Mutual Funds


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  • Why are mutual funds so important? Own about 20% of US stock market. 50% of families have. Probably your first investment (401k) You don’t own the stocks, just a part of the pool.
  • 95% of mutual fund assets are in open-end funds.
  • Usually load fees don’t exceed 5.5% but they can go as high as 8.5%. 12b-1 fees offend me. Why should my return be reduced by charges to attract new customers and enhance the manager’s profits.
  • There are about 35 different categories of funds Services include switching between funds, check on MMMF, provide tax info.
  • Even if diversified, can’t avoid market or systematic risk. Many have minimum sizes between $1,000 and $5,000. If drop below that, will be changed small account penalty fee.
  • Until 2003 considered to be “squeaky clean” NY Attorney General’s investigation SEC – not paying attention 15 mutual funds, 12 brokerage firms, four banks and dozens of individuals investigated, indicted and some fined.
  • Mutual Funds

    1. 1. Mutual Funds <ul><li>Diversified portfolio of stocks, bonds or other securities run by a professional manager </li></ul><ul><ul><li>$ 7.5 trillion in assets; 8,100+ different funds </li></ul></ul><ul><ul><li>Investors own shares in the fund </li></ul></ul><ul><li>Broadly diversified or focused on specific industries </li></ul><ul><li>Largest managers – Fidelity and Vanguard </li></ul>
    2. 2. Net Asset Value <ul><li>NAV = market value of all securities held (net of liabilities) divided by number of shares </li></ul><ul><li>Mutual Funds or open-end funds stand ready to issue more shares at NAV or buy them back </li></ul><ul><li>Closed-end funds have a fixed number of shares; must sell to another investor </li></ul>
    3. 4. Fees <ul><li>Earnings come from dividends, interest and capital gains distributed annually </li></ul><ul><li>Load or No-load types– load is a one-time sales charge (either front or back-end) </li></ul><ul><ul><li>Up to 8.5% plus </li></ul></ul><ul><li>Management/admin fees up to 3% and </li></ul><ul><li>12b-1 fees up to 1% for marketing/advert </li></ul>
    4. 5. Types of Funds <ul><li>Money Market MF – short-term, little risk </li></ul><ul><li>Bond funds – range from Governments to corporates to municipals to junk bonds </li></ul><ul><li>Stock funds categorized as aggressive growth, small company, growth and income, sector funds, index funds </li></ul><ul><li>International stock or bonds </li></ul><ul><li>Balanced or asset allocation funds </li></ul>
    5. 6. Types of Mutual Funds
    6. 7. Advantages of Mutual Funds <ul><li>Diversification through pooling </li></ul><ul><li>Flexibility – many types of funds </li></ul><ul><li>Professional management </li></ul><ul><li>Minimum transaction costs </li></ul><ul><li>Liquidity – for open-end funds, manager will buy back at NAV </li></ul><ul><li>Provide services </li></ul>
    7. 8. Disadvantages <ul><li>Can’t avoid systematic risk that affects whole market </li></ul><ul><li>Can’t match market performance because of fees (loads, expenses, 12b –1 fees) </li></ul><ul><li>Not all funds are safe (junk bonds) </li></ul><ul><li>Some trade frequently, recognizing short-term capital gains </li></ul>
    8. 9. Current Issues <ul><li>Late trading favors large investors </li></ul><ul><li>Infrequent disclosure of holdings </li></ul><ul><li>Too many inside directors </li></ul><ul><li>Excessive fees and manager compensation </li></ul><ul><li>Don’t disclose how proxies voted. </li></ul>