overheadsfall2014

1. Chapter 16:
Investing Through Mutual Funds

2. Objectives
Identify why people invest in mutual
funds.
Distinguish among the four major
objectives of mutual funds.
Classify mutual funds by portfolio.
List the unique benefits of mutual funds.

3. Objectives
Describe the various charges and fees
associated with investing in mutual funds.
Explain how to select a mutual fund in
which to invest.
Recognize valid reasons for selling a
mutual fund investment.

4. Investing Through Mutual Funds
open-end investment company combining
funds of investors who have purchased
shares in a diversified portfolio of securities.
MUTUAL FUND . . .

5. What is a Mutual Fund?
A pool of money
Managed by a professional investor
Manager works for an investment firm
Each fund has a specific objective
Over 6,000 funds to choose from

6. Figure 15.1

7. Three Reasons Why People
Purchase Mutual Funds
Diversification
 funds of many investors are pooled and
used to purchase a variety of investments
Professional management
 who is the fund’s manager?
 managers can change
Convenience
 phone
 mail 16-3

8. New/more types of funds
Few or no sales charges
Some performed better than common
stock
Widespread marketing
Selection is easier
Reasons for Investing Through Mutual
Funds

9. Dispense profits to investors
Investors expect dividend income
Investors expect price appreciation
Reasons for Investing Through Mutual
Funds

10. Closed and Open End Funds
Closed end fund (10% of funds)
limited number of shares issued initially
then can only purchase shares from
another investor willing to sell theirs
Open end fund (90% of funds)
no limitations on the number of shares
the investment company can issue
shares are issued and redeemed by the
investment company

11. Net Asset Value
portfolio market value - liabilities
the number of shares outstanding
Offer price = NAV + sales commission

12. Objectives of Mutual Funds
Current income
Long-term growth
Growth and income
Balanced

13. Common stock
Balanced
Bond
Specialty
Money market
Classification of Mutual Funds

14. Aggressive growth
Growth
Value
Growth and income
Classification of Mutual Funds
Small company
Sector
Global/international
Index
COMMON STOCK:

15. Recordkeeping/reporting
Easy purchase and sale
Automatic reinvestment
IRS-qualified tax-sheltered retirement
Withdrawal plans
Collateral for loans
Unique Benefits of Mutual Funds

16. Costs of Investing Through Mutual
Funds
Hidden fees
 Deferred load
 Redemption
 12b-1
Disclosure of Fees
“Which is better, load or no-load?”

17. Management Fees and Other
Charges
One-time sales load fees
12b-1 fees
•Cannot exceed more than 1% of the funds assets per
year
•For a fund to be classified as no-load these fees cannot
exceed more than 0.25% of the funds assets per year.

18. Load vs. No Load Funds
 Load Fund
 pay a commission to a sales
agent when you buy shares
 usually 3-8%
 No Load Fund
 no sales charge paid
 purchased directly from the
investment company
 usually have an 800 number you can call

19. Management Fees and Other Charges
Management fee
charged yearly (.25 - 1%) based on a
percentage of the funds asset value
Contingent deferred sales load
charged upon withdrawal of funds (1-6%)
decreases with time held
12b-1 fees
fee to defray advertising and marketing
costs of the fund

20. Match goals
Locate sources of comparative
performance data
 Financial press (i.e. Wall Street Journal,
Barron’s)
 Magazines (i.e. Fortune, Kiplinger’s)
 Specialized mutual fund publications
Strategies for Selecting a Mutual
Fund

21. Explanatory Notes
f-Previous day’s quotation
g-footnotes x and s apply
j-footnotes e and s apply
p-distribution costs apply, 12b-1
r-redemption charge may apply
s-stock split or dividend
t-footnotes p and f apply
v-footnotes x and e apply

22. Interpret comparative performance
information over time
 Long-term/short-term performance
 Size of fund
 Fund performance in up/down markets
Read prospectuses and annual reports
Strategies for Selecting a Mutual Fund

23.  Fund performs poorly compared with
similar funds
 Perception of economic trends indicates
business cycle will smooth out soon
 Fund grows too rapidly or becomes too
large
 Fund taken over by new manager
 Investment goals become more
conservative
 Need cash
When To Sell