Module #3: Mutual Funds

What is it? O A pool of funds collected from many investors for the purpose of investing in diversified holdings. O This pool gives you greater purchasing power than you could have own your own. O Funds are invested and managed by portfolio managers into various securities O Common securities consist of stocks, bonds, money market instruments.

Different Types of Modules O There are more than 10,000 Mutual Funds in North America! O Three main varieties of funds organized by risk level from least to most: O Money Market funds O Fixed Income funds O Equity funds

Money Market Funds O Consists of short-term debts O Little return O Principal is often not lost O Example: Treasury Bills

Fixed Income Funds O Primarily invested in government and corporate debt. O Objective is to provide steady cash flow. O Higher return but can be riskier than Money Market funds.

Equity Funds O Objective is long term capital growth. O Largest category of Funds. O Highest risk but also the highest reward. O There are many different types of these kinds of funds. Generally characterized price to earning ratios, price-to-book ratios and dividend yields.

Other Types O Balanced Funds O Global Funds O Specialty Funds O Index Funds

How Is Income Earned O Dividends on stocks and interest on bonds. O If the fund sells securities that have increased in price, the fund has a capital gain. O Increase in price of the funds.

Rise of Mutual Funds O The world’s first mutual fund dates back to O The funds were not introduced to the public until O The first Canadian fund, Canadian Investment Fund Ltd.(CIF), was established in O It gained majority of it’s popularity in the 1960s and the asset has been on the rise since. Estimated to be worth $800 billion in 2012.

Why Mutual Funds O Simplicity: Makes investment in financial markets easy. O Diversification: Managing risks becomes easier with mixing investments in different securities rather than individual portfolios. O Economies of Scale: Transactions can be made on a much larger scale for less money.

…Why Mutual Funds… O Divisibility: Purchasing funds in smaller denominations provide mutual fund investors to take advantage of dollar-cost averaging. O Liquidity: Getting in and out of mutual funds is relatively easy. O Professional Management: Portfolio managers, who are knowledgeable on investment, monitor the investments

Drawbacks O Professional Management: Profits on investments is not a guarantee. O Costs: Running a mutual fund can be expensive. O Dilution: Too much diversification does not bring an overall high return. O Taxes: Income is taxed.

How to Pick a Mutual Fund O Set goals on the desired capital gains and consider how much risk they are willing to take. O Decide on when and how you would like to get your return. O Understand the fees associated with the investment. O Evaluate past results of portfolio manager O Choose the size of the fund

Cost Associated with Buying Funds O The most common fees are: O Ongoing yearly fees of maintaining your investment O Transaction fees to buy or sell shares in a fund pg

Ongoing Fees O Often represented by the expense ratio, which is composed of: O Cost of hiring fund manager O Administrative costs O Brokerage Commissions

Transaction Fees O They are basically fees paid to the sales person and they can be either for: O Load Funds: These are funds sold by third parties. These funds can’t be bought directly by the public. O No-Load Funds: Funds sold directly to the public.

Analysing the Funds in The Market O Funds data can be found online or in newspapers. O There are third party organizations dedicated to evaluating the Mutual Funds in the market and their progress. O An example of organizations of such nature is showed in the video while also demonstrating key data to look at when evaluating funds. Video:

Key Terminology O Management Expense Ratio(MER): Total Administrative costs incurred by a mutual fund expressed as a percentage of the asset. O Net Asset Value(NAV): Size of fund in millions of dollars. Total assets minus current liabilities. O DCAF: Dollar Cost Averaging Fund O Yield: Income return on an investment O Total Expense Ratio(TER): Total Fund costs divided by Total Fund Asset.

Government body In Canada O Mutual Fund Dealer’s Association(MFDA) oversees Canadian Mutual Fund Industry. O A not-for-profit organization created in O It’s main objective is to protect investors by regulating all transactions. O More information regarding MFDA can be found on their website:

Quiz

Question 1: O What is the one common benefit and drawback of buying Mutual Funds?

Question 2: O What type of Fund provides steady Cash flow?

Question 3: O What is Expense Ratio composed of?

Question 4: O What was the first Canadian Fund?

Question 5: O How is income earned by a Mutual Fund?

Question 6: O What is MER?

Question 7: O Who manages a Mutual Fund?

Question 8: O What does MFDA do?

Question 9: O What type of Fund guarantees return of principle?

Question 10: O What is a Mutual Fund?