Chapter 16What is a Mutual Fund?Mutual Fund StatisticsWhy Investors Purchase Mutual FundsClosed- and Open-End FundsExchange-Traded FundsNet Asset Value (NAV)Load Funds and No-Load FundsManagement Fees and Other ChargesNumber of Mutual Funds by Type*Classification of Mutual FundsSlide 12Slide 13Slide 14Slide 15Families of FundsSteps to Evaluate Mutual FundsInternet Sources of Fund InformationReading a Mutual Fund Quote in the NewspaperOther Sources of Fund InformationSlide 21Mutual Fund TransactionsSlide 23Mutual Fund FeaturesMutual Fund ActivityChapter 16Investing in Mutual FundsInvesting in Mutual FundsMcGraw-Hill/IrwinCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.What is a Mutual Fund?•An investment alternative where money from investors is pooled to buy stocks, bonds, and other financial securities selected by professional managers.•Many people choose mutual funds for their retirement account investments.401(k) or 403(b)IRA Roth IRA16-2Mutual Fund Statistics•92 million individuals in 54 million households in the U.S. own mutual funds.•Over 8,000 mutual funds by 2004.•Over $8 trillion in assets owned by mutual funds in the U.S. by 2004.16-3Why Investors Purchase Mutual Funds•Professional management.Who is the fund’s manager?Managers can change.Be aware of the scandal involving late trading.•Diversification.Investors funds are used to purchase a variety of investments. This variety provides some safety.16-4Closed- and Open-End Funds•Closed-end funds (7% of funds).Shares are issued by an investment company only when the fund is organized.After all original shares are sold you can purchase shares only from another investor who is willing to sell.Traded on exchanges and over-the-counter.•Open-end funds (91% of 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 (NAV).16-5Exchange-Traded Funds•Invests in the stocks contained in a specific stock market index, like the Standard and Poor’s 500 stock index.•Performance of shares in the fund tend to mirror the performance of the index.•Low management fees since there is less need for decisions made by a portfolio manager.16-6Net Asset Value (NAV)Value of the fund’s portfolio - LiabilitiesNumber of shares outstandingFor most mutual funds, NAV is calculated at the close of trading each day.16-7Load Funds and No-Load Funds•Load Fund.Investors pay a commission (sales charge) up to 8.5% every time they purchase shares. This is sometimes called a front load. (Class A shares)Average charge is 3-5% for which an investor can get purchase advice and explanations.•No-Load Fund.Investors pay no sales charge up front.You deal directly with the fund with 800 numbers or web sites, or from discount brokers.16-8Management Fees and Other Charges•Contingent deferred sales load (back-end load) (Class B shares).Charged upon withdrawal of funds (1-5%).Generally decreases on a sliding scale depending on the number of years shares are held.•Management fee.Charged yearly (.5%-1.25% average) based on a percentage of the funds asset value.•12b-1 fees (Class C shares).Annual fee to defray advertising and marketing costs of the fund.1% or less of a fund’s assets per year.16-9Number of Mutual Funds by Type*16-10*Source: Year 2000 data from the U.S. Bureau of the Census, Statistical Abstract of the United States, 2001, page 744.Classification of Mutual Funds•Stock funds.Aggressive growth funds buy stocks in small, fast-growing companies.Equity income funds invest in stock of companies with a long history of paying dividends.Growth buy stock in companies with higher-than-average revenue and earnings growth.Global funds buy stock in companies in the U.S. and other countries, while international funds buy stock only in companies outside the United States. Index buys stocks that mirror an index.Large-cap funds invest in companies with capitalization of $5 billion or more.Mid-cap funds buy stock in companies whose capitalization is between $1 and $5 billion.16-11Classification of Mutual FundsRegional funds buy stock in companies in a specific region of the world.Sector funds buy stock in companies in a particular industry such as biotechnology. Small-cap funds buy stock in lesser-known companies with a capitalization of less than 500 million.Socially responsible funds avoid investing in companies that produce harmful products. 16-12(continued)Classification of Mutual Funds•Bond funds.High-yield (junk) bond funds buy corporate bonds that are higher risk and higher yield.Index bond funds invest in a sampling of bonds included in an index.Intermediate corporate bonds (5-10 years).Intermediate U.S. bond funds buy treasury notes with maturities of 5-10 years. Long-term corporate bonds (> 10 years).(continued)16-13Classification of Mutual FundsLong-term U.S. bond funds: U.S. Treasury and U.S. zero-coupon bonds with maturities > than 10 years.Municipal bonds: Invest in municipal bonds that provide investors tax-free interest income.Short-term U.S. bond funds invest in U.S.Treasury issues of 1-5 years.Short-term corporate bond funds: Investment grade bonds with maturities of 1-5 years.World bond funds buy bonds of foreign companies and governments.(continued)16-14Classification of Mutual Funds•Other funds.Asset allocation funds: invest in various asset classes, such as stocks, and bonds, with precise amounts within each type.Balanced funds: Invest in both stocks and bonds, with the primary objectives of conserving principal, providing income as well as growth.Money market funds: Invest in CD’s, government securities, and other safe investments.(continued)16-15Families of Funds•A family of funds exists when one investment company manages a group of mutual funds.•Each fund in the family has a different financial objective.•Exchange privileges allow you to move your money from one fund to another within the fund family with little or no charge.16-16Steps to Evaluate Mutual Funds•Are you ready to invest in mutual funds? •Determine your risk tolerance. •Determine your investment objectives.•Obtain the money you need invest.•A fund’s objective should match your investment objective.•Evaluate any mutual fund before buying or selling