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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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Presentation Transcript
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

slide9

$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?