Chapter 13 Investing In Mutual Funds 13-1 Kapoor  Dlabay  Hughes  Ahmad Prepared by Cyndi Hornby, Fanshawe College    200...
Learning Objectives - Chapter 13 <ul><li>Describe the characteristics of mutual funds. </li></ul><ul><li>Classify mutual f...
Learning Objective # 1 Describe the characteristics of mutual funds. 13-3
What is a Mutual Fund? <ul><li>An investment chosen by people who pool their money to buy stocks, bonds, and other financi...
Why Investors Purchase Mutual Funds <ul><li>Professional management </li></ul><ul><ul><li>Who is the fund’s manager? </li>...
Characteristics of Mutual Funds <ul><li>Closed-end funds  </li></ul><ul><ul><li>A fund of finite size </li></ul></ul><ul><...
Characteristics of Mutual Funds <ul><li>Net Asset Value </li></ul><ul><ul><li>The current market value of the securities c...
Characteristics of Mutual Funds <ul><li>Index Fund </li></ul><ul><ul><li>An affordable way for investors to invest in a di...
Characteristics of Mutual Funds <ul><li>Load Fund </li></ul><ul><ul><li>A mutual fund in which investors pay a commission ...
Management Fees & Other Charges <ul><li>Expense Ratio </li></ul><ul><ul><li>Expressed as a fixed percentage of the fund’s ...
Learning Objective # 2 Classify mutual funds by investment choice.  13-11
Classification of Mutual Funds <ul><li>Money Market Funds </li></ul><ul><ul><li>Income and liquidity through investment in...
Classification of Mutual Funds <ul><li>Dividend Funds </li></ul><ul><ul><li>Aim for tax-advantage income  </li></ul></ul><...
Classification of Mutual Funds <ul><li>Specialty funds </li></ul><ul><ul><li>Sacrifice diversification in an effort to bui...
Classification of Mutual Funds <ul><li>Ethical funds </li></ul><ul><ul><li>Investment decisions that are guided by moral c...
Fund Families <ul><li>A family of funds exists when one investment company manages a group of mutual funds. </li></ul><ul>...
Learning Objective # 3 Evaluate mutual funds for investment purposes. 13-17
Steps to Evaluate Mutual Funds <ul><li>Perform a financial checkup to make sure you are ready to invest. </li></ul><ul><li...
Reading a Mutual Fund Quote in the Newspaper <ul><li>Net asset value and asset value change. </li></ul><ul><li>Company and...
Other Sources of Fund Information <ul><li>Mutual fund prospectus. </li></ul><ul><ul><li>A statement describing the risk fa...
Other Sources of Fund Information <ul><ul><li>Process to buy and sell shares </li></ul></ul><ul><ul><li>Service provided a...
Other Sources of Fund Information <ul><li>Mutual Fund Annual Report </li></ul><ul><ul><li>Performance, investments, assets...
Learning Objective # 4 Describe how and why mutual funds are bought and sold. 13-23
Advantages of Mutual Funds <ul><li>Diversification </li></ul><ul><li>Professional Management </li></ul><ul><li>Ease of buy...
Disadvantages of Mutual Funds <ul><li>Purchase and withdrawal costs </li></ul><ul><li>Ongoing management fees </li></ul><u...
Mutual Fund Transactions <ul><li>Return on investment   </li></ul><ul><li>Income dividends </li></ul><ul><ul><li>The earni...
Mutual Fund Transactions <ul><li>Taxes and Mutual Funds </li></ul><ul><ul><li>Most returns subject to taxation </li></ul><...
Mutual Fund Transactions <ul><li>Purchase options </li></ul><ul><ul><li>Closed-end through the stock exchange </li></ul></...
Mutual Fund Transactions <ul><li>Withdrawal Options </li></ul><ul><ul><li>Closed-end funds sold to another investor </li><...
Summary of Learning Objectives <ul><li>Describe the characteristics of mutual fund investments </li></ul><ul><ul><li>Major...
Summary of Learning Objectives <ul><li>Describe the characteristics of mutual fund investments </li></ul><ul><ul><li>A loa...
Summary of Learning Objectives <ul><li>Classify mutual funds by investment objectives </li></ul><ul><ul><li>Tailored to me...
Summary of Learning Objectives <ul><li>Classify mutual funds by investment objectives </li></ul><ul><ul><li>Tailored to me...
Summary of Learning Objectives <ul><li>Evaluate mutual funds for investment purposes </li></ul><ul><ul><li>Responsibility ...
Summary of Learning Objectives <ul><li>Describe how and why mutual funds are bought and sold </li></ul><ul><ul><li>The adv...
Summary of Learning Objectives <ul><li>Describe how and why mutual funds are bought and sold </li></ul><ul><ul><li>Shareho...
Upcoming SlideShare
Loading in …5
×

Chapter 13 Investing In Mutual Funds

2,163 views

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
2,163
On SlideShare
0
From Embeds
0
Number of Embeds
42
Actions
Shares
0
Downloads
101
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Chapter 13 Investing In Mutual Funds

  1. 1. Chapter 13 Investing In Mutual Funds 13-1 Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College  2009 McGraw-Hill Ryerson Ltd.
  2. 2. Learning Objectives - Chapter 13 <ul><li>Describe the characteristics of mutual funds. </li></ul><ul><li>Classify mutual funds by investment choice. </li></ul><ul><li>Evaluate mutual funds for investment purposes. </li></ul><ul><li>Describe how and why mutual funds are bought and sold. </li></ul>13-2
  3. 3. Learning Objective # 1 Describe the characteristics of mutual funds. 13-3
  4. 4. What is a Mutual Fund? <ul><li>An investment chosen by people who pool their money to buy stocks, bonds, and other financial securities selected by professional managers who work for investment companies. </li></ul><ul><li>Each investor has a right to a proportional share of the assets of the fund and any income it earns </li></ul><ul><li>Many people choose mutual </li></ul><ul><li>funds for their retirement </li></ul><ul><li>account. </li></ul>13-4
  5. 5. Why Investors Purchase Mutual Funds <ul><li>Professional management </li></ul><ul><ul><li>Who is the fund’s manager? </li></ul></ul><ul><ul><li>Managers can change so investors must be careful </li></ul></ul><ul><li>Diversification </li></ul><ul><ul><li>Investors funds are pooled and used to purchase a variety of investments. </li></ul></ul><ul><ul><li>Funds own stock in hundreds of different companies </li></ul></ul><ul><ul><li>Buys from different asset classes (stocks, bonds & other securities </li></ul></ul><ul><li>Investment Company </li></ul><ul><ul><li>A firm that, for a management fee, invests the pooled finds of small investors in securities appropriate to its stated investment objectives </li></ul></ul>13-5
  6. 6. Characteristics of Mutual Funds <ul><li>Closed-end funds </li></ul><ul><ul><li>A fund of finite size </li></ul></ul><ul><ul><li>Shares are issued by an investment company only when the fund is originally set up </li></ul></ul><ul><ul><li>After all original shares are sold you can only purchase shares from another investor </li></ul></ul><ul><li>Open-end funds </li></ul><ul><ul><li>Shares are issued and redeemed by the investment company at the request of investors. </li></ul></ul><ul><ul><li>Investors can buy and sell shares at the net asset value. </li></ul></ul>13-6
  7. 7. Characteristics of Mutual Funds <ul><li>Net Asset Value </li></ul><ul><ul><li>The current market value of the securities contained in the mutual funds portfolio minus the mutual funds liabilities divided by the number of shares outstanding </li></ul></ul><ul><ul><li>Calculated at the close of trading each day </li></ul></ul><ul><li>(Value of the fund’s portfolio – Liabilities) </li></ul><ul><li>Number of shares outstanding </li></ul>13-7
  8. 8. Characteristics of Mutual Funds <ul><li>Index Fund </li></ul><ul><ul><li>An affordable way for investors to invest in a diversified basket of securities; constructed to track the components of a market index such as the S&P 500 or the S&P/TSX Composite </li></ul></ul><ul><li>Exchange Traded Funds (ETF’s) </li></ul><ul><ul><li>An affordable way for investors to invest in a diversified basket of securities; provides the diversification of an index fund with the flexibility of a stock </li></ul></ul><ul><li>Short Sell </li></ul><ul><ul><li>The practice of selling a borrowed stock in the hope of covering the sale by buying it at a lower price later </li></ul></ul>13-8
  9. 9. Characteristics of Mutual Funds <ul><li>Load Fund </li></ul><ul><ul><li>A mutual fund in which investors pay a commission (as high as 8.5%) every time they purchase or sell shares </li></ul></ul><ul><li>No-Load fund </li></ul><ul><ul><li>No sales charge </li></ul></ul><ul><li>Front-end load </li></ul><ul><ul><li>A sales fee charged with each purchase; reduces the funds actually invested. Most fund companies have lowered the maximum front-end load on their funds to around 6 % </li></ul></ul><ul><li>Back-end load </li></ul><ul><ul><li>Also referred to as a contingent deferred sales load. One to six percent of withdrawals on sliding scale decreasing with time held, then zero if selling after a set number of years. </li></ul></ul>13-9
  10. 10. Management Fees & Other Charges <ul><li>Expense Ratio </li></ul><ul><ul><li>Expressed as a fixed percentage of the fund’s total value, called the Management Expense Ratio (MER). Ranges from 0.25 percent (rare) to 4 percent, to cover investment company’s costs. Fee is up to 0.5 percent higher for back-end load funds. </li></ul></ul><ul><li>Special Fees </li></ul><ul><ul><li>Annual RRSP, RRIF, RESP trustee fee </li></ul></ul><ul><ul><li>Account set up fee </li></ul></ul><ul><ul><li>Short term trading fee </li></ul></ul><ul><ul><li>Processing fee </li></ul></ul><ul><ul><li>Service fees </li></ul></ul>13-10
  11. 11. Learning Objective # 2 Classify mutual funds by investment choice. 13-11
  12. 12. Classification of Mutual Funds <ul><li>Money Market Funds </li></ul><ul><ul><li>Income and liquidity through investment in short-term money market instruments </li></ul></ul><ul><ul><li>T-bills, commercial paper, short-term government bonds </li></ul></ul><ul><li>Mortgage funds </li></ul><ul><ul><li>Aim for income and safety </li></ul></ul><ul><ul><li>Hold a group of mortgages </li></ul></ul><ul><li>Bond Funds </li></ul><ul><ul><li>Aim for safety of principal and income but are subject to capital gains and losses, which have tax implications. </li></ul></ul><ul><ul><li>Government and corporate debt securities. </li></ul></ul>13-12
  13. 13. Classification of Mutual Funds <ul><li>Dividend Funds </li></ul><ul><ul><li>Aim for tax-advantage income </li></ul></ul><ul><ul><li>Possibility of capital growth </li></ul></ul><ul><ul><li>Invest in preferred shares </li></ul></ul><ul><ul><li>High quality common shares </li></ul></ul><ul><li>Balanced and Asset Allocation funds </li></ul><ul><ul><li>Provide a mixture of safety, income and capital appreciation. </li></ul></ul><ul><li>Equity or Common Stock funds </li></ul><ul><ul><li>Capital gains </li></ul></ul><ul><ul><li>Common shares </li></ul></ul>13-13
  14. 14. Classification of Mutual Funds <ul><li>Specialty funds </li></ul><ul><ul><li>Sacrifice diversification in an effort to build capital gains. </li></ul></ul><ul><ul><li>One industry, geographical area </li></ul></ul><ul><ul><li>Segment of the capital market </li></ul></ul><ul><li>International or Global funds </li></ul><ul><ul><li>Subset of specialty funds </li></ul></ul><ul><li>Real Estate funds </li></ul><ul><ul><li>Long-term growth through capital appreciation </li></ul></ul><ul><ul><li>Income-producing real property </li></ul></ul>13-14
  15. 15. Classification of Mutual Funds <ul><li>Ethical funds </li></ul><ul><ul><li>Investment decisions that are guided by moral criteria </li></ul></ul><ul><li>Segregated funds </li></ul><ul><ul><li>Insurance companies as an alternative </li></ul></ul><ul><ul><li>Guarantee that a portion of your principal will be returned to you at maturity </li></ul></ul><ul><li>Labour-sponsored venture capital corporations (LSVCCs) </li></ul><ul><ul><li>Sponsored by labour organizations </li></ul></ul><ul><ul><li>Invest in small to medium-sized businesses </li></ul></ul>13-15
  16. 16. Fund Families <ul><li>A family of funds exists when one investment company manages a group of mutual funds. </li></ul><ul><li>Funds in the family vary in their objectives. </li></ul><ul><li>You can move your money from one fund to another within a fund family with low or no charge. </li></ul><ul><li>Market Timer: an individual who helps investors decide when to switch their investments from one fund to another, usually within the same family </li></ul>13-16
  17. 17. Learning Objective # 3 Evaluate mutual funds for investment purposes. 13-17
  18. 18. Steps to Evaluate Mutual Funds <ul><li>Perform a financial checkup to make sure you are ready to invest. </li></ul><ul><li>Obtain the money needed to purchase mutual funds. </li></ul><ul><li>Determine your investment objectives. </li></ul><ul><li>Find a fund with an objective that matches your objective. </li></ul><ul><li>Evaluate, evaluate, and evaluate any mutual fund before buying or selling. </li></ul>13-18
  19. 19. Reading a Mutual Fund Quote in the Newspaper <ul><li>Net asset value and asset value change. </li></ul><ul><li>Company and fund name. </li></ul><ul><li>Fund objective. </li></ul><ul><li>Total return over various time periods. </li></ul><ul><li>Ranking among funds with the same objective. </li></ul><ul><li>Sales load or no load (NL). </li></ul><ul><li>Percent of annual average net expenses. </li></ul>13-19
  20. 20. Other Sources of Fund Information <ul><li>Mutual fund prospectus. </li></ul><ul><ul><li>A statement describing the risk factors. </li></ul></ul><ul><ul><li>A description of the fund’s past performance. </li></ul></ul><ul><ul><li>A statement describing the type of investments in the fund’s portfolio. </li></ul></ul><ul><ul><li>Information about dividends, distributions and taxes. </li></ul></ul><ul><ul><li>Information about the fund’s management. </li></ul></ul><ul><ul><li>Limitations when choosing investments </li></ul></ul>13-20
  21. 21. Other Sources of Fund Information <ul><ul><li>Process to buy and sell shares </li></ul></ul><ul><ul><li>Service provided and cost </li></ul></ul><ul><ul><li>How often investment portfolio changes </li></ul></ul><ul><ul><li>Provides a wealth of information to help you make an investment choice </li></ul></ul><ul><ul><li>Summarizes fund’s objectives </li></ul></ul><ul><ul><li>Provides a summary of the fess charged </li></ul></ul>13-21
  22. 22. Other Sources of Fund Information <ul><li>Mutual Fund Annual Report </li></ul><ul><ul><li>Performance, investments, assets and liabilities </li></ul></ul><ul><li>Mutual Fund Guidebooks </li></ul><ul><li>Financial Publications </li></ul><ul><ul><li>IE: Money </li></ul></ul><ul><ul><li>Canadian Business </li></ul></ul><ul><ul><li>Report on Business </li></ul></ul><ul><li>The Internet </li></ul><ul><ul><li>Internet search engines </li></ul></ul><ul><ul><li>Investment company web pages </li></ul></ul>13-22
  23. 23. Learning Objective # 4 Describe how and why mutual funds are bought and sold. 13-23
  24. 24. Advantages of Mutual Funds <ul><li>Diversification </li></ul><ul><li>Professional Management </li></ul><ul><li>Ease of buying and selling </li></ul><ul><li>Small amount of money required to open an account </li></ul><ul><li>Multiple withdrawal options </li></ul><ul><li>Distribution or reinvestment of income and capital gains </li></ul><ul><li>Switching privileges in fund family </li></ul><ul><li>Multiple services </li></ul>13-24
  25. 25. Disadvantages of Mutual Funds <ul><li>Purchase and withdrawal costs </li></ul><ul><li>Ongoing management fees </li></ul><ul><li>Potential poor performance </li></ul><ul><li>No control over capital gains distribution </li></ul><ul><li>Complicated tax reporting issues </li></ul><ul><li>Potential market risk with all investments </li></ul><ul><li>Some sales personnel are aggressive </li></ul>13-25
  26. 26. Mutual Fund Transactions <ul><li>Return on investment </li></ul><ul><li>Income dividends </li></ul><ul><ul><li>The earnings a fund pays to shareholders after it has deducted expenses from its dividend and interest income </li></ul></ul><ul><li>Capital gain distributions </li></ul><ul><ul><li>The payments made to a fund’s shareholders that result from the sale of securities in the fund’s portfolio </li></ul></ul><ul><li>Sell shares at a higher price than you paid </li></ul>13-26
  27. 27. Mutual Fund Transactions <ul><li>Taxes and Mutual Funds </li></ul><ul><ul><li>Most returns subject to taxation </li></ul></ul><ul><ul><li>Companies required to send statement specifying how much received in dividends and capital gains distribution </li></ul></ul><ul><ul><li>Although you do not receive cash (as the returns are reinvested) they are still taxable </li></ul></ul><ul><ul><li>Can be taxed in year when your burden is already heavy </li></ul></ul><ul><ul><li>May be taxed for full year even if you own for only part of the year </li></ul></ul>13-27
  28. 28. Mutual Fund Transactions <ul><li>Purchase options </li></ul><ul><ul><li>Closed-end through the stock exchange </li></ul></ul><ul><ul><li>Open-end, no-load directly from the investment company by phone or through the mail, or a sales representative </li></ul></ul><ul><li>Reinvestment Plan </li></ul><ul><ul><li>Dividends and capital gains reinvested to buy additional shares </li></ul></ul>13-28
  29. 29. Mutual Fund Transactions <ul><li>Withdrawal Options </li></ul><ul><ul><li>Closed-end funds sold to another investor </li></ul></ul><ul><ul><li>Open-end funds sold to the investment company that sponsors the fund </li></ul></ul><ul><ul><ul><li>shares redeemed at their Net Asset Value </li></ul></ul></ul><ul><ul><li>Withdraw specified, fix dollar amount until fund exhausted </li></ul></ul><ul><ul><li>Sell certain number of shares over period </li></ul></ul><ul><ul><li>Withdraw fixed percentage of asset growth </li></ul></ul><ul><ul><li>Withdraw all asset growth, leave principal untouched </li></ul></ul>13-28
  30. 30. Summary of Learning Objectives <ul><li>Describe the characteristics of mutual fund investments </li></ul><ul><ul><li>Major reasons chosen are professional management and diversification </li></ul></ul><ul><ul><li>Closed end fund is one whose shares are only issued when fund set up </li></ul></ul><ul><ul><li>Open end fund shares are sold and redeemed by the investment company at the net asset value (NAV) at the request of the investors </li></ul></ul>13-30
  31. 31. Summary of Learning Objectives <ul><li>Describe the characteristics of mutual fund investments </li></ul><ul><ul><li>A load fund charges commission every time your purchase shares </li></ul></ul><ul><ul><li>No commission is charged to purchase a no-load fund </li></ul></ul><ul><ul><li>Can also be front-end or back-end load </li></ul></ul><ul><ul><li>Other possible fees include management fees and contingent deferred sales loads </li></ul></ul>13-31
  32. 32. Summary of Learning Objectives <ul><li>Classify mutual funds by investment objectives </li></ul><ul><ul><li>Tailored to meet the investment objectives of their customers </li></ul></ul><ul><ul><ul><li>Money market funds </li></ul></ul></ul><ul><ul><ul><li>Mortgage funds </li></ul></ul></ul><ul><ul><ul><li>Bond funds </li></ul></ul></ul><ul><ul><ul><li>Dividend funds </li></ul></ul></ul><ul><ul><ul><li>Balanced and Asset Allocation funds </li></ul></ul></ul><ul><ul><ul><li>Equity or Common Stock funds </li></ul></ul></ul><ul><ul><ul><li>Specialty funds </li></ul></ul></ul>13-32
  33. 33. Summary of Learning Objectives <ul><li>Classify mutual funds by investment objectives </li></ul><ul><ul><li>Tailored to meet the investment objectives of their customers </li></ul></ul><ul><ul><ul><li>International or Global funds </li></ul></ul></ul><ul><ul><ul><li>Real Estate funds </li></ul></ul></ul><ul><ul><ul><li>Ethical funds </li></ul></ul></ul><ul><ul><ul><li>Segregated funds </li></ul></ul></ul><ul><ul><ul><li>Labour-sponsored venture capital corporations </li></ul></ul></ul><ul><ul><li>Many companies use fund family concept to allow investors to switch among funds for more potential, financial reward and security </li></ul></ul>13-33
  34. 34. Summary of Learning Objectives <ul><li>Evaluate mutual funds for investment purposes </li></ul><ul><ul><li>Responsibility for choosing the right fund rests with the investor </li></ul></ul><ul><ul><li>Information found in newspapers, financial objectives of fund, information in prospectus and annual reports, financial publications, professional advisory services, and the Internet </li></ul></ul>13-34
  35. 35. Summary of Learning Objectives <ul><li>Describe how and why mutual funds are bought and sold </li></ul><ul><ul><li>The advantages and disadvantages have made mutual funds the investment of choice for many </li></ul></ul><ul><ul><li>Share of closed end funds are sold on organized stock exchanges </li></ul></ul><ul><ul><li>Share of open end funds can be purchased from authorized salesperson, brokerage firm, mutual fund supermarket or investment company </li></ul></ul>13-35
  36. 36. Summary of Learning Objectives <ul><li>Describe how and why mutual funds are bought and sold </li></ul><ul><ul><li>Shareholders in mutual funds can receive return in one of three ways; </li></ul></ul><ul><ul><ul><li>Income dividends </li></ul></ul></ul><ul><ul><ul><li>Capital gain distributions </li></ul></ul></ul><ul><ul><ul><li>Capital gains when sold at a higher price than originally paid </li></ul></ul></ul><ul><ul><li>A number of purchase and withdrawal options are available </li></ul></ul>13-36

×