McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. C HAPTER P LAYLIST S ONGS : “MONEY” BY PINK FLOYD“MONEY” BY PINK FLOYD –LIVE 8 “MONEY” BY PINK FLOYD” “MONEY” BY PINK FLOYD” – ORIGINAL VIDEO Mutual Funds

12-2 Learning Objectives LO 12-1 Appreciate the history of mutual funds and understand mutual fund basics. LO 12-2 Examine the types of mutual funds. LO 12-3 Assess the benefits and risks of mutual funds. LO 12-4 Evaluate mutual funds in terms of their class, commission, and fee structure. LO 12-5 Plan how and where to invest in mutual funds.

12-3 Mutual Fund Basics Mutual fund: investment vehicle of pooled funds that buys assets with a specific investment objective; operated by a fund manager Fund manager: The person or people responsible for an investment fund Closed-end mutual fund: A publicly traded mutual fund that raises capital through an initial public offering (IPO) with an limited number of shares; no new investment funds can be added after the IPO Open-end mutual fund: A mutual fund in which investors can buy shares at the net asset value of the fund; new money can be added at any time

12-4 History of Mutual Funds 1893 – First mutual fund in the United States (closed-end) Boston Property and Trust 1929 – Stock market crash took with it most closed- end mutual funds 1980s – Open-end mutual funds gain popularity with individuals being able to invest their 401(k) retirement plans in mutual funds 2009 – Median investment in mutual funds by household = $80,000 Mutual funds are regulated by the Securities and Exchange Commission (SEC)

12-5 Costs and Fees of Mutual Funds Front-end load: A purchase fee, usually to pay commissions Back-end load: A redemption fee No-load mutual fund: Has neither a front nor back load Net asset value (NAV): The total value of all the assets in a mutual fund minus cost, divided by the number of shares outstanding (share price) Expense ratio: The total operating expenses divided by the average dollar value of the fund’s assets under management

12-6 Characteristics of Mutual Fund Investors (May 2009)

12-7 In the News What is your position on 401(k) plans that spend earnings on marketing costs? How can you educate yourself on 401(k) options?

12-8 Types of Mutual Funds Actively Managed Mutual Fund  Professional fund managers trying to maximize the return on the fund and finding assets that meet the fund’s objective  Higher trade volume, higher expenses because of the cost of the trades, higher expense ratio Index Market Funds  Follow well-known assets  Not actively managed  Lower trade volume, lower expenses because of the cost of the trades, lower expense ratio

12-9 Types of Mutual Funds Exchange-Traded Funds (ETFs)  Usually follow an index  Can be traded throughout the day on a stock exchange  Have become very popular Equity Mutual Funds  Stock mutual funds  Classified by Morningstar Style Box  Focus on a specific sector of the economy  Focus on the size of the company invested in

12-10 Total Net Assets and Number of ETFs

12-11 Types of Mutual Funds Bond Mutual Funds  Classified by term and type of bond  Bond rating Money Market Mutual Funds  Least risky  Consists of short-term investments  Not FDIC-insured Balanced Mutual Funds  Equity, bonds, and cash all in one fund  Targeted date fund

12-12 Benefits of Mutual Funds (Figure 12.3)

12-13 Dollar Cost Averaging Continuous Automatic Investing Specific dollar amount to invest (e.g.$10,000) Divided into equal amounts over a specific time period (e.g. 10 months Specific dollar amount to be invested on a continual basis (e.g. $100/month) No specified amount or end date Dollar Cost Averaging vs. Continuous Automatic Investing

12-14 Risk of Mutual Funds Only as secure as the assets they hold Look for an experienced funds manager Watch the turnover rate Can lose money

12-15

12-16 Costs and Classes of Mutual Funds Fees  Front-end load (5%, would only have $95 of every $100 put into the fund)  Back-end load  Commissions  Fee-based planner Share Classes  Class A, B, & C

12-17 Choosing and Buying a Mutual Fund Know your investment objective Know your risk level Research the funds Download and read the prospectus  Fund’s investment objective  Strategy for achieving the objectives  Principal risks of investing  Fees and expenses  Past performance  Holdings

12-18 Choosing and Buying a Mutual Fund Morningstar Style Box If you feel uncomfortable managing your own investments, you might want to talk to a financial planner, financial adviser, stock broker, or local banker

12-19 Asset Allocation Balanced Fund Samples

12-20 Choosing and Buying a Mutual Fund Open an account online with mutual find company  Vanguard, Fidelity, Oppenheimer  Look at requirements to open an account  Age  Minimum balance Discount broker  Scottrade, TD Ameritrade, e-Trade Financial Planners Banks

12-21 Popular Online References Morningstar ( Yahoo Finance ( Google Finance ( Value Line ( Wall Street Journal ( MSN Money ( CNN Money (

12-22 Learn “A public-opinion poll is no substitute for thought.” ~ Warren Buffet, Venture Capitalist (1930 -) LO 12-1 Appreciate the history of mutual funds and understand mutual fund basics. LO 12-2 Examine the types of mutual funds. LO 12-3 Assess the benefits and risks of mutual funds. LO 12-4 Evaluate mutual funds in terms of their class, commission, and fee structure. LO 12-5 Plan how and where to invest in mutual funds.

12-23 Plan & Act  Research mutual funds as options to support your short-term, intermediate, and long-term savings objectives (Worksheet 12.1)  Look into three similar funds at different mutual fund companies that have similar holdings according to the Morningstar Style Box (Worksheet 12.2)  Construct an investment plan that includes the appropriate use of mutual funds as an investment (Worksheet 12.3)

12-24 Evaluate Review your goals. Is there a mutual fund option that will put you on the path to achieve your goals? Every year, reevaluate your investment portfolio to decide if it is indeed meeting your investment objectives.