Chapter 12 Supplement C: Mutual Funds Chapter 12 Supplement C Mutual Funds

 2005 Kaplan Financial 2 Chapter 12 Supplement C: Mutual Funds Introduction to Mutual Funds Mutual funds are open-end investment companies that sell shares of stock to the public and use the proceeds to invest in a portfolio of securities on behalf of its shareholders Mutual funds are actually a subcategory of what is referred to as regulated investment companies

 2005 Kaplan Financial 3 Chapter 12 Supplement C: Mutual Funds Types of Investment Companies Unit Investment Trust (UIT) Exchange Traded Funds (ETFs) Closed-end Investment Company Open-end Investment Company (mutual funds)

 2005 Kaplan Financial 4 Chapter 12 Supplement C: Mutual Funds Mutual Fund Fees Loads or Sales Charges Front-end load Back-end load Other Mutual Fund Fees 12b-1 fees Management fees Expense ratio

 2005 Kaplan Financial 5 Chapter 12 Supplement C: Mutual Funds Mutual Fund Classification Load vs. No-Load Funds Classes of Load Fund Shares Class A shares Class B shares Class C shares

 2005 Kaplan Financial 6 Chapter 12 Supplement C: Mutual Funds How Do Fund Expenses Impact Performance? High quality performance funds may have high or low expense ratios However, the higher the expenses of the mutual fund, the more the fund manager will have to overcome to achieve strong return performance

 2005 Kaplan Financial 7 Chapter 12 Supplement C: Mutual Funds Advantages of Mutual Funds Low initial investment Diversification Ease of access Professional management Tax efficiency of fees Liquidity Transaction cost efficiency Variety Services

 2005 Kaplan Financial 8 Chapter 12 Supplement C: Mutual Funds Disadvantages of Mutual Funds Performance Fees, Loads, and Expenses The abundance of choices Liquidity Execution Classification system (misclassification) Built-in gains

 2005 Kaplan Financial 9 Chapter 12 Supplement C: Mutual Funds Types and Objectives of Mutual Funds Money Market Mutual Funds – provide investors the opportunity to earn competitive money market returns with the added benefits of ease of access and liquidity. Fixed-Income Mutual Funds – diversify the investment portfolio and provide investors with current income.

 2005 Kaplan Financial 10 Chapter 12 Supplement C: Mutual Funds Types and Objectives of Mutual Funds (cont.) Equity Mutual Funds – provide investors easy, efficient access to common stock securities. Hybrid or Balanced Funds – invest in a balanced fashion, such that a portion of the portfolio is invested in cash, fixed- income securities, and equity securities.

 2005 Kaplan Financial 11 Chapter 12 Supplement C: Mutual Funds How Do Investment Advisers Select Mutual Funds? Prospectus: Fund objective Investment policy/strategy Manager tenure Historical performance Portfolio turnover Fees and expenses Buying and selling shares Minimum initial investment Investor services

 2005 Kaplan Financial 12 Chapter 12 Supplement C: Mutual Funds How Do Investment Advisers Select Mutual Funds? (cont.) MPT statistics and performance measures: Coefficient of determination (R 2 ) Beta Jensen’s Alpha Sharpe ratio Treynor ratio

 2005 Kaplan Financial 13 Chapter 12 Supplement C: Mutual Funds MPT Statistics R 2 = % change in portfolio explained by changes in a market index Beta = Indicates volatility of portfolio as compared to the market  = R p - [R f + B (R m – R f )]

 2005 Kaplan Financial 14 Chapter 12 Supplement C: Mutual Funds MPT Statistics (cont.) S p = R p – R f  p T p = R p – R f 

 2005 Kaplan Financial 15 Chapter 12 Supplement C: Mutual Funds Managing Mutual Fund Portfolios Issues to look for: Changing asset size Style shift Manager changes Capital gain exposures