1. Chapter 13 Investing in Mutual Funds McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Investing in Mutual Funds
Chapter Objectives
Explain the characteristics of mutual fund investments.
Classify mutual funds by investment objective.
Evaluate mutual funds.
Describe how and why mutual funds are bought and sold.
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3. Objective 1 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
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4. 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”
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5. 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
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6. Characteristics of Funds
Closed-end funds
Fixed number of shares
Trade like shares of common stock
Actively managed
Exchange-traded Funds
Invests in securities contained in a specific securities index
Open-end mutual funds
Shares issued and redeemed on demand
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7. Shares traded on stock exchanges Trade price set by supply & demand
Closed-End Funds
Fixed number of shares issued when the fund is organized
Shares traded on stock exchanges
Trade price set by supply & demand
Most sell at a discount relative to their net asset value
Discount is sometimes substantial
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8. 6/3/2018
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
Can be sold short and traded with limit orders
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9. Net Asset Value Net asset value (NAV):
Assets under Management (AUM)
The current market value of the assets held by the fund
Net Assets = AUM - Liabilities
NAV calculated at the close of trading
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10. Open-End Funds Open-end funds ≈ 90% 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)
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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
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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
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13. Costs: Load Funds vs. No-Load Funds
Contingent deferred sales charge (CDSC)
“Back-end load”
“B” fund
“Redemption fee”
Charged upon withdrawal of funds (1-5%)
Generally decreases on a sliding scale depending on the number of years shares are held
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14. Costs: Management Fees and Other Charges
Charged yearly (.25%-1.5% average) based on a percentage of AUM
12b-1 fees
Annual fee to defray advertising and marketing costs
Cannot exceed 1% of AUM per year
Expense ratio
Total expenses associated with the management fees and operating costs of the fund
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15. Typical Mutual Fund Fees
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16. Objective 2 Classify Mutual Funds by Investment Objective
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17. 6/3/2018
Stock Funds
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18. 6/3/2018
Bond Funds
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19. 6/3/2018
Other Funds
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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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21. Objective 3 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
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22. Sources of Fund Information
Internet websites provide current values
Check fund companies’ Internet sites
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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
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24. Mutual Fund Prospectus
Fund objective(s)
Statement describing the risk factors
Description of the fund’s past performance
Statement describing the type of investments in the fund’s portfolio
Information about dividends, distributions and taxes
Information about the fund’s management
Information about limitations or requirements for the fund
Procedure to buy or sell shares
Services provided to investors
Turnover ratio of the fund’s investments
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25. Other Sources of Fund Information
Mutual fund annual report
Performance, investments, assets & liabilities
Financial Publications
Business Week, Forbes, Kiplinger's Personal Finance and Money
Business Week’s mutual fund survey 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
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26. Objective 4 Describe How and Why Mutual Funds are Bought and Sold
The Mechanics of a Mutual Fund Transaction
Open an account:
$250 to $3,000 and up depending on the fund family and the fund
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27. 3 Ways to Make Money on Mutual Funds
Return on Investment
3 Ways to Make Money on Mutual Funds
Income Dividends
Earnings paid from dividend and interest income
Taxed as ordinary income
Capital Gains Distribution
Distributions when the fund buys and sells securities
Taxed as long-term gains
Capital Gains (or Losses)
Capital gains (or losses) when you sell shares at a price different than price you originally paid
Taxed as short- or long-term gains
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28. Purchase Options *
* Investor may deal with one company, get one statement, yet have a choice of a wide variety of funds
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29. Purchasing Open-End Fund Shares
Regular account transactions
Easiest
Simply buy shares in amount and when desired
Voluntary savings plans
Allows for smaller than usual purchases on a recurring basis
Contractual savings plans
Require regular purchases over a specified period
Reinvestment plans
Automatically reinvests dividends and capital gains in the fund
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30. Withdrawal Options Closed-end funds & exchange-traded funds
Traded on stock exchanges and in the over the counter market
Sold like common stock shares
Open-end fund
Shares sold to the fund sponsoring company
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31. Mutual Fund Withdrawal Options
Withdraw a fixed dollar amount each period until account exhausted
Liquidate or “sell off’ a certain number of shares each period
Withdraw a fixed percentage of asset growth; principal untouched
Withdraw all income dividends and capital gains distribution; principal untouched
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32. END OF CHAPTER 13
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33. Additional Video
Mutual Fund Awards BusinessWeek and S&P’s Best Fund Picks
(Instructors see the notes section for directions.)
SYNOPIS: Helpful information about how BusinessWeek and Standard & Poor’s evaluate mutual funds is provided in this video. In addition, specific funds that are highly rated in the BusinessWeek survey are recommended.
1. Explain why investors still need to evaluate mutual funds when there is a professional manager or team of managers that choose the investments for a mutual fund.
2. What factors did BusinessWeek and Standard & Poor’s use to evaluate mutual funds? Would these same factors help you evaluate a mutual fund for your investment portfolio?
3. Specific small-cap, technology, and growth funds were described in this video. How would you research one of these funds to determine if the fund could help you obtain your investment goals?
This video is NOT available on the DVD. The authors have added the link, synopsis and follow up questions as an additional option for your course.
The link to this Business Week video is:
If you are viewing this PPT presentation in the slide show format and are connected to the Internet, you can simply click on the link at the top of the slide “Mutual Fund Awards…” and you will be connected to the site.
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