Chapter Sixteen

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Chapter Sixteen

  1. 1. CHAPTER 16 Investing in Mutual Funds Personal Finance 6e Kapoor Dlabay Hughes 16-1 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  2. 2. What is a Mutual Fund?  An investment chosen by people who pool their money to buy stocks, bonds, and other financial securities selected by professional managers who work for investment companies.  Each fund has a specific objective.  Over 6,000 funds to choose from.  Many people choose mutual funds for their retirement account [401(k), 403(b), IRA and Roth IRA] investments. 16-2 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  3. 3. Why Investors Purchase Mutual Funds  Professional management.  Who is the fund’s manager?  Managers can change.  Diversification.  Investors funds are pooled and used to purchase a variety of investments. This variety provides some safety. 16-3 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  4. 4. Closed- and Open-end Funds  Closed-end funds (10% of funds).  Shares are issued by an investment company only when the fund is organized.  After all original shares are sold you can only purchase shares from another investor.  Open-end funds (90% of funds).  Shares are issued and redeemed by the investment company at the request of investors.  Investors can buy and sell shares at the net 16-4 asset value. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  5. 5. Net Asset Value (NAV) Value of the fund’s portfolio - Liabilities Number of shares outstanding Offer price = NAV + sales commission 16-5 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  6. 6. Load Funds and No-Load Funds  Load Fund.  Investors pay a commission (sales fee) every time they purchase shares.  Average fee is 3-5% for which an investor can get purchase advice and explanations.  No Load-Fund.  Investors pay no sales fee, because there are no sales people.  You deal directly with the investment company via 800 numbers or web sites. 16-6 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  7. 7. Management Fees and Other Charges  Management fee.  Charged yearly (.25%-1% average) based on a percentage of the funds asset value.  Contingent deferred sales load.  Charged upon withdrawal of funds (1-6%).  Decreases with time held.  12b-1 fees.  Annual fee to defray advertising and marketing costs of the fund. 16-7 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  8. 8. Classification of Mutual Funds 120 100 80 $ Millions 60 40 20 0 Equity Funds Income & Money Market, Money Market, Bond Funds Tax Exempt Taxable 16-8 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  9. 9. Classification of Mutual Funds  Stock funds.  Aggressive growth.  International.  Equity income.  Mid cap.  Global.  Regional.  Growth.  Sector.  Growth and  Small cap. income.  Utility.  Index. 16-9 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  10. 10. Classification of Mutual Funds (continued)  Bond funds.  High-yield (junk) bonds. Treas ury B ill  Insured municipal bonds.  Intermediate corporate bonds.  Intermediate U.S. bond funds.  Long-term corporate bonds.  Long-term U.S. bonds.  Municipal bonds.  Short-term U.S. bonds.  Short-term corporate bonds. 16-10 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  11. 11. Classification of Mutual Funds (continued)  Stock and bond funds.  Balanced funds.  Invest in both stocks and bonds with the purpose of conserving capital.  Stock and bond blend funds.  Multipurpose objectives including flexible income, flexible portfolios, global securities, and convertible 16-11 securities. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  12. 12. Fund Families  A family of funds exists when one investment company manages a group of mutual funds.  Funds in the family vary in their objectives.  You can move your money from one fund to another within a fund family with low or no charge. 16-12 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  13. 13. Steps to Evaluate Mutual Funds  Perform a financial checkup to make sure you are ready to invest.  Obtain the money needed to purchase mutual funds.  Determine your investment objectives.  Find a fund with an objective that matches your objective.  Evaluate, evaluate, and evaluate any mutual fund before buying or selling. 16-13 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  14. 14. Reading a Mutual Fund Quote in the Newspaper  Net asset value and asset value change.  Company and fund name.  Fund objective.  Total return over various time periods.  Ranking among funds with the same objective.  Sales load or no load (NL).  Percent of annual average net expenses. 16-14 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  15. 15. Other Sources of Fund Information  Mutual fund prospectus.  A statement describing the risk factors.  A description of the fund’s past performance.  A statement describing the type of investments in the fund’s portfolio.  Information about dividends, distributions and taxes.  Information about the fund’s management.  Mutual fund annual report.  Performance, investments, assets and liabilities. 16-15 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  16. 16. Other Sources of Fund Information (continued)  Financial Publications.  Business Week, Forbes, Kiplinger's Personal Finance and Money are sources of information on mutual funds.  Business Week’s mutual fund survey includes:  Fund’s overall rating compared to other funds.  Fund’s rating compared to funds in the same category.  Fund size, sales charge and expense ratio.  History for past ten years.  Risk of loss factor and toll-free number. 16-16 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  17. 17. Other Sources of Fund Information (continued)  Use web sites to research a fund.  www.quote.yahoo.com  www.businessweek.com  www.morningstar.net  www.smartmoney.com  Check mutual fund companies Internet sites.  www.troweprice.com  www.vanguard.com  www.americanfunds.com 16-17 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  18. 18. *Who Owns Mutual Fund Shares? 6% 14% Households Private Pension Funds Bank Trusts and Estates 15% Other 65% 16-19 *U.S. Bureau of the Census, 1998. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.
  19. 19. Mutual Fund Transactions  Return on investment (may be taxable).  Income dividends.  Capital gain distributions.  Reinvestment plans are available.  Sell shares at a higher price than you paid.  Purchase options.  Closed-end through the stock exchange.  Open-end, no-load directly from the investment company by phone or through 16-19 the mail. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2001. All Rights Reserved.

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