Investing in

Mutual Funds

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Why Investors Purchase Mutual Funds
 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
 Each investor has a right to a proportional share of
the assets of the fund and any income it earns
 Many people choose mutual funds for their retirement
account

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Why Investors Purchase Mutual Funds
 Professional Management
 Who is the fund’s manager?
 Managers can change so investors must be careful
 Diversification
 Investors funds are pooled and used to purchase a variety of
investments.
 Funds own stock in hundreds of different companies
 Buys from different asset classes (stocks, bonds, and other
securities
 Investment Company
 A firm that, for a management fee, invests the pooled finds of
small investors in securities appropriate to its stated
investment objectives
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Why Investors Purchase Mutual Funds
Characteristics of Mutual Funds
Closed-end Mutual Funds


 A fund of finite size

 Shares are issued by an investment company only when
the fund is originally set up
 After all original shares are sold you can only purchase
shares from another investor
Open-end Mutual Funds


 Shares are issued and redeemed by the investment

company at the request of investors.
 Investors can buy and sell shares at the net asset value.
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Why Investors Purchase Mutual
Funds
Characteristics of Mutual Funds
Net Asset Value


 The current market value of the securities contained in the

mutual funds portfolio minus the mutual funds liabilities
divided by the number of shares outstanding
 Calculated at the close of trading each day

Value of the fund’s portfolio – Liabilities

Number of shares outstanding

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Why Investors Purchase Mutual
Funds
Characteristics of Mutual Funds
Index Fund
 An affordable way for investors to invest in a diversified
basket of securities; constructed to track the components of a
market index such as the S&P 500 or the S&P/TSX Composite
Exchange Traded Funds (ETF’s)

 An affordable way for investors to invest in a diversified

basket of securities; provides the diversification of an index
fund with the flexibility of a stock
Short Sell

 The practice of selling a borrowed stock in the hope of

covering the sale by buying it at a lower price later

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Why Investors Purchase Mutual
Funds
Characteristics of Mutual Funds
Load Fund
 A mutual fund in which investors pay a commission (as high as
8.5%) every time they purchase or sell shares
 Contingent Deferred Sales Load – pay upon withdrawal of funds
No-Load fund

 No sales charge
Front-end load

 A sales fee charged with each purchase; reduces the funds actually
invested. Most fund companies have lowered the maximum front-end
load on their funds to around 6 %
Back-end load

 Also referred to as a contingent deferred sales load. One to six per

cent of withdrawals on sliding scale decreasing with time held, then
zero if selling after a set number of years.
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Why Investors Purchase Mutual Funds
 Expense Ratio
 Expressed as a fixed percentage of the fund’s total value,
called the Management Expense Ratio (MER). Ranges
from 0.25 per cent (rare) to 4 per cent, to cover
investment company’s costs. Fee is up to 0.5 per cent
higher for back-end load funds.
 Special Fees
 Annual RRSP, RRIF, RESP trustee fee
 Account set up fee
 Short-term trading fee
 Processing fee
 Service fees

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Why Investors Purchase Mutual Funds

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Classification of Mutual Funds
 Money Market Funds
 Income and liquidity through investment in short-term
money market instruments
 T-bills, commercial paper, short-term government bonds
 Mortgage funds
 Aim for income and safety
 Hold a group of mortgages
 Bond Funds
 Aim for safety of principal and income but are subject to
capital gains and losses, which have tax implications
 Government and corporate debt securities
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Classification of Mutual Funds
 Dividend Funds
 Aim for tax-advantage income
 Possibility of capital growth
 Invest in preferred shares
 High quality common shares
 Balanced and Asset Allocation funds
 Provide a mixture of safety, income, and capital
appreciation
 Equity or Common Stock funds
 Capital gains
 Common shares

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Classification of Mutual Funds
 Specialty funds
 Sacrifice diversification in an effort to build capital
gains.
 One industry, geographical area
 Segment of the capital market
 International or Global funds
 Subset of specialty funds
 Real Estate funds
 Long-term growth through capital appreciation
 Income-producing real property
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Classification of Mutual Funds
 Ethical funds
 Investment decisions that are guided by moral criteria
 Segregated funds
 Insurance companies as an alternative
 Guarantee that a portion of your principal will be
returned to you at maturity
 Labor-sponsored venture capital corporations
(LSVCCs)
 Sponsored by labor organizations
 Invest in small to medium-sized businesses
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Classification of Mutual Funds
Features of fund families include the following:
A family of funds exists when one investment company

manages a group of mutual funds

Funds in the family vary in their objectives

You can move your money from one fund to another

within a fund family with low or no charge

Market Timer: an individual who helps investors decide

when to switch their investments from one fund to

another, usually within the same family

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How to Make a Decision to Buy or
Sell Mutual Funds
Steps to evaluate mutual funds include:
Perform a financial checkup to make sure you are ready

to invest
Obtain the money needed to purchase mutual funds

Determine your investment objectives

Find a fund with an objective that matches your

objective
Evaluate, evaluate, and evaluate any mutual fund before

buying or selling

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How to Make a Decision to Buy or
Sell Mutual Funds
How to Read the Mutual Funds Section of the
Newspaper
Net asset value and asset value change
Company and fund name

Fund objective

Total return over various time periods

Ranking among funds with the same objective

Sales load or no load (NL)

Per cent of annual average net expenses

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How to Make a Decision to Buy or
Sell Mutual Funds
Mutual Fund Prospectus
A statement describing the risk factors

A description of the fund’s past performance

A statement describing the type of investments in the

fund’s portfolio
Information about dividends, distributions and taxes

Information about the fund’s management

Limitations when choosing investments

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How to Make a Decision to Buy or
Sell Mutual Funds
Mutual Fund Prospectus
 Process to buy and sell shares
 Service provided and cost
 How often investment portfolio changes
Provides a wealth of information to help you make an
investment choice
Summarizes fund’s objectives

Provides a summary of the fess charged

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How to Make a Decision to Buy or
Sell Mutual Funds
Other sources of fund information include:
Mutual Fund Annual Report

 Performance, investments, assets, and liabilities

Mutual Fund Guidebooks
Financial Publications

 IE: Money
 Canadian Business
 Report on Business
The Internet


 Internet search engines

 Investment company web pages
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The Mechanics of a Mutual Fund
Transaction
Advantages of mutual funds are:
Diversification

Professional Management

Ease of buying and selling

Small amount of money required to open an account

Multiple withdrawal options

Distribution or reinvestment of income and capital gains

Switching privileges in fund family

Multiple services

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The Mechanics of a Mutual Fund
Transaction
Disadvantages of mutual funds are:
Purchase and withdrawal costs

Ongoing management fees

Potential poor performance

No control over capital gains distribution

Complicated tax reporting issues

Potential market risk with all investments

Some sales personnel are aggressive

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The Mechanics of a Mutual Fund
Transaction
Mutual fund transactions include:
Return on investment

Income dividends

 The earnings a fund pays to shareholders after it has

deducted expenses from its dividend and interest
income
 Capital gain distributions
 The payments made to a fund’s shareholders that result
from the sale of securities in the fund’s portfolio
 Sell shares at a higher price than you paid

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The Mechanics of a Mutual Fund
Transaction
 Taxes and Mutual Funds
 Most returns subject to taxation
 Companies required to send statement specifying how
much received in dividends and capital gains distribution
 Although you do not receive cash (as the returns are
reinvested) they are still taxable
 Can be taxed in year when your burden is already heavy
 May be taxed for full year even if you own for only part
of the year

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The Mechanics of a Mutual Fund
Transaction
 Purchase Options
 Closed-end through the stock exchange
 Open-end, no-load directly from the investment
company by phone or through the mail, or a sales
representative
 Reinvestment Plan
 Dividends and capital gains reinvested to buy additional
shares

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The Mechanics of a Mutual Fund
Transaction

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The Mechanics of a Mutual Fund
Transaction
Withdrawal Options
Closed-end funds sold to another investor

Open-end funds sold to the investment company that

sponsors the fund

 shares redeemed at their Net Asset Value

Withdraw specified, fix dollar amount until fund

exhausted
Sell certain number of shares over period

Withdraw fixed percentage of asset growth

Withdraw all asset growth, leave principal untouched

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Summary
 Describe the characteristics of mutual fund
investments
 Major reasons chosen are professional management
and diversification
 Closed end fund is one whose shares are only issued
when fund set up
 Open end fund shares are sold and redeemed by the
investment company at the net asset value (NAV) at
the request of the investors

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Summary
 Describe the characteristics of mutual fund investments
 A load fund charges commission every time your
purchase shares
 No commission is charged to purchase a no-load fund
 Can also be front-end or back-end load
 Other possible fees include management fees and
contingent deferred sales loads

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Summary
 Classify mutual funds by investment objectives
 Tailored to meet the investment objectives of their
customers
 Money market funds
 Mortgage funds
 Bond funds
 Dividend funds
 Balanced and Asset Allocation funds
 Equity or Common Stock funds
 Specialty funds

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Summary
 Classify mutual funds by investment objectives
 Tailored to meet the investment objectives of their
customers
 International or Global funds
 Real Estate funds
 Ethical funds
 Segregated funds
 Labor-sponsored venture capital corporations
 Many companies use fund family concept to allow
investors to switch among funds for more potential,
financial reward and security

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Summary
 Evaluate mutual funds for investment purposes
 Responsibility for choosing the right fund rests with
the investor
 Information found in newspapers, financial objectives
of fund, information in prospectus and annual reports,
financial publications, professional advisory services,
and the Internet

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Summary
 Describe how and why mutual funds are bought and
sold
 The advantages and disadvantages have made mutual
funds the investment of choice for many
 Share of closed end funds are sold on organized stock
exchanges
 Share of open end funds can be purchased from
authorized salesperson, brokerage firm, mutual fund
supermarket, or investment company

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Summary
 Describe how and why mutual funds are bought and
sold
 Shareholders in mutual funds can receive return in one
of three ways:
 Income dividends
 Capital gain distributions
 Capital gains when sold at a higher price than originally
paid
 A number of purchase and withdrawal options are
available

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