Mutual Funds

Objectives: Define mutual funds. Explain why investors buy mutual funds. Identify types of mutual funds. Define exchange traded funds.

Definition A mutual fund is an investment alternative in which investors pool their money to buy stocks, bonds, and other investments based on the selection of professional fund managers who work for an investment company.

Advantages Provides an investor with limited resources & an entire portfolio of diverse securities Mutual funds have professional management Typically loses are reduced because a loss from one investment can be compensated by a gain from another

Ownership People who buy shares of a mutual fund are its owners or shareholders. A mutual fund can make money from its securities in two ways: A security can pay dividends or interest to the fund A security can rise in value A fund can also lose money and drop in value.

Why invest is a mutual fund? Mutual funds make saving and investing simple, accessible, and affordable. The advantages of mutual funds include professional management, diversification, variety, liquidity, affordability, convenience, and ease of recordkeeping—as well as strict government regulation and full disclosure.

Check Point What is a mutual fund? Why would you invest in a mutual fund? What advantages are there to a mutual fund? What disadvantages are there to a mutual fund?

Mutual Fund Types Bond Funds: Invest primarily in bonds, if the bonds are tax-free, this advantage is passed to the investor Stock Funds: Invest primarily in stocks, they could be categorized into types of stocks– blue chips, technology, medical, etc.

Mutual Fund Types Growth Funds: Invest in companies that are expected to grow over the long run (high risk if in the short run) Income Funds: Invest in bonds and stocks that produce steady and reliable dividend and interest payments

Mutual Fund Types Aggressive Growth: A mutual fund that attempts to achieve the highest capital gains. While they may have high growth potential, these funds are only for investors willing to accept a high risk-return trade-off. 

Mutual Fund Types Balanced Funds: Diversified portfolio; strive for balance between growth and income Global Funds: Invest in international companies, new industries in foreign countries, and companies in the world marketplace

Check Point Why do you think the fund type matters when investing? Sarah is a 55 year old woman looking towards retirement, which mutual fund type would you recommend for Sarah? Why? Your brother is a 20 year old looking to start investing, which mutual fund type would you recommend for him? Why?

Index Funds Index Funds: Invest in securities to match a market index with the goal of having returns similar to those of that index Most popular index funds track: S&P 500 Russell 2000 (small companies) DJ Wilshire 5000 (total stock market) Barclays Capital Aggregate Bond Index (total bond market)

Exchange Trade Funds (ETFs) A security that tracks an index, a commodity or a basket of assets like an index fund (type of mutual fund), but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. Lower expense ratios that the average mutual fund because not actively managed

Review Why would someone choose to use a mutual fund? Why would someone use an index fund instead of a mutual fund? How do you know which mutual fund type to use? How does the risk of a mutual fund compare to that of a single stock? Bond?