1. Mutual Funds Explain the characteristics of mutual fund investments.
What are the different Classification of mutual funds?
How are we able to evaluate mutual funds.

2. Learning Objective Explain the Characteristics of Mutual Fund Investments
Mutual Fund = an investment vehicle offered by investment companies to those who wish to:
Pool money
Buy stocks, bonds, and other financial securities
Have buy/sell decisions made by a fund manager
Many mutual funds chosen for inclusion in retirement account investments

3. Investment Company
Pools the money of many investors – its shareholders – to invest in a variety of securities
Employs the fund manager who is compensated for selecting securities appropriate to the fund’s stated objective
“Financial Intermediary”

4. Why Investors Purchase Mutual Funds
Professional management
Who is the fund’s manager?
How has the fund performed under the current managers?
Diversification
Investor’s funds are used to purchase a variety of investments
Risk reduction

5. Advantages and Disadvantages of Investing in Mutual Funds
Diversification
Purchase/withdrawal costs
Professional Management
Ongoing management fees such as 12b-1 fees
Ease of buying and selling shares
Poor performance that may not match the S&P 500 index
Multiple withdrawal options
Inability to control when capital gain distribution occurs and tax reporting issues
Distribution or reinvestment of dividends and capital gain distributions
Potential market risk like every other investment
A 12b-1 fee is an annual marketing or distribution fee on a mutual fund. The 12b-1 fee is considered to be an operational expense and, as such, is included in a fund's expense ratio. It is generally between 0.25 and 1% (the maximum allowed) of a fund's net assets.

6. Characteristics of Funds
Closed-end funds (≈ 6% of funds)
Fixed number of shares
Trade like shares of common stock
Actively managed
Exchange-traded funds (≈ 9% of funds)
Invests in securities contained in a specific securities index
Open-end mutual funds (≈ 85% of funds)
Shares issued and redeemed on demand

7. Fixed number of shares issued when the fund is organized
Closed-End Funds
Fixed number of shares issued when the fund is organized
Shares traded on stock exchanges or the over-the-counter market.
Trade price set by supply and demand 7

8. 5/18/2018
Exchange Traded Funds
Invests to replicate the composition of a specific securities index
Performance mirrors index performance
Low management fees
Trade on exchanges throughout the day like stock
Prices determined by supply and demand
You can use limit orders and sell short or use margin 8

9. Open-End Funds Open-end funds ≈ 85% of all funds
Shares issued and redeemed by the investment company at the request of investors
Investors free to buy and sell shares at the net asset value (NAV)

10. Net Asset Value
Net asset value (NAV):
The value of the fund’s portfolio minus liabilities divided by the number of outstanding shares
NAV calculated at the close of trading 10

11. Costs: Load Funds vs. No-Load Funds
Sometimes called an “A” fund
Commission (sales charge) up to 8.5%
Average = 3 to 5%
Paid every time shares purchased
Purchased through brokerage firms or registered representatives
Salespeople prepared to explain the fund and help determine if it meets the investor’s financial goals

12. Costs: Load Funds vs. No-Load Funds
No up-front sales charge
No salespeople
Investor deals directly with the investment company via 800 numbers or web sites, or from discount brokers

13. Costs: Load Funds vs. No-Load Funds
Contingent deferred sales charge (CDSC)
“Back-end load”
“B” fund (no upfront cost, high fees if sold in the first 6-8 years)
“Redemption fee”
Charged upon withdrawal of funds (1-5%)
Generally decreases on a sliding scale depending on the number of years shares are held
Example of a Fund with a CDSC
The American Funds Growth Fund of American Class B ("AGRBX") is an example of a fund with a contingent deferred sales charge.
Lapointe (ING my first 4 years of teaching sold me funds like this. I had no idea the cost for closing out when I wanted to roll my funds over into a new company)

14. Possible Costs: Management Fees and Other Charges
Charged yearly (.25%-1.5% average) based on a percentage of assets
12b-1 fees (distribution fee)
Annual fee to defray advertising and marketing costs
Cannot exceed 1% of assets per year
Cannot exceed 0.25% for a fund to be called “no load”
Expense ratio
Total expenses associated with the management fees and operating costs of the fund

15. Typical Mutual Fund Fees
Type of Fee or Charge
Customary Amount
Load Fund
Up to 8.5 percent of the purchase
No-Load Fund
No Sales Charge
Contingent deferred sales Load
1 to 5 percent of withdrawals, depending on how long you own shares in the fund before making a withdrawal
Management Fees
0.25 to 1.5 percent per year of the fund’s net asset value on a predetermined date
12b-1 fee
Cannot exceed 1 percent of the fund’s asset per year
Expense Ratio
The amount investors pay for all fees and operating costs

16. Learning Objective Classify Mutual Funds by Investment Objective

17. 5/18/2018
Stock Funds 17

18. 5/18/2018
Bond Funds 18

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Other Funds 19

20. A Family of Funds
One investment company manages a group of mutual funds
Each fund has a different financial objective
Exchange privileges allow movement from one fund to another within the family with low or no charge
Fidelity Investments
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Franklin Templeton Funds
Forester’s Financial

21. Learning Objective Evaluate Mutual Funds
Managed Funds vs. Index Funds
Managed fund  a fund manager makes all decisions regarding what securities are included in the fund’s portfolio
Index fund  securities held by the fund replicate those contained in a specific index like the S&P 500

22. Sources of Fund Information
Internet websites provide current values
Check fund companies’ Internet sites

23. Sources of Fund Information
Professional Advisory Services
Lipper Analytical Services
Morningstar, Inc.
Value Line
Mutual fund newsletters
Available in libraries and from brokerage firms and online

24. Mutual Fund Prospectus
Fund objective(s)
Statement describing the risk factors
The fund’s past performance
The type(s) of investments in the fund’s portfolio
Information about dividends, distributions and taxes
The fund’s management
Limitations or requirements for the fund
Procedure to buy or sell shares
Services provided to investors
Turnover ratio of the fund’s investments

25. Other Sources of Fund Information
Mutual fund annual report
Performance, investments, assets and liabilities
Financial Publications
Bloomberg Businessweek, Forbes, Kiplinger's Personal Finance, Money, and The Wall Street Journal
A mutual fund’s information usually includes:
Fund’s overall rating compared to all other funds, and to funds in the same category
Fund size, sales charge and expense ratio
Historical returns for the past ten years