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