Chapter16:

InvestingThroughMutualFunds

Objectives
Identify why people invest in mutual funds.
Distinguish among the four major
objectives of mutual funds.
Classify mutual funds by portfolio.
List the unique benefits of mutual funds.

Objectives
Describe the various charges and fees
associated with investing in mutual funds.
Explain how to select a mutual fund in
which to invest.
Recognize valid reasons for selling a
mutual fund investment.

InvestingThroughMutualFunds
MUTUAL FUND . . .
open-end investment company combining
funds of investors who have purchased
shares in a diversified portfolio of securities.

WhatisaMutualFund?
A pool of money
Managed by a professional investor
Manager works for an investment firm
Each fund has a specific objective
Over 6,000 funds to choose from

Figure15.1

Three Reasons Why People

Purchase Mutual Funds
Diversification
funds of many investors are pooled and
used to purchase a variety of investments
Professional management
who is the funds manager?
managers can change
Convenience
phone
mail
16-3

ReasonsforInvestingThroughMutual
Funds
New/more types of funds
Few or no sales charges
Some performed better than common
stock
Widespread marketing
Selection is easier

ReasonsforInvestingThroughMutual
Funds
Dispense profits to investors
Investors expect dividend income
Investors expect price appreciation

ClosedandOpenEndFunds
Closed end fund (10% of funds)
limited number of shares issued initially
then can only purchase shares from
another investor willing to sell theirs
Open end fund (90% of funds)
no limitations on the number of shares the
investment company can issue
shares are issued and redeemed by the
investment company

NetAssetValue

portfolio market value - liabilities

the number of shares outstanding

Offer price = NAV + sales commission

ObjectivesofMutualFunds
Current income
Long-term growth
Growth and income
Balanced

ClassificationofMutualFunds
Common stock
Balanced
Bond
Specialty
Money market

ClassificationofMutualFunds
COMMON STOCK:
Aggressive growth

Small company

Growth

Sector

Value

Global/international

Growth and income

Index

UniqueBenefitsofMutualFunds
Recordkeeping/reporting
Easy purchase and sale
Automatic reinvestment
IRS-qualified tax-sheltered retirement
Withdrawal plans
Collateral for loans

CostsofInvestingThroughMutual
Funds
Hidden fees
Deferred load
Redemption
12b-1

Disclosure of Fees
Which is better, load or no-load?

ManagementFeesandOther
Charges
One-time sales load fees
12b-1 fees
Cannot exceed more than 1% of the funds assets per
year
For a fund to be classified as no-load these fees cannot
exceed more than 0.25% of the funds assets per year.

Loadvs.NoLoadFunds
Load Fund
pay a commission to a sales
agent when you buy shares
usually 3-8%
No Load Fund
no sales charge paid
purchased directly from the
investment company
usually have an 800 number you can call

ManagementFeesandOtherCharges
Management fee
charged yearly (.25 - 1%) based on a
percentage of the funds asset value
Contingent deferred sales load
charged upon withdrawal of funds (1-6%)
decreases with time held
12b-1 fees
fee to defray advertising and marketing
costs of the fund

StrategiesforSelectingaMutual
Fund
Match goals
Locate sources of comparative
performance data
Financial press (i.e. Wall Street Journal,
Barrons)
Magazines (i.e. Fortune, Kiplingers)
Specialized mutual fund publications

ExplanatoryNotes
f-Previous days quotation
g-footnotes x and s apply
j-footnotes e and s apply
p-distribution costs apply, 12b-1
r-redemption charge may apply
s-stock split or dividend
t-footnotes p and f apply
v-footnotes x and e apply

StrategiesforSelectingaMutualFund
Interpret comparative performance
information over time
Long-term/short-term performance
Size of fund
Fund performance in up/down markets

Read prospectuses and annual reports

WhenToSell
Fund performs poorly compared with similar
funds
Perception of economic trends indicates
business cycle will smooth out soon
Fund grows too rapidly or becomes too large
Fund taken over by new manager
Investment goals become more conservative
Need cash