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Mutual Funds

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  1. Mutual Funds Chapter Playlist Songs: “Money” by Pink Floyd –Live 8 “Money” by pink Floyd” – original video

  2. Learning Objectives • LO 12-1 Appreciate the history of mutual funds and understand mutual fund basics. • LO 12-2 Examine the types of mutual funds. • LO 12-3 Assess the benefits and risks of mutual funds. • LO 12-4 Evaluate mutual funds in terms of their class, commission, and fee structure. • LO 12-5 Plan how and where to invest in mutual funds.

  3. Mutual Fund Basics • Mutual fund: investment vehicle of pooled funds that buys assets with a specific investment objective; operated by a fund manager • Fund manager: Theperson or people responsible for an investment fund • Closed-end mutual fund: A publicly traded mutual fund that raises capital through an initial public offering (IPO) with an limited number of shares; no new investment funds can be added after the IPO • Open-end mutual fund: A mutual fund in which investors can buy shares at the net asset value of the fund; new money can be added at any time

  4. History of Mutual Funds • 1893 – First mutual fund in the United States (closed-end) Boston Property and Trust • 1929 – Stock market crash took with it most closed-end mutual funds • 1980s – Open-end mutual funds gain popularity with individuals being able to invest their 401(k) retirement plans in mutual funds • 2009 – Median investment in mutual funds by household = $80,000 • Mutual funds are regulated by the Securities and Exchange Commission (SEC)

  5. Costs and Fees of Mutual Funds • Front-end load: A purchase fee, usually to pay commissions • Back-end load: A redemption fee • No-load mutual fund: Has neither a front nor back load • Net asset value (NAV): The total value of all the assets in a mutual fund minus cost, divided by the number of shares outstanding (share price) • Expense ratio: The total operating expenses divided by the average dollar value of the fund’s assets under management

  6. Characteristics of Mutual Fund Investors(May 2009)

  7. In the News • What is your position on 401(k) plans that spend earnings on marketing costs? • How can you educate yourself on 401(k) options?

  8. Types of Mutual Funds • Actively Managed Mutual Fund • Professional fund managers trying to maximize the return on the fund and finding assets that meet the fund’s objective • Higher trade volume, higher expenses because of the cost of the trades, higher expense ratio • Index Market Funds • Follow well-known assets • Not actively managed • Lower trade volume, lower expenses because of the cost of the trades, lower expense ratio

  9. Types of Mutual Funds • Exchange-Traded Funds (ETFs) • Usually follow an index • Can be traded throughout the day on a stock exchange • Have become very popular • Equity Mutual Funds • Stock mutual funds • Classified by Morningstar Style Box • Focus on a specific sector of the economy • Focus on the size of the company invested in

  10. Total Net Assets and Number of ETFs

  11. Types of Mutual Funds • Bond Mutual Funds • Classified by term and type of bond • Bond rating • Money Market Mutual Funds • Least risky • Consists of short-term investments • Not FDIC-insured • Balanced Mutual Funds • Equity, bonds, and cash all in one fund • Targeted date fund

  12. Benefits of Mutual Funds (Figure 12.3)

  13. Dollar Cost Averaging vs. Continuous Automatic Investing Dollar Cost Averaging Continuous Automatic Investing • Specific dollar amount to invest (e.g.$10,000) • Divided into equal amounts over a specific time period (e.g. 10 months • Specific dollar amount to be invested on a continual basis (e.g. $100/month) • No specified amount or end date

  14. Risk of Mutual Funds • Only as secure as the assets they hold • Look for an experienced funds manager • Watch the turnover rate • Can lose money

  15. Costs and Classes of Mutual Funds • Fees • Front-end load (5%, would only have $95 of every $100 put into the fund) • Back-end load • Commissions • Fee-based planner • Share Classes • Class A, B, & C

  16. Choosing and Buying a Mutual Fund • Know your investment objective • Know your risk level • Research the funds • Download and read the prospectus • Fund’s investment objective • Strategy for achieving the objectives • Principal risks of investing • Fees and expenses • Past performance • Holdings

  17. Choosing and Buying a Mutual Fund • Morningstar Style Box • If you feel uncomfortable managing your own investments, you might want to talk to a financial planner, financial adviser, stock broker, or local banker

  18. Asset Allocation Balanced Fund Samples

  19. Choosing and Buying a Mutual Fund • Open an account online with mutual find company • Vanguard, Fidelity, Oppenheimer • Look at requirements to open an account • Age • Minimum balance • Discount broker • Scottrade, TD Ameritrade, e-Trade • Financial Planners • Banks

  20. Popular Online References • Morningstar (www.morningstar.com) • Yahoo Finance (http://finance.yahoo.com/) • Google Finance (www.google.com/finance) • Value Line (http://www.valueline.com/) • Wall Street Journal (www.wsj.com) • MSN Money (www.money.msn.com) • CNN Money (http://money.cnn.com)

  21. Learn “A public-opinion poll is no substitute for thought.” ~Warren Buffet, Venture Capitalist (1930 -) • LO 12-1 Appreciate the history of mutual funds and understand mutual fund basics. • LO 12-2 Examine the types of mutual funds. • LO 12-3 Assess the benefits and risks of mutual funds. • LO 12-4 Evaluate mutual funds in terms of their class, commission, and fee structure. • LO 12-5 Plan how and where to invest in mutual funds.

  22. Plan & Act • Research mutual funds as options to support your short-term, intermediate, and long-term savings objectives (Worksheet 12.1) • Look into three similar funds at different mutual fund companies that have similar holdings according to the Morningstar Style Box (Worksheet 12.2) • Construct an investment plan that includes the appropriate use of mutual funds as an investment (Worksheet 12.3)

  23. Evaluate • Review your goals. • Is there a mutual fund option that will put you on the path to achieve your goals? • Every year, reevaluate your investment portfolio to decide if it is indeed meeting your investment objectives.