Ch. 18 PowerPoint Slides

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Ch. 18 PowerPoint Slides

  1. 1. Chapter Eighteen Mutual Funds
  2. 2. Overview <ul><li>A mutual fund is a pooled investment portfolio with many different investors (shareholders) managed by a professional manager. </li></ul><ul><li>There are over 8000 mutual funds managing over $12 Trillion in assets as of November 2007. </li></ul><ul><li>Mutual funds account for just under 20% of total household financial assets and approximately 50% of people own mutual funds. </li></ul><ul><li>Approximately 55% of mutual fund assets are held in stock market mutual funds. </li></ul>
  3. 3. Advantages/Disadvantages of Mutual Funds <ul><li>Diversification </li></ul><ul><li>Professional Management </li></ul><ul><li>Time Savings </li></ul><ul><li>Selection </li></ul><ul><li>Performance </li></ul><ul><li>Expenses </li></ul>
  4. 4. Structure of Mutual Funds <ul><li>Open-End Mutual Fund </li></ul><ul><li>Closed-End Mutual Fund </li></ul><ul><li>Exchange Traded Fund (ETF) </li></ul>
  5. 5. Mutual Fund Objectives <ul><li>Money Market Mutual Funds </li></ul><ul><li>Bond Funds </li></ul><ul><li>Equity Funds </li></ul><ul><li>Hybrid Funds </li></ul><ul><li>Specialty Funds </li></ul><ul><li>International Funds </li></ul>
  6. 6. Mutual Fund Expenses <ul><li>Load Charges – A fee charged at the time of purchase designed to compensate sales agents. </li></ul><ul><li>Expense Ratios – An annual charge (taken daily) to cover the costs of managing the mutual fund and to generate a profit for fund management. </li></ul><ul><li>12b-1 fees – An annual fee taken from the fund to compensate sales agents and provide services for shareholders. </li></ul><ul><li>Share Classes </li></ul><ul><ul><li>Class A – Front-end load charge and may have small 12b-1 annual fee. </li></ul></ul><ul><ul><li>Class B – No front-end load, higher annual 12b-1 charges, and a Contingent Deferred Sales Load (declining back-end load charge). Typically convert to A shares after 6-8 years. </li></ul></ul><ul><ul><li>Class C – No front-end load, higher annual 12b-1 charges, does not convert to A shares. </li></ul></ul><ul><li>Estimating true cost of various expenses – See handout and spreadsheet. </li></ul>
  7. 7. Information on Mutual Funds <ul><li>Yahoo Finance </li></ul><ul><li>Moneycentral </li></ul><ul><li>Value Line </li></ul><ul><li>Prospectus </li></ul><ul><li>Fund Families </li></ul>
  8. 8. Hedge Funds <ul><li>According to Hedgefunds.net, it is estimated that hedge funds managed $2.7 trillion as of the end of the third quarter in 2007. </li></ul><ul><li>Less regulated than mutual funds and can use more specialized (and sometimes risky) strategies. </li></ul><ul><li>Typically have significantly higher expenses. </li></ul><ul><li>Restricted to high net worth individuals and institutions. </li></ul>
  9. 9. Homework <ul><li>Q 1-5, 11, 13, 15-16 </li></ul><ul><li>P 1-2, 4, 8, 10 </li></ul><ul><li>You are planning to invest $200 per month into one of three mutual funds. Mutual Fund A has a 5% load charge and a 0.5% annual expense ratio. Mutual Fund B has no load charge and a 1.25% annual expense ration. Mutual Fund C has no load charge and a 0.5% annual expense ratio. If your investment horizon is 4 years and you anticipate a 9% rate of return (compounded monthly), what is the total cost (in $) for each of the 3 funds. What if your investment horizon is 35 years? </li></ul><ul><li>Discuss under what types of investor horizons class A shares would be preferred to class C shares for a mutual fund investor? How about a situation where class C shares might be preferred? </li></ul><ul><li>Explain how a fund with low turnover may be better than a fund with high turnover. </li></ul><ul><li>Consider a strategy where an investor reallocates his wealth each year to put 20% of his investment portfolio into each of the top 5 performing mutual funds from the previous year. Is this likely to be an effective strategy? Explain. </li></ul><ul><li>Explain the difference between a hedge fund and a mutual fund. </li></ul>

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