Mutual Funds By: Carmen and Matt

What are they? A collections of stocks, bonds, or individual securities that are managed according to a specific objective. Mutual funds are seen as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

What is a Portfolio? A portfolio is a collection of mutual fund accounts that make up a person or families financial assets. Portfolios contain different types of stocks, bonds and other financial securities. (Mutual Funds, 401K, Savings)

What is Diversification? A portfolio strategy designed to reduce exposure to risk by combining a variety of investments, (stocks, bonds, real estate) which are unlikely to all move in the same direction. The goal of diversification is to reduce the risk in a portfolio. Many investors are afraid that their investments will either lose money or not gain enough over time. By owning shares in a mutual fund instead of owning individual stocks or bonds, the risk of losing money is spread out. Many people will invest in a large number of assets so that a loss in one is minimized by gains in others. The more stocks and bonds you own, the less any one of them can hurt you financially.

What is Dilution? Dilution is a reduction in earnings per share of common stocks, that occur through the insurance of additional shares or the conversion of convertible securities. Dilution is a result of too much diversification.

Types of Mutual Funds Bond Funds Also known as fixed income, invest in corporate and government debt with the purpose of providing income through dividend payments. Often included in a portfolio to raise an investor’s total return, by providing steady income when the stock funds loses value.

Risks with Bond Funds The three main risks with Bond Funds.. 1.Interest rates on the bond rise, causing the bond itself to decline in value. 2.The company that issued the bond may fail in order to pay back their debts. 3.If the bond is paid off early, there is the chance the manager may not be able to reinvest the proceeds in something else that pays as high a return.

Types of Mutual Funds Stock Funds or Equity Funds Investments in shares of publically traded companies primarily in the United States. Many people invest based on the companies market capitalization or its total stock value.

Types of Mutual Funds Stock Funds Stock Funds are the most inconsistent. Their value can rise and fall very quickly over a short period of time. Stock Funds have preformed better over the long term because they are traded on the expectation that a company’s future will include expanded market shares, greater revenues and higher profits.

Types of Mutual Funds Money Market Funds Have the lowest risk compared to other mutual funds, but are more vulnerable to rising inflation because of the return rate on these funds. “By law, they are limited to investing only in specific high-quality, short-term investments issued by the U.S. government, U.S. corporations, and state and local governments.” Money Market Funds try to keep their net asset value at $1 per share.

Net Asset Value or NAV Net Asset Value is the price at which you can buy and sell shares, as long as you don't have to pay a sales commission, or "load." You have to pay loads when you buy from a broker, financial planner, insurance agent or other adviser If a mutual fund has a portfolio of stocks and bonds worth $10 million and there are a million shares, the NAV would be $10. A fund's NAV changes every day, depending on the price fluctuations of the fund's holdings.

Who Can Invest In Them? Anyone can invest in a mutual fund as long as they have a bank account. Most banks have their own mutual funds you can purchase. The minimum investment is usually $100. Investors purchase mutual fund shares from the fund itself. Investors sell their shares on a continuous basis.

Advantages vs. Disadvantages Advantages.. 1.Diversification 2.Affordability/Convienence 3.Professioal Management 4.Liquidity 5.Flexability 6.Dividend Reinvestment

Advantages vs. Disadvantages Disadvantages… 1.Fees and Expenses 2.No Control / Management Abuse 3.Dilution 4.Poor Performances 5.Tax Inefficiency 6.No Insurance

Where Can I Buy Mutual Funds? Banks Online Brokers-a person that arranges transactions between a buyer and seller and gets commission when the deal is executed. Financial Advisors Contacting the Fund Directly

How Do Mutual Funds Make Money Dividend Payments-The fund may earn income in the form of dividends and interest on the portfolio. Capital Gains Distributions-The price on the security of the fund may increase, so when a fund sells the increased price is the capital gain. Increased NAV-If the market value of the fund increases after expenses then the NAV increases. The high NAV reflects the high value of the investment.

Interest and Dividends Dividends are basically the same thing as interest. Interest is the extra money that the mutual funds company may or may not give you for lending them their money. If you own a stock or mutual fund that pays a dividend then you can receive the dividend as cash ( they mail you a check or direct deposit) or it can be reinvested. Reinvesting a dividend means that the money from the dividend is used to buy more of the investment you own.

Capital Gain A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor. A capital loss occurs if the proceeds from the sale of a capital asset are less than the purchase price.

Are mutual funds insured? Mutual Funds are not insured by the FDIC or any other government agency. Even buying funds through a bank, carries the banks name, but is not guaranteed by the federal government. Losing money investing in a mutual fund is a common risk most people take.

Who controls the Investments? Mutual Funds are controlled by a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective. “Most funds are overseen by a board of directors or a trustee (if the U.S. fund is organized as a trust as they commonly are) which is charged with ensuring the fund is managed appropriately by its investment adviser and other service organizations and vendors, all in the best interests of the fund's investors.”

Types of Fees Redemption Fee Exchange Fee Account Fee Purchase Fee Management Fee Every company that manages a mutual fund charges an annual fee - generally between 0.5% to 2.5%.

Redemption Fee A fee that is paid by the shareholder when they want to switch their shares.

Exchange Fee A fee that some funds impose on shareholders if they exchange (transfer) to another fund within the same fund group.

Account Fee A fee that some funds impose on investors in connection with the maintenance of their accounts.

Purchase Fee A type of fee that some funds charge their shareholders when the shareholders purchase their shares.

Management Fee Fees that are paid out of fund assets to the fund’s investment adviser for managing the fund’s investment portfolio.

Getting Rid of a Mutual Fund Find last mutual fun statement and find the balance. Call the customer service number and say you want to liquidate your shares. Decide how you want your money paid to you. (cash, stocks, bonds, direct bank transfer)

What is Liquidity? Liquidity refers to how quickly and cheaply an asset can be converted into cash. Money (in the form of cash) is the most liquid asset. Assets that generally can only be sold after a long exhaustive search for a buyer are known as illiquid. In mutual funds liquidity lets the owner sell off their mutual funds in a short period of time without there being much difference between the sale price and the most current market value.

Mutual Fund Limits There are no federal limits to how much money you can place in a mutual fund. A minimum or maximum contribution may be imposed however by the stock broker.

How are they Different? A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals) Other funds only take money from one investor.

Quiz 1. Define Mutual Funds and Portfolios. Mutual Funds are a collections of stocks, bonds, or individual securities that are managed according to a specific objective. Portfolios are a collection of mutual fund accounts that make up a person or families financial assets.

Quiz What are the 3 types of Mutual Fund Fees? The three types of fees are redemption, exchange, account, purchase, management.

Quiz What are the three types of funds? Stock Funds, Bond Funds, Money Market Funds.

Quiz What are two advantages and disadvantages of mutual funds? Two advantages are flexibility and professional management, two disadvantages are no control and poor performances.

Quiz Describe NAV and what it stands for. NAV stands for Net Asset Value. Net Asset Value is the price at which you can buy and sell shares. A fund's NAV changes every day, depending on the price fluctuations of the fund's holdings.

36 Revisions Tax Efficiency is an attempt to minimize tax liability when given many different financial decisions. Percentage of a pre-tax return realizable on a financial instrument (such as a bond, stock or share) by a taxable investor after paying his or her tax liability. Percentagepre-taxreturnonfinancial instrumentbondstockshare taxableinvestorpayingtax liability Debt to a government incurred by a tax payer as accrued or assessed taxes. Tax liability is shown as a short-term liability in financial statements, and takes precedence over all other liabilities. Debtgovernmenttaxpayertaxesliabilityshort-term financial statementstakesprecedenceother liabilities 36

37 Interest vs Dividends Interest is the fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time, value of money, the credit risk of the borrower, and the inflation rate.feechargedlenderborrowermoneyannualpercentageprincipalrate dependenttime, value of moneycredit riskinflation rate Dividends are a portion of a companies earnings that is returned to the shareholders.Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property.cashcash dividendtakeformstockstock dividendproperty 37

38 Mutual Funds You can not buy mutual funds from banks! The best places to buy mutual funds are from either a stock broker or a financial advisor.

39 Extra Information Diversify into different securities to minimize risk Portfolios should be managed off of age, young=aggressive, more risk, higher reward...old=safe, less risk, save money. Stock and Bonds usually run opposite of each other. When stocks are doing well, bond purchases aren’t as high. (vise versa). 39

40 Your yearly portfolio value is calculated and depending on how much it’s worth, is how much of a fee you will have to pay. An example of capital...buy at $10, sell at $20, for a capital gain of $10. 40