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HUSC 3366 Chapter 13 Investing in Mutual funds
 

HUSC 3366 Chapter 13 Investing in Mutual funds

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Fundamental of Family Financial Planning Course PowerPoint Lectures

Fundamental of Family Financial Planning Course PowerPoint Lectures

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    HUSC 3366 Chapter 13 Investing in Mutual funds HUSC 3366 Chapter 13 Investing in Mutual funds Presentation Transcript

    • Chapter 13
      • In this chapter you will learn to:
      • Describe the characteristics of mutual fund investments.
      • Classify mutual funds by investment objective.
      • Evaluate mutual funds.
      • Describe how and why mutual funds are bought and sold.
      Department of Human Sciences - University of Arkansas at Pine Bluff 1-
      • An investment alternative where money from investors is pooled to buy stocks, bonds, and other financial securities selected by professional managers.
      • Many people choose mutual funds for their retirement account investments.
        • 401(k) or 403(b)
        • IRA
        • Roth IRA
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • 92 million individuals in 54 million households in the U.S. own mutual funds.
      • Over 8,000 mutual funds by 2004.
      • Over $8 trillion in assets owned by mutual funds in the U.S. by 2004.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Objective 1: Describe the characteristics of mutual fund investments.
      Department of Human Sciences - University of Arkansas at Pine Bluff 1-
      • Professional management.
        • Who is the fund’s manager?
        • Managers can change.
        • Be aware of the scandal involving late trading.
      • Diversification.
        • Investors funds are used to purchase a variety of investments. This variety provides some safety.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Closed-end funds (7% of funds).
        • Shares are issued by an investment company only when the fund is organized.
        • After all original shares are sold you can purchase shares only from another investor who is willing to sell.
        • Traded on exchanges and over-the-counter.
      • Open-end funds (91% 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 asset value (NAV).
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Invests in the stocks contained in a specific stock market index, like the Standard and Poor’s 500 stock index.
      • Performance of shares in the fund tend to mirror the performance of the index.
      • Low management fees since there is less need for decisions made by a portfolio manager.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Value of the fund’s portfolio - Liabilities
      • Number of shares outstanding
      • For most mutual funds, NAV is calculated at the close of trading each day.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Load Fund.
        • Investors pay a commission (sales charge) up to 8.5% every time they purchase shares. This is sometimes called a front load. (Class A shares)
        • Average charge is 3-5% for which an investor can get purchase advice and explanations.
      • No-Load Fund.
        • Investors pay no sales charge up front.
        • You deal directly with the fund with 800 numbers or web sites, or from discount brokers.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Contingent deferred sales load (back-end load) (Class B shares).
        • Charged upon withdrawal of funds (1-5%).
        • Generally decreases on a sliding scale depending on the number of years shares are held.
      • Management fee.
        • Charged yearly (.5%-1.25% average) based on a percentage of the funds asset value.
      • 12b-1 fees (Class C shares).
        • Annual fee to defray advertising and marketing costs of the fund.
        • 1% or less of a fund’s assets per year.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
    • * Source: Year 2000 data from the U.S. Bureau of the Census, Statistical Abstract of the United States, 2001, page 744. 1-
      • Objective 2: Classify mutual funds by invest objective.
      1-
      • Stock funds.
        • Aggressive growth funds buy stocks in small, fast-growing companies.
        • Equity income funds invest in stock of companies with a long history of paying dividends.
        • Growth buy stock in companies with higher-than-average revenue and earnings growth.
        • Global funds buy stock in companies in the U.S. and other countries, while international funds buy stock only in companies outside the United States.
        • Index funds buys stocks that mirror an index .
        • Large-cap funds invest in companies with capitalization of $5 billion or more.
        • Mid-cap funds buy stock in companies whose capitalization is between $1 and $5 billion.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
        • Regional funds buy stock in companies in a specific region of the world.
        • Sector funds buy stock in companies in a particular industry such as biotechnology.
        • Small-cap funds buy stock in lesser-known companies with a capitalization of less than 500 million.
        • Socially responsible funds avoid investing in companies that produce harmful products.
      (continued) 1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Bond funds.
        • High-yield (junk) bond funds buy corporate bonds that are higher risk and higher yield.
        • Index bond funds invest in a sampling of bonds included in an index.
        • Intermediate corporate bonds (5-10 years).
        • Intermediate U.S. bond funds buy treasury notes with maturities of 5-10 years.
        • Long-term corporate bonds (> 10 years).
      (continued) 1- Department of Human Sciences - University of Arkansas at Pine Bluff
        • Long-term U.S. bond funds: U.S. Treasury and U.S. zero-coupon bonds with maturities > than 10 years.
        • Municipal bonds: Invest in municipal bonds that provide investors tax-free interest income.
        • Short-term U.S. bond funds invest in U.S.Treasury issues of 1-5 years.
        • Short-term corporate bond funds: Investment grade bonds with maturities of 1-5 years.
        • World bond funds buy bonds of foreign companies and governments.
      (continued) 1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Other funds.
        • Asset allocation funds: invest in various asset classes, such as stocks, and bonds, with precise amounts within each type.
        • Balanced funds: Invest in both stocks and bonds, with the primary objectives of conserving principal, providing income as well as growth.
        • Money market funds: Invest in CD’s, government securities, and other safe investments.
      (continued) 1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • A family of funds exists when one investment company manages a group of mutual funds.
      • Each fund in the family has a different financial objective.
      • Exchange privileges allow you to move your money from one fund to another within the fund family with little or no charge.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Objective 3:
      • Evaluate mutual funds.
      Department of Human Sciences - University of Arkansas at Pine Bluff 1-
      • Are you ready to invest in mutual funds?
      • Determine your risk tolerance.
      • Determine your investment objectives.
      • Obtain the money you need invest.
      • A fund’s objective should match your investment objective.
      • Evaluate any mutual fund before buying or selling ( www.morningstar.com )
      • Consider managed funds vs. indexed funds
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Use web sites to research a fund.
        • http://finance.yahoo.com
        • www.businessweek.com
        • www.morningstar.com (also other advisory services, such as Value Line).
        • www.smartmoney.com
      • Check mutual fund companies Internet sites.
        • www.trendstarfunds.com
        • www.vanguard.com
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Net asset value and asset value change.
      • The fund family and fund name.
      • Fund objective.
      • Total return over various time periods.
      • Ranking among funds with the same objective.
      • Sales load fees if any, or no load (NL).
      • Annual expenses.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Mutual fund prospectus tells the funds objective and:
        • 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 on how to open an account.
        • Dividends, distributions and taxes.
        • Information about the fund’s management.
        • The process for investors to buy or sell shares.
        • Services provided to investors.
        • The turnover ratio of the fund’s investments.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Mutual fund annual report.
        • Performance, investments, assets and liabilities.
      • Financial Publications.
        • Business Week , Forbes , Kiplinger's Personal Finance and Money are sources of information.
        • Business Week’s mutual fund survey includes information such as the...
          • Fund’s overall rating compared to all other funds, and to funds in the same category.
          • Fund size, sales charge and expense ratio.
          • Performance for best and worst quarters.
      (continued) 1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Objective 4:
      • Describe how and why mutual funds are bought and sold.
      Department of Human Sciences - University of Arkansas at Pine Bluff 1-
      • You can open an account from $250 to $3,000 and up depending on the fund & family.
      • Open-end, no-load directly from the investment company by phone, mail, online, or from a discount broker.
      • Closed-end or exchange-traded funds are purchased through a broker; traded on stock exchanges and over-the-counter.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • There are several ways you can get a return on your investment.
        • Capital gains: sell shares at a price > than you paid (Report on Schedule D and 1040).
        • Income dividends: earnings funds pay to shareholders from dividend and interest income (Taxed as regular income).
        • Capital gain distributions: Payments to shareholders from sale of securities held by the fund (Show on Schedule D and 1040).
        • Income and capital gain distributions can be automatically reinvested.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Automatic investments: Money is taken from your checking account monthly and invested in a fund.
      • Telephone Switching: Call your fund and move money from one fund to another in the same family.
      • Withdrawals: Various withdrawal options; you can withdraw funds by phone, letter, online, etc.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff
      • Go online to www.morningstar.com , www.cbsmarketwatch.com or other sources and do some research on mutual funds.
      • Find a fund that you feel would be a good investment for you.
      • Pair off with another student. Compare your mutual fund selections and discuss your investment objectives and how this fund will meet those objectives.
      1- Department of Human Sciences - University of Arkansas at Pine Bluff