1 Mutual Funds Diversified portfolio of stocks, bonds or other securities run by a professional manager –$ 7.9 trillion in assets; 8,300 different funds –Investors own shares in the fund Broadly diversified or focused on specific industries Largest managers – Fidelity and Vanguard

2 Net Asset Value NAV = market value of all securities held (net of liabilities) divided by number of shares Mutual Funds or open-end funds stand ready to issue more shares at NAV or buy them back Closed-end funds have a fixed number of shares; must sell to another investor

3

4 Fees Earnings come from dividends, interest and capital gains distributed annually Load or No-load types– load is a one-time sales charge (either front or back-end) –Up to 8.5%plus Management/admin fees up to 3% and 12b-1 fees up to 1% for marketing/advert

5 Types of Funds Money Market MF – short-term, little risk Bond funds – range from Governments to corporates to municipals to junk bonds Stock funds categorized as aggressive growth, small company, growth and income, sector funds, index funds International stock or bonds Balanced or asset allocation funds

6 Types of Mutual Funds

7 Advantages of Mutual Funds Diversification through pooling Flexibility – many types of funds Professional management Minimum transaction costs Liquidity – for open-end funds, manager will buy back at NAV Provide services

8 Disadvantages Can’t avoid systematic risk that affects whole market Can’t match market performance because of fees (loads, expenses, 12b –1 fees) Not all funds are safe (junk bonds) Some trade frequently, recognizing short- term capital gains