The Growth of the Mutual Fund Industry

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The Growth of the Mutual Fund Industry

  1. 1. The Growth of the Mutual Fund Industry <ul><ul><li>Mutual Fund Statistics </li></ul></ul><ul><ul><ul><li>Almost 1 in 2 U.S. households invest in the stock market directly or through mutual funds </li></ul></ul></ul><ul><ul><ul><li>Over 8,000 mutual funds </li></ul></ul></ul><ul><ul><ul><li>Over $7 trillion of assets </li></ul></ul></ul>
  2. 2. Why Learn About Mutual Funds? <ul><li>To choose investments in a retirement plan </li></ul><ul><li>To invest an insurance or divorce settlement </li></ul><ul><li>To get started as a new investor </li></ul><ul><li>To build a portfolio </li></ul><ul><li>To invest a year-end bonus or tax refund </li></ul><ul><li>To put what you read & hear in perspective </li></ul>
  3. 3. What is a Mutual Fund? <ul><ul><li>A mutual fund is: </li></ul></ul><ul><ul><li>a portfolio of stocks, bonds, or other </li></ul></ul><ul><ul><li>securities </li></ul></ul><ul><ul><li>collectively owned by many investors </li></ul></ul><ul><ul><li>managed by a professional investment company </li></ul></ul>
  4. 4. Mutual Funds Make Money in Two Ways <ul><li>Current income (dividends or interest earned on the portfolio investments) </li></ul><ul><li>Capital gains (selling securities that have gone up in value) </li></ul>
  5. 5. How the Investor Makes Money <ul><li>Income distribution (dividends and interest that are passed on to investors) </li></ul><ul><li>Capital gains (an increase in a fund’s value) </li></ul><ul><li>Combination = total return </li></ul>
  6. 6. Forms of Mutual Fund Companies <ul><li>Open-end: issues and redeems shares at any time </li></ul><ul><li>Closed-end: trades like a stock and issues a fixed number of shares </li></ul>
  7. 7. What Is Net Asset Value (NAV)? <ul><li>The NAV is the price your fund pays you per share when you sell. </li></ul><ul><li>Value of fund </li></ul><ul><li>Number of shares = NAV </li></ul><ul><li>Example: $52,500,000 </li></ul><ul><li>3,500,000 = $15 per share </li></ul>
  8. 8. Why Mutual Funds vs. Individual Securities? <ul><li>Individual securities: </li></ul><ul><ul><li>Require time and expertise to analyze </li></ul></ul><ul><ul><li>Usually have higher transaction costs </li></ul></ul><ul><ul><li>Offer less probability of adequate diversification </li></ul></ul><ul><ul><li>OK if: </li></ul></ul><ul><ul><ul><li>you have stock-picking expertise </li></ul></ul></ul><ul><ul><ul><li>you have $20-30K to buy 10-20 stocks </li></ul></ul></ul><ul><ul><ul><li>you are buying Treasuries </li></ul></ul></ul>
  9. 9. Advantages of Mutual Funds <ul><li>1) Full-time, professional management </li></ul><ul><li>2) Reduced risk through diversification </li></ul><ul><li>3) Earn competitive returns </li></ul><ul><li>4) Small $ amount needed to start </li></ul><ul><li>5) Retain ready access to your money </li></ul>
  10. 10. More Advantages of Funds <ul><li>6) Inexpensive way to invest </li></ul><ul><li>7) Convenience </li></ul><ul><li>8) Automatic withdrawal plans available </li></ul><ul><li>9) Lower incidence of bankruptcy and fraud </li></ul><ul><li>10) Monitoring fund investments is easy </li></ul>
  11. 11. Disadvantages of Mutual Funds <ul><li>Funds follow market declines </li></ul><ul><li>No guaranteed rate of return </li></ul><ul><li>Unwanted taxable distributions </li></ul><ul><li>Record-keeping for tax purposes can be difficult </li></ul>
  12. 12. The Mutual Fund Marketplace <ul><li>Stock funds </li></ul><ul><li>Bond funds </li></ul><ul><li>Money market funds </li></ul>
  13. 13. Types of Funds by Investment Objective <ul><li>Growth </li></ul><ul><li>Income </li></ul><ul><li>Growth & income </li></ul><ul><li>Capital preservation </li></ul>
  14. 14. Match Your Goal to the Right Fund Categories with a growth objective <ul><li>Growth </li></ul><ul><li>Aggressive growth </li></ul><ul><li>Small cap </li></ul><ul><li>Specialty (Sector) </li></ul><ul><li>International </li></ul><ul><li>Global </li></ul><ul><li>Index </li></ul>
  15. 15. Match Your Goal Categories with an Income Objective <ul><li>Income </li></ul><ul><li>Corporate bond </li></ul><ul><li>Municipal bond </li></ul><ul><li>High-yield (junk) bond </li></ul><ul><li>Government bond </li></ul><ul><li>GNMA </li></ul><ul><li>Global bond </li></ul>
  16. 16. Match Your Goal Funds with Growth & Income Objective <ul><li>Equity-income </li></ul><ul><li>Growth & income </li></ul><ul><li>Balanced </li></ul>
  17. 17. Match Your Goal Funds with a Preservation of Capital Objective <ul><li>Taxable money market </li></ul><ul><li>Tax-free money market </li></ul>
  18. 18. Match Your Goal Funds with All Four Objectives <ul><li>Lifestyle </li></ul><ul><li>Asset allocation </li></ul><ul><li>Fund of funds </li></ul>
  19. 19. Risk and Return Relationship <ul><li>The higher the level of risk, the higher the expected return </li></ul><ul><ul><ul><ul><ul><li>Sector </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Aggressive Growth </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>International </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Growth </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Stock Index </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Lifestyle </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Growth & Income </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Equity-Income </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Balanced </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Income </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Bond </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Money Market </li></ul></ul></ul></ul></ul>
  20. 20. Mutual Fund Costs <ul><li>Sales charges/loads </li></ul><ul><ul><ul><li>Sales commissions </li></ul></ul></ul><ul><li>Operating expenses </li></ul><ul><ul><ul><li>Management fees </li></ul></ul></ul><ul><ul><ul><li>Marketing costs </li></ul></ul></ul><ul><ul><ul><li>Overhead expenses </li></ul></ul></ul>
  21. 21. Types of Funds by Sales Charge <ul><li>No-load -- No sales commission </li></ul><ul><li>Load -- 4%-8.5% commission </li></ul><ul><li>Back-end load -- Declining 6%-1% </li></ul><ul><li>Low-load -- 1%- 3% </li></ul>
  22. 22. Mutual Fund Operating Expenses <ul><li>Management and administrative fees </li></ul><ul><li>12b-1 fee for marketing and distribution </li></ul><ul><li>Redemption fee </li></ul><ul><li>CHECK OVERALL EXPENSE RATIO </li></ul>
  23. 23. Mutual Fund Economics <ul><li>Costs and Fees A Shrs B Shrs C Shrs </li></ul><ul><li>Sales Load 5.5% None None </li></ul><ul><li>Redemption Fee None 0.5% None </li></ul><ul><li>Marketing Fee .25% .75% 1.00% </li></ul><ul><li>Management 1.30% 1.15% 1.20% </li></ul><ul><li>Annual Expense 1.55% 1.90% 2.20% </li></ul>
  24. 24. Avoid Above-Average Expense Ratios <ul><li>Stock funds > 1.4% </li></ul><ul><li>Bond funds > 1.00% </li></ul><ul><li>Money market funds > 0.5% </li></ul>
  25. 25. Seven Steps to Finding the Right Fund <ul><li>1) Identify type of fund that matches goal </li></ul><ul><li>2) Do more reading </li></ul><ul><li>3) Research specific funds </li></ul><ul><li>4) Determine selection criteria </li></ul><ul><li>5) Get and read the prospectus </li></ul><ul><li>6) Make your purchase </li></ul><ul><li>7) Establish a schedule to buy more </li></ul>
  26. 26. Step 1 -- Identify Types of Funds That Will Help You Reach Your Goals <ul><li>Focus your search </li></ul><ul><li>Begin building your portfolio </li></ul><ul><li>Establish an asset allocation strategy </li></ul>
  27. 27. Step 2 -- Do More Reading <ul><li>Mutual Funds For Dummies - Eric Tyson </li></ul><ul><li>Guide To Successful No-Load Investing - Sheldon Jacobs </li></ul><ul><li>The Right Way To Invest In Mutual Funds - Walter Updegrave </li></ul><ul><li>Bogle on Mutual Funds and Common Sense on Mutual Funds - John Bogle </li></ul>
  28. 28. Step 3 -- Research Specific Funds <ul><li>Personal finance publications </li></ul><ul><li>Business newspapers </li></ul><ul><li>Mutual fund trade associations </li></ul><ul><li>Library references </li></ul><ul><li>Fund-provided information </li></ul><ul><li>Professional advisors </li></ul>
  29. 29. Personal Finance Publications <ul><li>Money </li></ul><ul><li>Kiplinger’s Personal Finance </li></ul><ul><li>Forbes </li></ul><ul><li>Business Week </li></ul><ul><li>Smart Money </li></ul>
  30. 30. Newspapers & Trade Associations <ul><li>The Wall Street Journal </li></ul><ul><li>Barron’s </li></ul><ul><li>The New York Times </li></ul><ul><li>USA Today </li></ul><ul><li>Investment Company Institute </li></ul><ul><li>Mutual Fund Education Alliance </li></ul>
  31. 31. Library & Fund-Provided Info <ul><li>Morningstar </li></ul><ul><li>Value Line </li></ul><ul><li>Lipper Analytical </li></ul><ul><li>Annual reports </li></ul><ul><li>SAI </li></ul><ul><li>Prospectus </li></ul>
  32. 32. Internet Sites <ul><li><www.morningstar.com> </li></ul><ul><li><www. networth.galt.com> </li></ul><ul><li><www. brill.com> </li></ul><ul><li><www. ici.org> </li></ul><ul><li><www. mfea.com> </li></ul><ul><li><www.sec.gov/mfcc/mfcc-int.htm> </li></ul>
  33. 33. Step 4 -- Determine Your Selection Criteria <ul><li>Fund objective (relative to your goal) </li></ul><ul><li>Cost to purchase (no-load vs. load) </li></ul><ul><li>Fund fees/expense ratio </li></ul><ul><li>Investment minimum </li></ul><ul><li>Manager tenure </li></ul><ul><li>Performance (1, 3, 5 years) </li></ul><ul><li>Longevity </li></ul>
  34. 34. Step 5 -- Get a Prospectus for Each Fund from: <ul><li>Mutual fund families </li></ul><ul><li>Mutual fund supermarkets/networks </li></ul><ul><li>Full-service & discount brokers </li></ul><ul><li>Financial planners </li></ul><ul><li>Banks </li></ul><ul><li>Internet </li></ul>
  35. 35. Step 6 -- Make Your Purchase <ul><li>By mail </li></ul><ul><li>Local investment center </li></ul><ul><li>Toll-free 800 number for assistance </li></ul><ul><li>Through a broker or financial planner </li></ul><ul><li>On-line </li></ul>
  36. 36. Step 7 -- Continually Buy More <ul><li>Use a dollar-cost-averaging system--Investing a fixed number of dollars, e.g., $50 or $100, at periodic intervals, usually monthly or quarterly </li></ul>
  37. 37. Dollar-Cost-Averaging <ul><li>Month Amount Invested Share Price Shares Purchased Cumulative Value </li></ul><ul><li>January $150 $30 5 $150.00 </li></ul><ul><li>February $150 $30 5 $300.00 </li></ul><ul><li>March $150 $25 6 $400.00 </li></ul><ul><li>April $150 $25 6 $550.00 </li></ul><ul><li>May $150 $20 7.5 $590.00 </li></ul><ul><li>June $150 $15 10 $592.50 </li></ul><ul><li>July $150 $15 10 $742.50 </li></ul><ul><li>August $150 $15 10 $892.50 </li></ul><ul><li>September $150 $20 7.5 $1,340.00 </li></ul><ul><li>October $150 $25 6 $1,825.00 </li></ul><ul><li>November $150 $30 5 $2,340.00 </li></ul><ul><li>December $150 $30 5 $2,490.00 </li></ul><ul><li>TOTAL $1,800 $280 83 $2,490.00 </li></ul><ul><li>Average Cost $21.69 per share Average Price $23.33 </li></ul>
  38. 38. Final Hints: <ul><li>Invest for your goals </li></ul><ul><li>Research funds carefully with a questioning attitude </li></ul><ul><li>Review progress quarterly, comparing “apples with apples” </li></ul><ul><li>Read your mail </li></ul><ul><li>Keep excellent records </li></ul>
  39. 39. Take These Action Steps <ul><li>Make a list of long- and short-term financial goals and match them with an appropriate mutual fund </li></ul><ul><li>Learn about mutual fund choices available through your employer’s retirement plan </li></ul><ul><li>Decide on your selection criteria </li></ul><ul><li>Identify specific mutual funds that match your investment goals </li></ul>
  40. 40. Take These Action Steps <ul><li>Call at least three mutual fund organizations for a prospectus. </li></ul><ul><li>Do follow-up research and compare at least three mutual funds using Morningstar or Value Line. </li></ul><ul><li>Complete a mutual fund application and make an investment. </li></ul>

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