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
buy shares in the MUTUAL FUND.
FUND MANAGER selects and purchases a variety of
investment instruments.
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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.
• New shares issued as money flows in.
• Net Asset Value (NAV) is the current market price
  of all securities owned by the fund (less any
  liabilities) divided by the number of shares
  outstanding.

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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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Advantages of Mutual Funds

• Diversification risk is lowered one share buys
  a slice of everything in the fund.
• Professional management pay someone else to
  make investing decisions.
• Financial returns relatively attractive returns
  over the long term.
• Convenience easy 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 of sale of securities within
  fundtiming of sales has tax implications for
  investor.

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• Exchange-Traded Funds

• Trade on listed exchanges like closed-end funds.
• Number of shares outstanding can be increased or
  decreased, depending on demand.

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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 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 charge commissions of 13 when
  shares are purchased.
• Back-end load funds charge a commission when
  shares are sold.

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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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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.

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THE END