pay for your child’s education and your retirement – in one or more low-fee diversified index funds.
    • 42. Golden Rules of Investing in Mutual Funds (continued)
      • Don’t jump in and out of the mutual fund market; instead, keep it simple by investing in a few funds and leave your money alone. That’s all.

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