Investing in mutual funds

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Investing in mutual funds

  1. 1. Investing in Mutual Funds
  2. 2. What is a Mutual Fund? An investment alternative where money from investors is pooled to buy stocks, bonds, and other financial securities selected by professional managers.
  3. 3. Why Investors Purchase MutualFunds Professional management.  Who is the fund’s manager?  Managers can change.  Be aware of the scandal involving late trading. Diversification.  Investors funds are used to purchase a variety of investments. This variety provides some safety
  4. 4. Closed- and Open-End Funds Closed-end funds (7% of funds).  Shares are issued by an investment company only when the fund is organized.  After all original shares are sold you can purchase shares only from another investor who is willing to sell.  Traded on exchanges and over-the-counter. Open-end funds (91% of funds).  Shares are issued and redeemed by the investment company at the request of investors.  Investors can buy and sell shares at the net asset value (NAV).
  5. 5. Exchange-Traded Funds Invests in the stocks contained in a specific stock market index, like the Standard and Poor’s 500 stock index. Performance of shares in the fund tend to mirror the performance of the index. Low management fees since there is less need for decisions made by a portfolio manager.
  6. 6. Net Asset Value (NAV) Value of the fund’s portfolio - Liabilities Number of shares outstanding For most mutual funds, NAV is calculated at the close of trading each day.
  7. 7. Load Funds and No-Load Funds Load Fund.  Investors pay a commission (sales charge) up to 8.5% every time they purchase shares. This is sometimes called a front load. (Class A shares)  Average charge is 3-5% for which an investor can get purchase advice and explanations. No-Load Fund.  Investors pay no sales charge up front.  You deal directly with the fund with 800 numbers or web sites, or from discount brokers.
  8. 8. Classification of Mutual Funds Stock funds.  Aggressive growth funds buy stocks in small, fast- growing companies.  Equity income funds invest in stock of companies with a long history of paying dividends.  Growth buy stock in companies with higher-than- average revenue and earnings growth.
  9. 9. Contd..  Global funds buy stock in companies in the U.S. and other countries, while international funds buy stock only in companies outside the United States.  Index buys stocks that mirror an index.  Large-cap funds invest in companies with capitalization of $5 billion or more.  Mid-cap funds buy stock in companies whose capitalization is between $1 and $5 billion.
  10. 10. Classification of Mutual Funds  Regional funds buy stock in companies in a specific region of the world.  Sector funds buy stock in companies in a particular industry such as biotechnology.  Small-cap funds buy stock in lesser-known companies with a capitalization of less than 500 million.  Socially responsible funds avoid investing in companies that produce harmful products
  11. 11. Classification of Mutual Funds Bond funds.  High-yield (junk) bond funds buy corporate bonds that are higher risk and higher yield.  Index bond funds invest in a sampling of bonds included in an index.  Intermediate corporate bonds (5-10 years).  Intermediate U.S. bond funds buy treasury notes with maturities of 5-10 years.  Long-term corporate bonds (> 10 years).
  12. 12. Classification of Mutual Funds  Long-term U.S. bond funds: U.S. Treasury and U.S. zero-coupon bonds with maturities > than 10 years.  Municipal bonds: Invest in municipal bonds that provide investors tax-free interest income.  Short-term U.S. bond funds invest in U.S.Treasury issues of 1-5 years.  Short-term corporate bond funds: Investment grade bonds with maturities of 1-5 years.  World bond funds buy bonds of foreign companies and governments.
  13. 13. Classification of Mutual Funds Other funds.  Asset allocation funds: invest in various asset classes, such as stocks, and bonds, with precise amounts within each type.  Balanced funds: Invest in both stocks and bonds, with the primary objectives of conserving principal, providing income as well as growth.  Money market funds: Invest in CD’s, government securities, and other safe investments.
  14. 14. Families of Funds A family of funds exists when one investment company manages a group of mutual funds. Each fund in the family has a different financial objective. Exchange privileges allow you to move your money from one fund to another within the fund family with little or no charge.
  15. 15. Steps to Evaluate Mutual Funds Are you ready to invest in mutual funds? Determine your risk tolerance. Determine your investment objectives. Obtain the money you need invest. A fund’s objective should match your investment objective. Evaluate any mutual fund before buying or selling (www.morningstar.com) Consider managed funds vs. indexed funds
  16. 16. Other Sources of FundInformation Mutual fund prospectus tells the funds objective and:  A statement describing the risk factors.  A description of the fund’s past performance.  A statement describing the type of investments in the fund’s portfolio.  Information on how to open an account.
  17. 17. Contd..  Dividends, distributions and taxes.  Information about the fund’s management.  The process for investors to buy or sell shares.  Services provided to investors.  The turnover ratio of the fund’s investments

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