Mutual Funds

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Mutual Funds

  1. 1. Introduction to mutual funds
  2. 2. What is a mutual fund? <ul><li>Mutual funds are pools of money that are managed by an investment company on behalf of many investors </li></ul><ul><li>It’s a financial product </li></ul><ul><li>They offer investors a variety of different goals </li></ul><ul><li>Think of mutual funds as financial intermediaries </li></ul>
  3. 3. Advantages <ul><li>Professional Management </li></ul><ul><li>Diversification </li></ul><ul><li>Liquidity </li></ul>
  4. 4. Disadvantages <ul><li>Professional management </li></ul><ul><li>No control </li></ul><ul><li>Dilution </li></ul><ul><li>Hidden costs </li></ul>
  5. 5. How do I buy mutual funds? <ul><li>Most mutual funds require a minimum investment of about $500-$1000 </li></ul><ul><li>You can purchase mutual funds from brokers, directly from mutual fund companies, or private investment firms </li></ul>
  6. 6. Open & closed end funds <ul><li>Describes how the fund is structured in terms of ownership </li></ul><ul><li>An open-end fund issues and redeems shares on demand </li></ul><ul><li>-There is no limit to the amount of shares the fund can issue </li></ul><ul><li>A closed-end fund issues a set number of shares in an IPO </li></ul><ul><li>-trades on an exchange </li></ul><ul><li>-most sell at a discount to their underlying asset value </li></ul><ul><li>-Unit/share price is determined by investor demand </li></ul>
  7. 7. Load vs. no-load <ul><li>Load funds charge a commission while no-load funds are commission free </li></ul><ul><li>The basic structure of load funds are: </li></ul><ul><li>1) Front-end with a commission varying from about 3-6.25% of the investment </li></ul><ul><li>2) Back-end/redemption with a commission of about 3% of investment </li></ul>
  8. 8. Expense ratios <ul><li>MER (Management Expense Ratio) </li></ul><ul><li>Represents the management fees charged by all funds </li></ul><ul><li>It is taken as percentage of total assets and then transferred on to the shareholders as a fee </li></ul><ul><li>Usually between 0.2-2% of the funds assets </li></ul><ul><li>Another fee usually charged is an administrative fee </li></ul>
  9. 9. The Effects of these fees $10 000 investment with a 9% annual return and 0.5% MER for Loads Cumulative ROI Comparison Total Return Comparison Start Year 1 Year 2 Year 3 100% No-Load $10,000 $10,900 $11,881 $12,950 5% Front-End Load $ 9,500 $10,303 $11,174 $12,119 3% Back-End Load $10,000 $10,845 $11,762 $12,374 Year 1 Year 2 Year 3 100% No-Load 9.0% 18.8% 29.5% 5% Front-End Load 3.0% 11.7% 21.2% 3% Back-End Load 8.4% 17.6% 23.7%
  10. 10. Taxes & how they affect mutual funds <ul><li>All investments in mutual funds are subject to tax </li></ul><ul><li>Managed mutual funds on average turn over approximately 85% of their holdings per year. </li></ul><ul><li>The higher the turn over the higher the taxable gains on those sales </li></ul><ul><li>Taxable gains are distributed to the shareholders of the Fund </li></ul><ul><li>An 85% turnover will result in approximately reducing returns by about 0.7% per year </li></ul>
  11. 11. NAVPS <ul><li>Net Asset Value Per Share </li></ul><ul><li>Value of Fund Holdings/Units Purchased=Unit Price </li></ul><ul><li>NAVPS increases through the capital gains it owns </li></ul><ul><li>Other ways a mutual fund can make money for shareholders: </li></ul><ul><li>1) A mutual fund can receive dividends from the stocks it owns </li></ul><ul><li>2) Interest paid on money in the bank or interest payments from bonds </li></ul>
  12. 12. The Prospectus tells us about…. <ul><li>The fund philosophy/investment style </li></ul><ul><li>Objectives </li></ul><ul><li>Who’s investing our money </li></ul><ul><li>Loads </li></ul><ul><li>MER </li></ul><ul><li>Historical performance data </li></ul><ul><li>Holdings </li></ul>
  13. 13. How do I know what fund to Invest in? <ul><li>The type of fund you invest in depends on your: </li></ul><ul><li>1)Goals </li></ul><ul><li>2)Risk tolerance </li></ul><ul><li>3)Time frame </li></ul>
  14. 14. Fund categories <ul><li>Bond funds </li></ul><ul><li>General equity (stock) funds </li></ul><ul><li>Balanced funds </li></ul><ul><li>Global/international funds </li></ul><ul><li>Sector funds </li></ul><ul><li>Index funds </li></ul>
  15. 15. Conclusions <ul><li>Mutual funds can be a great financial tool if they are utilized properly </li></ul><ul><li>Purchase funds according to your objectives, risk tolerance and time horizon </li></ul><ul><li>Read the prospectus to understand the dynamics of the fund you’re purchasing </li></ul>

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