Chapter 15 Investing in Mutual Funds Mutual Funds Raise money by selling shares to the investing...

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


• Mutual FundsINDIRECT INVESTMENT– You own shares in the mutual fund

company.– The mutual fund owns the shares of the

individual company stocks and bonds.


• 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


• 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


• 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


• 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.


• 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


• Services Offered by Mutual Funds Automatic Reinvestment of Distributions Automatic Investments Exchange Privileges Check Writing


• 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


• 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


• 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


• 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


• 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


• Classifications of Mutual FundsTraditionally classified as:

1. Stock funds

2. Bond or income funds

3. Money market funds


• Stock FundsCan be further categorized as:Aggressive growth fundsGrowth and income fundsLong-term growth fundsSmall company growth fundsInternational funds


• Bond FundsCan be further categorized as:Government fundsHigh-yield corporate fundsInvestment-grade corporate fundsMortgage-backed securities fundsMunicipal bond fundsWorld income funds


• Money Market FundsCan be further categorized as:Government fundsTaxable fundsTax-exempt funds


• Three Types of Mutual Funds Worth Noting– Sector Funds– Asset Allocation Funds– Index 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


• 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


• 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


• Sector Funds– Invest in only one industry

(telecommunications, for example)– Much more risky than other stock funds


• Advantages of Mutual FundsThree main reasons to invest in mutual funds:

1. Diversification

2. Small minimum investment

3. Professional management


• 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.


• 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


• 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


• 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


• 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


• 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


• 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


• 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


• 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


• 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


• 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


• 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

Date post:	28-Dec-2015
Category:	Documents
Upload:	aleesha-mitchell
View:	224 times
Download:	2 times

Chapter 15 Investing in Mutual Funds Mutual Funds Raise money by selling shares to the investing...

Documents