CH 14 1 Mutual funds are a form of investment operated by companies that raise money from shareholders and invest it in stocks bonds currencies futures options or money market securities a Think of them as groups or pools of investments b When investing in mutual funds you invest in several companies therefore spreading the risk 2 How a mutual fund works a Mutual funds are organizations that raise funds by selling shares to the public i These funds are used to purchase groups of securities consistent with the fund s objective ii Diversity is one of the key advantages of a mutual fund 1 the concept of mutual funds rests on pooled diversification iii Mutual funds require small minimum investments usually 1000 and they are professionally managed 1 Professionals buy and sell the stocks within the mutual fund and decide on their mix 2 The investor pays a fee for the professional management of the fund iv In other words a mutual fund company seeks profit from 1 income from interest and dividend payments received from the fund s securities and 2 increases in the value of the fund based on the rising value of the underlying securities If all goes well the mutual fund investor receives income as dividends and also shares in the profits when the shares are sold v Negative aspects include 1 Risk factors involved that vary considerably between funds 2 Lack of personal control 3 The fees hidden and overt b Fees i Load funds fees associated with mutual funds 1 These fees defray the cost of providing planning advice and fund selection ii No load funds mutual funds that are sold to investors directly from fund companies that impose no sales charge but still includes a management fee Index fund fees are based on the amount of money the investor has in one fund iii iv 12b 1 fee mutual fund that assesses shareholders for promotion expenses 1 Cover a fund s marketing and distribution efforts and may include account maintenance fees 3 Open end mutual funds and close end mutual funds a Open end mutual funds shares that are issued and redeemed by the investment company at the request of investors i About 90 of all mutual funds fall under this category ii Investors buy and sell shares at the net asset value plus a small commission iii Net asset value NAV value of the fund s portfolio assets minus liabilities divided by the number of shares outstanding b Close end mutual funds funds with a fixed number of shares listed on the stock exchange i 10 ii bought through stock exchange 4 Objectives provide c Index funds track performance of the broader stock or bond markets i Top 500 stocks managed by computer ii S P 500 is an index of 500 large company stocks a How matching objectives works An investor looks for funds that i Current income look for funds whose dividends are well ii Capital growth seek equity type securities and anticipate how protected much it will grow iii Conservation of principal protects the principal amount by careful selection of conservative investments and the constant monitoring of these investments 1 Controlling funds b Prospectus formal written summary of a commercial venture or offering i Provides 1 Summary of fees dividends distributions taxes 2 Statement about risk factors 3 Statement describing the types of investments involved 4 Description of fund s past performances 5 Info about fund s management c Annual report i Reveals the fund s financial condition ii Involves an established company and is an annual report on how they are doing PE ratio how much the company is worth and management pictures d Professional advisory services i Unbiased service that looks up companies to see how they are 1 Some info is free but a more in depth analysis involves a doing fee e Size and type of company i Narrow funds into differnet types of companies by placing them into categories by size or type f Socially responsible funds i They invest in certain types of industries that they don t believe in alcohol child labor tobacco pollution 5 Summary of steps to follow in selecting funds i Decide if mutual funds fits into your investment plans ii Find out about different fund s objectives financial record and iii management If your are in a 28 or higher tax bracket consider tax free bonds and money funds iv Consider no load funds with low annual expenses If you pay fees find what they are and what services you get v Read any agreement carefully 6 Purchasing Mutual funds a Regular account transactions most common option and investors decide how much they want to invest and how many shares they can afford b Voluntary savings plans you make an initial purchase and make an agreement to make minimum purchase of certain amount per month c Contractual plans require investors to make regular purchases over a number of years or upfront d Reinvestment plans shareholder dividends and capital gain distributions are automatically reinvested to purchase more shares of the fund i Dividends continue to keep getting put back in to build what you own e Selling or rebalancing mutual funds i Sell when its not doing well and you think you can put it somewhere better Sell to rebalance and diversify ii Since close end funds are listed on securities exchanges they can be sold to other investors iii Open end funds can be sold on any business day to the investment company that sponsors the fund Ways to sell open end funds 1 Simplest is notifying the fund you want to sell and they send you a check or transfer the money into your account 2 Another is to withdraw all income that results from interest dividends and capital gains earned by the fund while it was held 3 Last withdraw a fixed percentage of assets growth f Taxation and mutual funds i Investors should keep records of all buying and selling transactions for tax reporting purposes g Funds as a gateway the competition grows i Increasingly no loan fund groups are branching out into brokerage operations and home banking 1 Investors holding shares of a no loan fund through a broker are customers of the broker not the fund group 7 Types of real estate investments a Real estate piece of land and all physical property related to it b Real estate investments fall into c Direct real estate investments i Direct investments investors hold legal title to property such as single family dwellings apartments land and non residental real estate Indirect investments incvestors appoint a trustee to hold legal title on behalf of all investors in a group including real estate investment
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