Mutual Funds

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Mutual Funds
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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?

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What is a Mutual Fund?

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

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Advantages of Mutual Funds

• DIVERSIFICATION
• SMALLER MINIMUM INVESTMENTS
• PROFESSIONAL MANAGEMENT

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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.

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Services Offered by Mutual Funds

• AUTOMATIC REINVESTMENT OF DISTRIBUTIONS
• AUTOMATIC INVESTMENT PLANS
• CHECK WRITING
• EXCHANGE PRIVILEGES
• PERIODIC STATEMENTS

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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?

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Mutual Fund Fees and Expenses

• LOAD CHARGES
• FRONT-END LOAD
• BACK-END LOAD
• EXPENSES
• MANAGEMENT OR ADVISORY FEES
• OPERATING EXPENSES
• 12B-1 FEE

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• EVALUATING FEES AND EXPENSES
• DIFFERENCES IN ANNUAL OPERATING EXPENSES

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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.

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Open-end Fund (Mutual Fund)

• new shares sold as demanded.
• company will buy back the shares at any time.

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Closed-end Investment Company

• set number of shares / bought sold on exchange
• market price usually
• 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

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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

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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

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Types of Investment Companies

• Common stock funds
• growth
• income
• index
• mixed
• industry specific (health care, airlines, etc.)
• ecology minded
• regional funds

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Types of Funds, cont.

• 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

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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?

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Implications of Performance Studies

• For investors with little money?
• For investors with more money?
• Advisability of diversification among funds?