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Investing in mutual funds


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  • 1. Lecture 19 Investing in Mutual Funds
  • 2. 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
  • 3. Mutual Fund Statistics
    • Only 5%of Household savings in MFs
    • Over 3000 mutual funds by 2009 with 30 fund houses.
  • 4. 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.
  • 5. 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).
  • 6. 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.
  • 7. 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.
  • 8. 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.
  • 9. 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.
  • 10. 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
  • 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)
  • 12. 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
  • 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
  • 14. 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.
  • 15. 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. 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.
  • 17. 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.
  • 18. 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)