Post on 28-Dec-2015
transcript
Chapter 15 Investing in Mutual Funds
• Mutual FundsRaise money by selling shares to the investing
public
Use these pooled funds to purchase various types of securities
Chapter 15 Investing in Mutual Funds
• Mutual FundsINDIRECT INVESTMENT– You own shares in the mutual fund
company.– The mutual fund owns the shares of the
individual company stocks and bonds.
Chapter 15 Investing in Mutual Funds
• Open-end Investment FundsConstantly issuing new shares and redeeming
existing sharesA buyer buys shares DIRECTLY FROM
THE FUNDA buyer redeems shares BACK TO THE
FUND
Chapter 15 Investing in Mutual Funds
• Mutual Funds– Passes the income paid by securities in
interest or dividends along to the shareholders
– Also passes the capital gain or loss (if security becomes more or less valuable) along to the shareholder
Chapter 15 Investing in Mutual Funds
• Measuring Value of Mutual FundsNET ASSET VALUE important number for
determining mutual fund’s worth
Formula for computing:
Current market value of securities owned
LESS liabilities
Divided by number of outstanding shares
Chapter 15 Investing in Mutual Funds
• Measuring Value of Mutual FundsIf the current market value of securities owned is:
– $53 million and there are
– 12 million shares,
– the NET ASSET VALUE is:
$53 million/ 12 million = $4.42 per share
As the market value changes, the fund’s net asset value changes as well.
Chapter 15 Investing in Mutual Funds
• Buying Mutual Funds– Can be purchased through a stockholder or
directly from mutual fund– Obtain a prospectus before purchasing
which states:Investment objectives of the fundTypes of securities it purchasesRecent performanceFees charged
Chapter 15 Investing in Mutual Funds
• Services Offered by Mutual Funds Automatic Reinvestment of Distributions Automatic Investments Exchange Privileges Check Writing
Chapter 15 Investing in Mutual Funds
• Automatic Reinvestment of DistributionsProfits put back into your account. Increases
the number of shares you own
You can reinvest either:• Investment income (dividends and interest)
• Realized capital gains (selling a security for more than you paid for it)
• Excellent way to establish regular investment plan
Chapter 15 Investing in Mutual Funds
• Exchange Privileges– Funds often part of MUTUAL FUND
FAMILY (different mutual funds offered by same company)• Money can be transferred between funds within
this family
• Transfers can be done by phone
Chapter 15 Investing in Mutual Funds
• Check Writing– Fund redeems enough shares to cover the
checks– Usually checks must be made for a minimum
of $500– These accounts do not replace function of
bank or credit union checking account
Chapter 15 Investing in Mutual Funds
• Mutual Fund Regulations– Regulated by U.S. Securities and Exchange
Commission (SEC)Determines information covered in prospectusLimits types of advertisements mutual funds can
use
– Also subject to state approval
Chapter 15 Investing in Mutual Funds
• Obtaining Mutual Fund Information Two of best-known rating services• Morningstar
• CDA/Wiesenberger
Also annual issues devoted to mutual funds in Money magazine Consumer’s Report
Chapter 15 Investing in Mutual Funds
• Classifications of Mutual FundsTraditionally classified as:
1. Stock funds
2. Bond or income funds
3. Money market funds
Chapter 15 Investing in Mutual Funds
• Stock FundsCan be further categorized as:Aggressive growth fundsGrowth and income fundsLong-term growth fundsSmall company growth fundsInternational funds
Chapter 15 Investing in Mutual Funds
• Bond FundsCan be further categorized as:Government fundsHigh-yield corporate fundsInvestment-grade corporate fundsMortgage-backed securities fundsMunicipal bond fundsWorld income funds
Chapter 15 Investing in Mutual Funds
• Money Market FundsCan be further categorized as:Government fundsTaxable fundsTax-exempt funds
Chapter 15 Investing in Mutual Funds
• Three Types of Mutual Funds Worth Noting– Sector Funds– Asset Allocation Funds– Index Funds
Chapter 15 Investing in Mutual Funds
• Asset Allocation FundsClassified as total return funds Invest in mixture of stocks, bonds, and
money market instrumentsPercentage invested in each to produce:
High returns
Less volatility
Chapter 15 Investing in Mutual Funds
• Index Funds– Attempts to replicate performance of a
major stock index– Standard & Poor’s 500 most popular index• Comprised of 500 large, well-known companies
• Considered one of best measures of overall stock markets
Chapter 15 Investing in Mutual Funds
• Index Funds– Investors do no better and also no worse
than overall market– Two reasons to invest:
Average stock fund has had difficulty beating overall stock market lately
Low fees charged by funds
Chapter 15 Investing in Mutual Funds
• Sector Funds– Invest in only one industry
(telecommunications, for example)– Much more risky than other stock funds
Chapter 15 Investing in Mutual Funds
• Advantages of Mutual FundsThree main reasons to invest in mutual funds:
1. Diversification
2. Small minimum investment
3. Professional management
Chapter 15 Investing in Mutual Funds
• DiversificationTypical stock fund owns over 100 different
common stocksDuplicating this diversification individually
would necessitate • HUGE investment of time
• HUGE investment of money
However not all stocks funds are diversified. Read the prospectus.
Chapter 15 Investing in Mutual Funds
• Smaller Minimum InvestmentInvestor can purchase well-diversified
portfolio for small investment
Same amount of dollars would not allow individual to achieve this diversification
Stock and bond mutual funds usually require initial investments between $1,000 and $3,000
Chapter 15 Investing in Mutual Funds
• Professional Management– Eliminates most time-consuming paperwork– May include the preparation of some tax
forms– Managers make all the buy and sell decisions– Although professionally managed, NO
GUARANTEE THE FUND WILL ALWAYS PRODUCE SUPERIOR RESULTS
Chapter 15 Investing in Mutual Funds
• Picking the Right Fund– After choosing your goals, identify mutual
fund most consistent withYour goalsYour investment time horizonExpected return needed to meet your goalsYour tolerance for risk
Chapter 15 Investing in Mutual Funds
• Evaluating Fees and ExpensesThree key points to remember in evaluating
fees and expensesSubstantial variation exists in operating
expensesThey can dramatically impact value of
investment over timeEvidence exists that higher fees affect
performance adversely
Chapter 15 Investing in Mutual Funds
• Historical PerformancePerhaps single most important criterion for choosing
between funds
Reports on performance for evaluating funds include:Type of fund and investment styleTotal returnRelative performanceRiskOverall rating
Chapter 15 Investing in Mutual Funds
• Total ReturnMeasures return over a period of time Takes into account• Income received
• Changes in price
To assess total return, examine performance• Over varying period of time
• The longer time frame, the better
Chapter 15 Investing in Mutual Funds
• Relative Performance Comparing mutual fund’s performance to a relative
benchmark
– Best benchmark is market index comprised of type of securities in which the fund invests
– Can also compare performance of a mutual fund to other funds with similar objectives
Chapter 15 Investing in Mutual Funds
• How Does Dollar Cost Averaging Work?
Elise has $1,500 to invest. She is debating whether to invest the whole amount at one time (lump sum) or to invest in regular intervals over the next six months.
If the price per share declines over time you can buy more shares. The opposite is also true.
Remember the Time Value of Money – Money today will be worth more in the future than payments
Chapter 15 Investing in Mutual Funds
• Making Changes to Mutual Funds Investments Re-assessing investment goals as investor
agesRebalancing investments to • Adjust income to maintain target asset allocation
• Re-adjust changing returns earned by different types of investments
Chapter 15 Investing in Mutual Funds
• Warning Signs for Mutual Funds1. Performance lags behind benchmarks for
three consecutive years
2. Fund gets very LARGE very FAST
• Manager may run out of good investments
• Performance will subsequently suffer
Chapter 15 Investing in Mutual Funds
• Warning Signs for Mutual Funds3. Expenses keep rising• Rising fees charged by funds trying to benefit
from popularity
• Rising fees mean lower returns
4. Management turnover• New manager’s investment philosophy may be
different