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The Growth of the Mutual Fund Industry
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The Growth of the Mutual Fund Industry

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  • 1. The Growth of the Mutual Fund Industry
      • Mutual Fund Statistics
        • Almost 1 in 2 U.S. households invest in the stock market directly or through mutual funds
        • Over 8,000 mutual funds
        • Over $7 trillion of assets
  • 2. Why Learn About Mutual Funds?
    • To choose investments in a retirement plan
    • To invest an insurance or divorce settlement
    • To get started as a new investor
    • To build a portfolio
    • To invest a year-end bonus or tax refund
    • To put what you read & hear in perspective
  • 3. What is a Mutual Fund?
      • A mutual fund is:
      • a portfolio of stocks, bonds, or other
      • securities
      • collectively owned by many investors
      • managed by a professional investment company
  • 4. Mutual Funds Make Money in Two Ways
    • Current income (dividends or interest earned on the portfolio investments)
    • Capital gains (selling securities that have gone up in value)
  • 5. How the Investor Makes Money
    • Income distribution (dividends and interest that are passed on to investors)
    • Capital gains (an increase in a fund’s value)
    • Combination = total return
  • 6. Forms of Mutual Fund Companies
    • Open-end: issues and redeems shares at any time
    • Closed-end: trades like a stock and issues a fixed number of shares
  • 7. What Is Net Asset Value (NAV)?
    • The NAV is the price your fund pays you per share when you sell.
    • Value of fund
    • Number of shares = NAV
    • Example: $52,500,000
    • 3,500,000 = $15 per share
  • 8. Why Mutual Funds vs. Individual Securities?
    • Individual securities:
      • Require time and expertise to analyze
      • Usually have higher transaction costs
      • Offer less probability of adequate diversification
      • OK if:
        • you have stock-picking expertise
        • you have $20-30K to buy 10-20 stocks
        • you are buying Treasuries
  • 9. Advantages of Mutual Funds
    • 1) Full-time, professional management
    • 2) Reduced risk through diversification
    • 3) Earn competitive returns
    • 4) Small $ amount needed to start
    • 5) Retain ready access to your money
  • 10. More Advantages of Funds
    • 6) Inexpensive way to invest
    • 7) Convenience
    • 8) Automatic withdrawal plans available
    • 9) Lower incidence of bankruptcy and fraud
    • 10) Monitoring fund investments is easy
  • 11. Disadvantages of Mutual Funds
    • Funds follow market declines
    • No guaranteed rate of return
    • Unwanted taxable distributions
    • Record-keeping for tax purposes can be difficult
  • 12. The Mutual Fund Marketplace
    • Stock funds
    • Bond funds
    • Money market funds
  • 13. Types of Funds by Investment Objective
    • Growth
    • Income
    • Growth & income
    • Capital preservation
  • 14. Match Your Goal to the Right Fund Categories with a growth objective
    • Growth
    • Aggressive growth
    • Small cap
    • Specialty (Sector)
    • International
    • Global
    • Index
  • 15. Match Your Goal Categories with an Income Objective
    • Income
    • Corporate bond
    • Municipal bond
    • High-yield (junk) bond
    • Government bond
    • GNMA
    • Global bond
  • 16. Match Your Goal Funds with Growth & Income Objective
    • Equity-income
    • Growth & income
    • Balanced
  • 17. Match Your Goal Funds with a Preservation of Capital Objective
    • Taxable money market
    • Tax-free money market
  • 18. Match Your Goal Funds with All Four Objectives
    • Lifestyle
    • Asset allocation
    • Fund of funds
  • 19. Risk and Return Relationship
    • The higher the level of risk, the higher the expected return
            • Sector
            • Aggressive Growth
            • International
            • Growth
            • Stock Index
            • Lifestyle
            • Growth & Income
            • Equity-Income
            • Balanced
            • Income
            • Bond
            • Money Market
  • 20. Mutual Fund Costs
    • Sales charges/loads
        • Sales commissions
    • Operating expenses
        • Management fees
        • Marketing costs
        • Overhead expenses
  • 21. Types of Funds by Sales Charge
    • No-load -- No sales commission
    • Load -- 4%-8.5% commission
    • Back-end load -- Declining 6%-1%
    • Low-load -- 1%- 3%
  • 22. Mutual Fund Operating Expenses
    • Management and administrative fees
    • 12b-1 fee for marketing and distribution
    • Redemption fee
    • CHECK OVERALL EXPENSE RATIO
  • 23. Mutual Fund Economics
    • Costs and Fees A Shrs B Shrs C Shrs
    • Sales Load 5.5% None None
    • Redemption Fee None 0.5% None
    • Marketing Fee .25% .75% 1.00%
    • Management 1.30% 1.15% 1.20%
    • Annual Expense 1.55% 1.90% 2.20%
  • 24. Avoid Above-Average Expense Ratios
    • Stock funds > 1.4%
    • Bond funds > 1.00%
    • Money market funds > 0.5%
  • 25. Seven Steps to Finding the Right Fund
    • 1) Identify type of fund that matches goal
    • 2) Do more reading
    • 3) Research specific funds
    • 4) Determine selection criteria
    • 5) Get and read the prospectus
    • 6) Make your purchase
    • 7) Establish a schedule to buy more
  • 26. Step 1 -- Identify Types of Funds That Will Help You Reach Your Goals
    • Focus your search
    • Begin building your portfolio
    • Establish an asset allocation strategy
  • 27. Step 2 -- Do More Reading
    • Mutual Funds For Dummies - Eric Tyson
    • Guide To Successful No-Load Investing - Sheldon Jacobs
    • The Right Way To Invest In Mutual Funds - Walter Updegrave
    • Bogle on Mutual Funds and Common Sense on Mutual Funds - John Bogle
  • 28. Step 3 -- Research Specific Funds
    • Personal finance publications
    • Business newspapers
    • Mutual fund trade associations
    • Library references
    • Fund-provided information
    • Professional advisors
  • 29. Personal Finance Publications
    • Money
    • Kiplinger’s Personal Finance
    • Forbes
    • Business Week
    • Smart Money
  • 30. Newspapers & Trade Associations
    • The Wall Street Journal
    • Barron’s
    • The New York Times
    • USA Today
    • Investment Company Institute
    • Mutual Fund Education Alliance
  • 31. Library & Fund-Provided Info
    • Morningstar
    • Value Line
    • Lipper Analytical
    • Annual reports
    • SAI
    • Prospectus
  • 32. Internet Sites
    • <www.morningstar.com>
    • <www. networth.galt.com>
    • <www. brill.com>
    • <www. ici.org>
    • <www. mfea.com>
    • <www.sec.gov/mfcc/mfcc-int.htm>
  • 33. Step 4 -- Determine Your Selection Criteria
    • Fund objective (relative to your goal)
    • Cost to purchase (no-load vs. load)
    • Fund fees/expense ratio
    • Investment minimum
    • Manager tenure
    • Performance (1, 3, 5 years)
    • Longevity
  • 34. Step 5 -- Get a Prospectus for Each Fund from:
    • Mutual fund families
    • Mutual fund supermarkets/networks
    • Full-service & discount brokers
    • Financial planners
    • Banks
    • Internet
  • 35. Step 6 -- Make Your Purchase
    • By mail
    • Local investment center
    • Toll-free 800 number for assistance
    • Through a broker or financial planner
    • On-line
  • 36. Step 7 -- Continually Buy More
    • Use a dollar-cost-averaging system--Investing a fixed number of dollars, e.g., $50 or $100, at periodic intervals, usually monthly or quarterly
  • 37. Dollar-Cost-Averaging
    • Month Amount Invested Share Price Shares Purchased Cumulative Value
    • January $150 $30 5 $150.00
    • February $150 $30 5 $300.00
    • March $150 $25 6 $400.00
    • April $150 $25 6 $550.00
    • May $150 $20 7.5 $590.00
    • June $150 $15 10 $592.50
    • July $150 $15 10 $742.50
    • August $150 $15 10 $892.50
    • September $150 $20 7.5 $1,340.00
    • October $150 $25 6 $1,825.00
    • November $150 $30 5 $2,340.00
    • December $150 $30 5 $2,490.00
    • TOTAL $1,800 $280 83 $2,490.00
    • Average Cost $21.69 per share Average Price $23.33
  • 38. Final Hints:
    • Invest for your goals
    • Research funds carefully with a questioning attitude
    • Review progress quarterly, comparing “apples with apples”
    • Read your mail
    • Keep excellent records
  • 39. Take These Action Steps
    • Make a list of long- and short-term financial goals and match them with an appropriate mutual fund
    • Learn about mutual fund choices available through your employer’s retirement plan
    • Decide on your selection criteria
    • Identify specific mutual funds that match your investment goals
  • 40. Take These Action Steps
    • Call at least three mutual fund organizations for a prospectus.
    • Do follow-up research and compare at least three mutual funds using Morningstar or Value Line.
    • Complete a mutual fund application and make an investment.

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