Mutual funds
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Mutual Funds. Objectives. WHAT IS A MUTUAL FUND? HOW DO MUTUAL FUNDS OPERATE? HOW MUCH DOES MUTUAL FUND INVESTING COST? HOW SHOULD MUTUAL FUND PERFORMANCE BE EVALUATED? WHAT ARE OTHER TYPES OF INVESTMENT COMPANIES?. What is a Mutual Fund?.

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Mutual Funds

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Mutual funds

Mutual Funds


Objectives

Objectives

  • WHAT IS A MUTUAL FUND?

  • HOW DO MUTUAL FUNDS OPERATE?

  • HOW MUCH DOES MUTUAL FUND INVESTING COST?

  • HOW SHOULD MUTUAL FUND PERFORMANCE BE EVALUATED?

  • WHAT ARE OTHER TYPES OF INVESTMENT COMPANIES?


What is a mutual fund

What is a Mutual Fund?

A MUTUAL FUND IS AN INVESTMENT COMPANY THAT SELLS SHARES REPRESENTING AN INTEREST IN A PORTFOLIO OF SECURITIES.


Advantages of mutual funds

Advantages of Mutual Funds

  • DIVERSIFICATION

  • SMALLER MINIMUM INVESTMENTS

  • PROFESSIONAL MANAGEMENT


How do mutual funds operate

How Do Mutual Funds Operate?

  • Net Asset Value (NAV)

  • (Total portfolio value - liabilities) / # of shares

  • Management is usually contracted to an outside firm with fees ranging from 1/4% to 1/2% a year.

  • Often management companies will start many funds and will provide advisory services, etc. for them.


Services offered by mutual funds

Services Offered by Mutual Funds

  • AUTOMATIC REINVESTMENT OF DISTRIBUTIONS

  • AUTOMATIC INVESTMENT PLANS

  • CHECK WRITING

  • EXCHANGE PRIVILEGES

  • PERIODIC STATEMENTS


Taxation of mutual funds

Taxation of Mutual Funds

  • Mutual fund taxes are passed through to investors. Mutual funds are generally considered to be unfriendly from a tax standpoint.

  • Why?


Mutual fund fees and expenses

Mutual Fund Fees and Expenses

LOAD CHARGES

  • FRONT-END LOAD

  • BACK-END LOAD

    EXPENSES

  • MANAGEMENT OR ADVISORY FEES

  • OPERATING EXPENSES

    12B-1 FEE


Mutual funds

$26,000

$24,000

$22,000

$20,000

Investment Value

Fund A: Annual operating

$18,000

expenses equal .75%.

$16,000

$14,000

Fund B: Annual

operating expenses

$12,000

equal 2%.

$10,000

0

1

2

3

4

5

6

7

8

9

10

End of Year

EVALUATING FEES AND EXPENSES

DIFFERENCES IN ANNUAL OPERATING EXPENSES


Other types of investment companies

Other Types of Investment Companies

  • UNIT INVESTMENT TRUSTS

    UNMANAGED PORTFOLIO OF A SPECIFIC TYPE OF SECURITY; INVESTORS PURCHASE UNITS.

  • CLOSED-END INVESTMENT COMPANIES

    MANAGED PORTFOLIO OF SECURITIES WITH A FIXED NUMBER OF SHARES OUTSTANDING.


Open end fund mutual fund

Open-end Fund (Mutual Fund)

  • new shares sold as demanded.

  • company will buy back the shares at any time.


Closed end investment company

Closed-end Investment Company

  • set number of shares / bought & sold on exchange

  • market price usually < NAV, but . . .

    • emerging markets funds

  • changes in the discount affect total return

  • dividend yield usually above average because of discount

  • must pay commission to buy or sell


Load vs no load

Load vs. No-load

  • most all funds obtained through brokers will have a load

  • load = sales fee

  • price = NAV + sales fee of 7 1/2% to 8%

  • usually no redemption fee

  • no-load funds are sold at NAV

  • low-load funds have a fee of only about 3%


Tradeoffs between loads and fees

Tradeoffs Between Loads and Fees

  • many no-load funds charge up to 1 1/2% per year for management

  • some low-loads do this also.

  • all funds charge management fees of from 1/2% to 1 1/2%.

  • *** Read Prospectus ***


Types of investment companies

Types of Investment Companies

  • Common stock funds

    • growth

    • income

    • index

    • mixed

    • industry specific (health care, airlines, etc.)

    • ecology minded

    • regional funds


Types of funds con t

Types of Funds, con’t.

  • Balanced funds

    • stocks and bonds

    • percentages vary greatly

    • See prospectus for strategy

  • Bond funds

    • corporate, government, junk, capital gains plays

    • mixed, municipals (state specific), income

  • Money market funds


Performance

Performance

  • After expenses, most funds do not consistently beat the market

  • Performance figures do not take taxes into account

  • The funds that tend to be the best in a given year do not tend to continue to perform at the top. Why?


Implications of performance studies

Implications of Performance Studies

  • For investors with little money?

  • For investors with more money?

  • Advisability of diversification among funds?


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