CHAPTER 13: INVESTING IN MUTUAL FUNDS

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CHAPTER 13 INVESTING INMUTUAL FUNDS
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Mutual Fund Basics
INVESTORS pool their money and
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Mutual Fund Basics
INVESTORS pool their money and
buy shares in the MUTUAL FUND.
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Mutual Fund Basics
INVESTORS pool their money and
buy shares in the MUTUAL FUND.
FUND MANAGER selects and purchases a variety of
investment instruments.
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Advantages of Mutual Funds

• Diversificationrisk is lowered one share buys a
  slice of everything in the fund.
• Professional managementpay someone else to make
  investing decisions.
• Financial returnsrelatively attractive returns
  over the long term.
• Convenienceeasy in out, small outlays, help
  with record keeping.

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Disadvantages of Mutual Funds

• No choice in securities selection if you dont
  agree with choices, you must change funds.
• No control over sale of securities within
  fundtiming of sales has tax implications for
  investor.

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How Mutual Funds are Organized

• Each fund is a separate corporation or trust and
  is owned by the shareholders.
• Other main players include
• Management companyruns the daily operations.
• Investment advisoroversees portfolio.
• Distributorsells fund shares.
• Custodianphysically safeguards funds assets.
• Transfer agentexecutes transactions and
  maintains shareholder records.

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Types of Investment Companies

• Open-End Investment Companies (mutual funds)
• Dominant type of investment company
• Shares purchased from and sold back to company.
  Shares are not traded among individual investors.
  
• New shares issued as money flows in.
• NAV is usually the quoted price.

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• Net Asset Value (NAV)

• Current value of all securities held in funds
  portfolio.
• Open-end funds buy back their own shares at NAV.

NAV Current market price of all fund
assets (Less any liabilities) Divided by the
number of outstanding shares
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• 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.

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• Exchange-Traded Funds

• Typically structured as index funds.
• Spiders based on SP 500
• Diamonds based DJIA
• Qubes based on Nasdaq 100
• Trade on listed exchanges like closed-end funds.
• Numbers of shares outstanding can be increased or
  decreased, depending on demand, like open-end
  funds.

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• 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.

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• 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 or property REITs invest in properties
  mortgage REITs invest in mortgages hybrid REITs
  invest in both.

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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 hold commissions to 23 when
  shares are purchased.
• Back-end load funds charge a commission when
  shares are sold.

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• No-Load Fundsno fee to purchase or redeem shares
  and low or no 12(b)-1 fees.

• 12(b)-1 Feesannual fees for marketing and
  promotion.
• Management Feesannual fees charged by all funds
  to pay the fund manager.

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• Maximum allowable fees

• Total sales charges and fees cannot exceed 8
  1/2.
• Of this amount, 12(b)-1 fees cannot exceed 1.
• Funds cannot call themselves no-load if their
  12(b)-1 fees exceed 0.25.

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• Keep Track of Fees!

• Funds are required to disclose all fees in their
  prospectus.
• Even no-load funds can have high annual expense
  ratios and/or 0.25 12(b)-1 fees.
• Fees affect your return, and annual fees will be
  collected regardless of the performance of the
  fund.

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Types of Funds

• Growth
• Aggressive Growth
• Value
• Equity-Income
• Balanced
• Growth Income
• Bond

• Money Market
• Index
• Sector
• Socially Responsible
• International
• Asset Allocation

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Services Offered by Mutual Funds

• Automatic Investment Planmutual fund
  periodically drafts money from investor's bank
  account.
• Automatic Reinvestment Planfund earnings and
  distributions automatically reinvested in
  additional shares of fund.
• Regular Incomefund automatically pays out to
  investor predetermined amount periodically.

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• Conversion Privilegesallow shareholders to
  easily move from one fund to another within the
  fund family.

• Retirement Plansfunds set up and administer
  retirement plans for self-employed individuals.

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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!

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• Assess the fund's services.

• Check the fees charged.
• Consider the fund's longer-term returns as well
  as its shorter-term returns.
• Refer to Exhibit 13.8 concerning mutual fund
  facts every investor should know.

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Mutual Fund Performance

• Returns consist of
• 1) dividend/interest income earned by the fund
  assets
• 2) realized capital gains distributions from sale
  of assets within the fund
• 3) change in mutual fund's share price.
• Past performance reveals success of fund managers
  but does not guarantee future returns!

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THE END!