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ppt_ch15.ppt ppt_ch15.ppt Presentation Transcript

  • Chapter Fifteen Investing Through Mutual Funds
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • Figure 15.1: How a Mutual Fund Works
  • 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.
  • Ordinary Income Dividend Distributions
    • Ordinary Income Dividend Distributions – the fund pays out dividend income and interest it has received from securities it owns.
  • 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.
  • 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.
  • Mutual Funds Have Different Investment Objectives
    • Prospectus – a mutual fund’s investment objectives must be stated in this.
  • 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.
  • Funds with a Balanced Objective
    • Balanced Funds – invest in a mixture of bonds, preferred stocks, and blue-chip common stocks.
  • 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.
  • 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.
  • 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.
  • Funds with a Growth Objective (continued)
    • International Funds – hold only foreign stocks, and some such funds focus on a single country or geographic region.
  • 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.
  • 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.
  • 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.
  • 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.
  • Figure 15.2: The Wisdom of Automatic Reinvestment
  • 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.
  • 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.
  • Beneficiary Designation
    • Beneficiary Designation – enables the shareholder to name one or more beneficiaries so that the proceeds to go them without going through probate.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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
  • Figure 15.3: Balancing Risk and Returns on Mutual Funds
  • 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
  • Interpret Comparative Performance Information Over Time (continued)
    • Consider the size of the fund
    • Consider fund performance in up and down markets
  • 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.
  • 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.
  • 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.