chapter 13 investing in mutual funds
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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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mutual fund basics
ABC XYZ MUTUAL FUNDMutual 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
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.
slide4
Closed-End Investment Companies
  • 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.
advantages of mutual funds
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.
disadvantages of mutual funds
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.
slide7
Exchange-Traded Funds
  • Trade on listed exchanges like closed-end funds.
  • Number of shares outstanding can be increased or decreased, depending on demand.
slide8
Unit Investment Trusts
  • 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.
slide9
Real Estate Investment Trusts (REITs)
  • 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.
mutual fund cost considerations
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.
types of funds
Growth

Aggressive Growth

Value

Equity-Income

Balanced

Growth & Income

Bond

Money Market

Index

Sector

Socially Responsible

International

Asset Allocation

Types of Funds
making mutual fund investments
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!
slide13
Assess the fund's services.
  • Check the fees charged.
  • Consider the fund's longer-term returns as well as its shorter-term returns.
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