1 MUTUAL FUND BASICS

2 PLEASE DO NOW… On Socrative, please answer the following questions: 1.What are mutual funds? 2.What are the advantages of mutual funds?

3 TODAY’S GOALS How can we make money from mutual funds? What are the advantages/disadvantages of mutual funds? What are the 3 types of mutual funds? What is the EXPENSE RATIO? What is NAV? Analyze the 3 classes of mutual fund shares.

4 INVESTMENT MANAGEMENT STANDARD(S) Achievement Standard : Use a rational decision- making process as it applies to the roles of citizens, workers, and consumers. Achievement Standard : Evaluate savings and investment options to meet short- and long-term goals.

5 DEFINITIONS TO KNOW Capital Gain Junk Bonds 12B-1 Fee NAV Expense Ratio

6 HOW CAN WE MAKE MONEY FROM MUTUAL FUNDS?

7 WHAT ARE THE ADVANTAGES OF MUTUAL FUNDS? Theoretically, professional management Diversification Liquidity Simplicity

8 WHAT ARE THE DISADVANTAGES OF MUTUAL FUNDS? Professional management!!! Costs Diversification!!! (Dilution) Taxes

9 WHAT ARE THE 3 MAIN TYPES OF MUTUAL FUNDS? 1.Equity(Stock) Funds 2.Fixed-Income(Bond) Funds 3.Money-Market Funds Are there any other types of funds?

10 OTHER TYPES OF MUTUAL FUNDS… Balanced Funds Global/International Funds Specialty Funds Index Funds

11 WHAT IS THE EXPENSE RATIO? To put it simply, the EXPENSE RATIO is the ongoing expenses of a mutual fund which include:  The cost of the fund manager  Administrative costs  12B-1 fees Are high fees worth it???? Higher expense funds do not, on average, perform better than lower expense funds.

12 WHAT IS NAV? Net Asset Value (NAV) is the value of a mutual fund. When buying or selling a mutual fund, you pay or get the NAV of the fund plus/minus any sales fees.

13 MUTUAL FUND SHARE CLASSES… There are 3 main mutual fund share classes: 1. A shares—front-load sales charge, lowest expense ratio of all share classes. Commission to broker paid upfront, with small trail (.25%) 2. B shares—back-load deferred sales charge, highest expense ratio of all share classes. HIGHEST commission to broker paid upfront, with small trail (.25%). BEWARE OF THE B SHARE!!!! 3.C shares—minimal back-load sales charge, expense ratio higher than A share, typically the same or lower than a B share. Commission to broker level at 1%. In your opinion, which share class is best????

14 USEFUL CALCULATIONS FOR MUTUAL FUNDS There are 2 useful formulas that will help us calculate important data for us to use: 1.) Sales Load on Mutual Fund= Total purchase price * % sales load 2.) Annual % Return on Investment for Mutual Funds (ROI)= ((Closing NAV – Opening NAV)/Opening NAV) - Expense ratio

15 LET’S PRACTICE… Mike purchases $15,000 in A shares of ABCD mutual fund. The load on the mutual fund is 4%. How much are his shares worth the instant he buys them? Solution : Total Purchase Price * Sales Load = $15,000 x.04 = $600 in Total Sales Charges $15,000 - $600 = $14,400 Therefore, his shares are worth $14,400 the instant he buys them.

16 LET’S PRACTICE SOME MORE… On the end of the trading day on 12/31/07, Dan’s mutual fund had a NAV of $20, excluding expenses. At the end of the trading day on 12/31/08 his mutual fund had an NAV of $22.50, excluding expenses. The expense ratio on the mutual fund is 2.75%. What was the overall percentage return on Dan’s mutual fund for 2008, including expenses. Solution: ((Closing NAV – Opening NAV)/Opening NAV) - Expense ratio = (($ $20)/$20) – 2.75% = (12.50% %) = 9.75% Therefore, his % return for the year was 9.75% including expenses. = ($2.50/$20) – 2.75%

17 A LOOK AHEAD…  Index Investing  You will be constructing a mutual fund portfolio for Case Study #3

18 QUESTIONS???