Chapter 13 investing in mutual funds
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CHAPTER 13: INVESTING IN MUTUAL FUNDS. ABC XYZ MUTUAL FUND. Mutual Fund Basics. INVESTORS pool their money and. buy shares in the MUTUAL FUND. FUND MANAGER selects and purchases a variety of investment instruments. Types of Investment Companies :.

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Chapter 13 investing in mutual funds l.jpg

CHAPTER 13: INVESTING INMUTUAL FUNDS


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ABC XYZ MUTUAL FUND

Mutual Fund Basics

INVESTORS

pool their money and

buy shares in

the MUTUAL

FUND.

FUND MANAGER

selects and purchases a

variety of investment

instruments.


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Types of Investment Companies:

  • Open-End Investment Companies (mutual funds)

    • Dominant type of investment company; shares purchased from and sold back to company.

    • New shares issued as money flows in.

    • Net Asset Value (NAV) is the current market price of all securities owned by the fund (less any liabilities) divided by the number of shares outstanding.


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  • Operate with a fixed number of shares outstanding.

  • All trading is done between investors on the open market.

  • Shares frequently trade at a discount or premium to net asset value.


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Advantages of Mutual Funds:

  • Diversification— risk is lowered; one share buys a slice of everything in the fund.

  • Professional management— pay someone else to make investing decisions.

  • Financial returns— relatively attractive returns over the long term.

  • Convenience— easy in & out, small outlays, help with record keeping.


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Disadvantages of Mutual Funds:

  • No choice in securities selection— if you don’t agree with choices, you must change funds.

  • No control of sale of securities within fund—timing of sales has tax implications for investor.


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  • Trade on listed exchanges like closed-end funds.

  • Number of shares outstanding can be increased or decreased, depending on demand.


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  • Usually sold by brokerage houses.

  • Investors purchase a share in an unmanaged pool of investments.

  • No trading of securities within the portfolio once the trust assets have been purchased.

  • Tend to have relatively high transaction costs and yearly fees.


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  • Closed-end investment companies whose trust assets are limited to real estate investments.

  • Offer a more diverse and marketable way to invest in real estate.

  • Equity REITs invest in properties; mortgage REITs invest in mortgages; hybrid REITs invest in both.


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Mutual Fund Cost Considerations:

  • Loads = sales commissions

    • Front-end load funds (or simply "load funds") charge a commission when shares are purchased.

    • Low-load funds charge commissions of 1–3% when shares are purchased.

    • Back-end load funds charge a commission when shares are sold.


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Growth

Aggressive Growth

Value

Equity-Income

Balanced

Growth & Income

Bond

Money Market

Index

Sector

Socially Responsible

International

Asset Allocation

Types of Funds


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Making Mutual Fund Investments

Selecting a Mutual Fund:

  • Match the fund's objectives with your investment objectives.

  • Consider your tolerance for risk and your investment time horizon.

  • Read the prospectus!


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  • Check the fees charged.

  • Consider the fund's longer-term returns as well as its shorter-term returns.



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