What is a Mutual Fund

1
What is a Mutual Fund?

• An investment chosen by people who pool their
  money to buy stocks, bonds, and other financial
  securities selected by professional managers who
  work for investment companies.
• Pack of pencils
• There are over 9,200 funds to choose from.
• Fidelity, T. Rowe Price, American Funds,
  Oppenheimer, etc.

2
Why Investors Purchase Mutual Funds

• Professional management.
• Who is the funds manager?
• How has the fund performed under the current
  managers?
• Diversification.
• Investors funds are used to purchase a variety
  of investments. This variety provides often
  provides an element of safety.

3
Load Funds compared to No-Load Funds

• Load Fund.
• Investors pay a commission (sales charge) up to
  8.5 every time they purchase shares. This is
  sometimes called an A fund.
• Average charge is 3-5 for which an investor can
  get purchase advice and explanations.
• No-Load Fund.
• Investors pay no sales charge up front.
• You deal directly with the investment company
  via 800 numbers or web sites, or from discount
  brokers.

4
Management Fees and Other Charges

• Management fee.
• Charged yearly (.25-1.5 average) based on a
  percentage of the funds asset value.
• 12b-1 fees.
• Annual fee to defray advertising and marketing
  costs of the fund.
• Cannot exceed 1 of a funds assets per year.
• Expense ratio
• The total expenses associated with the management
  fees and operating costs of the fund

5
Objective 2 Classify mutual funds by investment
objectives

• Classification of Mutual Funds
• STOCK FUNDS
• Aggressive growth funds buy stocks in small,
  fast-growing companies.
• Equity income funds invest in stock of companies
  with a long history of paying dividends.
• Global stock funds buy stock in companies in the
  U.S. and other countries.
• Growth funds buy stock in companies with higher-
  than-average revenue and earnings growth.
• Index funds buys stocks that mirror an index.

6
Classification of Mutual Funds

• International funds buy stock only in companies
  outside the United States.
• Large cap funds buy stock in companies with total
  capitalization of at least 5 billion or more.
• Lifecycle funds these funds start as being
  risky and become more conservative.
• Midcap funds invest in companies
  with a capitalization of
  1 to 5 billion.

7
Sources of Fund Information

• INTERNET
• Use websites to find current values, research a
  fund.
• www.morningstar.com
• www.smartmoney.com
• Check mutual fund companies Internet sites.
• www.troweprice.com
• www.vanguard.com

8
Mutual Fund Prospectus

• Mutual fund prospectus tells the funds objective,
  plus
• A statement describing the risk factors.
• A description of the funds past performance.
• A statement describing the type of investments in
  the funds portfolio.
• Information about dividends, distributions and
  taxes.
• Information about the funds management.
• Information about limitations or requirements for
  the fund.
• The process for investors to buy or sell shares.
• Services provided to investors.
• The turnover ratio of the funds investments.

9
Other Sources of Fund Information

• Mutual fund annual report.
• Performance, investments, assets and liabilities.
• Financial Publications.
• Business Week, Forbes, Kiplinger's Personal
  Finance and Money are sources of information.
• Business Weeks mutual fund survey includes
  information such as the...
• Funds overall rating compared to all other
  funds, and to funds in the same category.
• Fund size, sales charge and expense ratio.
• Historical returns for the past ten years.

10
The Mechanics of Mutual Fund Transactions

• RETURN ON INVESTMENTS
• There are 3 ways to make money on different funds
• Income Dividends
• Earnings a fund pays to the shareholders from its
  dividend and interest income
• Capital Gains Distribution
• Capital gain distributions are made to
  shareholders when the fund buys and sells
  securities in the fund.
• Capital Gains
• You have capital gains when you sell shares at a
  higher price than you paid.

11
The Mechanics of Mutual Fund Transactions

• Three ways to purchase mutual fund shares
• Your money
• Dividends
• Capital Gains