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Investing in mutual funds
 

Investing in mutual funds

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    Investing in mutual funds Investing in mutual funds Presentation Transcript

    • Lecture 19 Investing in Mutual Funds
    • What is a Mutual Fund?
      • 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.
        • SIPs
        • MIPs
      16-2
    • Mutual Fund Statistics
      • Only 5%of Household savings in MFs
      • Over 3000 mutual funds by 2009 with 30 fund houses.
      16-3
    • Why Investors Purchase Mutual Funds
      • 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.
      16-4
    • Closed- and Open-End Funds
      • 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).
      16-5
    • Exchange-Traded Funds
      • 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.
      16-6
    • Net Asset Value (NAV)
      • 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.
      16-7
    • Load Funds and No-Load Funds
      • 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.
      16-8
    • Management Fees and Other Charges
      • Contingent deferred sales load (back-end load) 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.
      16-9
    • Classification of Mutual Funds
      • 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.
        • Index buys stocks that mirror an index .
        • Large-cap funds invest in companies with capitalization of 5000 crores or more.
        • Mid-cap funds buy stock in companies whose capitalization is between 2500 crores
      16-11
    • Classification of Mutual Funds
        • 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 low capitalization
        • Socially responsible funds avoid investing in companies that produce harmful products.
      16-12 (continued)
    • Classification of Mutual Funds
      • 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.
        • Long-term corporate bonds (> 10 years).
      (continued) 16-13
    • Classification of Mutual Funds
      • 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) 16-15
    • Families of Funds
      • 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.
      16-16
    • Steps to Evaluate Mutual Funds
      • 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
      • Consider managed funds vs. indexed funds
      16-17
    • Reading a Mutual Fund Quote in the Newspaper
      • 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.
      16-19
    • Other Sources of Fund Information
      • 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.
      16-20
    • Other Sources of Fund Information
      • Mutual fund annual report.
        • Performance, investments, assets and liabilities.
      • Financial Publications.
          • 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.
      16-21 (continued)