Principles - Chapter 3 Notes

Principles of Investing                                                                                    Chapter 3

Mutual Funds



What are Mutual Funds?

  -A collection of stocks and/or bonds and/or other investments,  pooled together to make a more diversified investment option.

·           -Managed by a fund manager.

     How are mutual funds different than owning stock?

·      -Professional Fund Managers take your money and invest in assorted stocks, bonds, and other investments

·      -Instead of buying stocks, you buy shares in a fund.

·      -You own a portion of the fund

·      -Mutual funds make money on dividends and interest





Buys shares




Pay dividends

Pay interest

Increase in price

Produce capital gains


Makes investments


Passes on dividend and interest value of shares increases



















- Price of mutual funds are determined by net asset value.  This is determined by net asset value, which is calculated at each

days end.

NAV = Total Value of a Funds Investment Portfolio – Liabilities

                         Number of Shares Outstanding


Advantages of Mutual Funds

·      - Diversification

·      - Professional fund management

·      - Managers track all components

·      - Convenience

·      - Easy to buy and sell

·      - Can purchase through a brokerage firm or directly

·      - Automatic reinvestment of dividends



Family of Funds

·      - Includes funds managed by the same company

·      - You can transfer from one fund to another based on your investment needs or goals


Categories of Mutual Funds

·      - Common Stock Funds

·      - Sector funds (stocks from one industrial sector

o   Gold funds, technology funds, healthcare funds

·      - International funds (stocks from other parts of the world)

·      - Aggressive Growth (small companies with high growth potential)

·      - Long-Term growth (better known steady-growth companies)

o   IBM, Disney

·      - Growth and income (a mixed portfolio of stocks and bonds)

·      - Balanced Funds (stocks and bonds)

·      - Municipal (tax exempt) bond funds

·      - Corporate Bond Funds

·      - Money Market Funds


Mutual Fund Costs


Expense Ratio

·      - Expressed as a percentage of assets deducted each fiscal year for fund expenses

·      - Includes management fees, 12b-1 fees, administrative fees, operating costs

·      - 0.3% - 5%



Mutual Fund Loads

·      Front-End Load

o   Up-Front sales Charge (usually 5.75% or less)

o   Decreases with certain conditions

o   Reach a breakpoint (usually $25,000, $50,000, $75,000, or $100,000)

o   Reach a breakpoint between you and a family member

·      No-Load

o   Charge no sales fee

·      Back-End Load

o   Also called Contingent Deferred Sales Charge

o   Only charged when you sell the fund shares

o   Usually decreases from 5.75% to 0 over a period of 8 years




Where to find mutual fund information?

·      Newspaper

·      Morningstar

·      Internet

o   Yahoo! Finance, Individual Mutual Fund website

·      Financial Magazines

o   Forbes, Money Magazine


Important information to determine before purchasing a mutual fund.

·      What fund category does the fund fall into?

o   Common Stock Funds

o   Sector funds

o   International funds

o   Aggressive Growth

o   Long-Term growth

o   Growth and income

o   Balanced Funds (stocks and bonds)

o   Municipal (tax exempt) bond funds

o   Corporate Bond Funds

o   Money Market Fund

·      How does the fund compare to its peers?

·      How long has the fund manager been with the fund?

·      How much experience does the fund manager have?

·      What is the Morningstar rating?

·      What kind of returns does the fund experience?

o   Below Average, Average, Above Average

·      How risky is the fund?

o   Low Risk, Moderate, High Risk

·      What are the past returns?

·      Turnover Ratio

o   How often does the fund manager buy and sell stocks?

·      What does it cost to invest?

o   Load, Expense Ratio