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
| SHAREHOLDER $ Buys shares
| STOCKS and OTHER INVESTMENTS $ Pay dividends Pay interest Increase in price Produce capital gains |
| MUTUAL FUND Makes investments | MUTUAL FUND Passes on dividend and interest value of shares increases |
| STOCKS and OTHER INVESTMENTS | SHAREHOLDER |
Pricing
- 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