1. Mutual Funds
Financial Literacy

2. What We Will Cover What is a Mutual Fund?
Advantages and Disadvantage of Mutual Funds
Costs of Mutual Funds
Types of Mutual Funds
ETFs
Buying a Mutual Fund

3. What is a Mutual Fund? Investors pool their money
A fund manager buys a variety of stocks
Each investor owns a share of the fund (the total of all the stocks in the fund)
When the fund increases in value, the investor makes money

4. How Mutual Funds Work Individual Investor Mutual Fund Individual
The mutual
fund invests
in a wide
range of
stocks and
bonds
Individual
Investor
Individual
Investor
Individual
Investor
Individual
Investor

5. Net Asset Value
Mutual funds do not change price throughout the trading day
The price you buy and sell for is called net asset value (NAV) rather than stock price
It is updated only once a day, at the end of the trading day
NAV equals Total value of securities minus debts divided by number of shares

6. Open-Ended Funds
This type of fund may issue as many shares as it wishes, and anyone can invest
95% of funds are open-ended

7. Closed-End Funds Closed-end funds can issue a limited number of shares
Investors buy and sell shares among themselves

8. Advantages of Mutual Funds
Diversification
You purchase a small amount of many stocks without having to physically buy each stock
Professional Management
Fund managers are professionals with access to better information than the average investor

9. Advantages of Mutual Funds
Minimal transaction costs
Individual investors save on brokerage fees compared to individual stock purchases.
In a retirement account there is a delay in state and federal income taxes.
Liquidity
Easy to buy and sell
Flexibility
There are over 8000 funds to choose from, allowing you to invest in an area you want

10. Disadvantages of Mutual Funds
Lower-than-market performance
On average, mutual funds underperform the market
Costs
May charge a sales fee as well as an annual expense fee that will eat away your profits

11. Disadvantages of Mutual Funds
Risk
Depending on the segment of the market the mutual fund invests, it may do very well or very poorly
Systemic Risk
A market crash will have a negative effect on your fund

12. Disadvantages of Mutual Funds
Fees:
“Load” funds charge a commission to buy or sell the funds
Usually 4-8% of the investment
“Front-end load” means you pay a commission when you buy
“Back-end load” means you pay a commission when you sell the fund

13. Disadvantages of Mutual Funds
“No-load” funds mean you don’t pay a sales commission, but deal directly through the investment company
Some funds will charge a fee if you sell within a specific period of time, such as 90 days

14. Disadvantages of Mutual Funds
Owners of mutual funds pay an annual expense
Known as the expense ratio
Typically it is .25 to 2 percent of the investment value
Try to buy a fund with the lowest expense ratio possible
Expenses can eat up all or most of your profits, especially if the fund isn’t performing well

15. Costs of Mutual Funds Taxes 12b-1 fee
You have to pay taxes on gains as you go, except in a retirement account
12b-1 fee
These are marketing expenses passed on to the investor
They do not benefit the investor at all
Try to find funds that have minimum or no 12b-1 fees
They will eat into your profits and do not provide any benefit to the investor

16. Types of Mutual Funds Stock funds Most popular types of funds
They buy mostly stocks, but may also invest in cash, bonds, and money market funds

17. Types of Stock Funds Aggressive Growth Funds
The fund buys stocks that will (hopefully) increase dramatically in price
Very volatile
Small-Company Growth Funds
Investments are limited to small companies
Volatile

18. Types of Stock Funds Income Funds Growth-and-Income Funds
Concentrate more on strong companies paying dividends
Less risky than aggressive growth funds
Growth-and-Income Funds
Concentrate on stocks providing dividends plus the potential for growth
Less volatile

19. Types of Stock Funds Sector Funds International
Specializes in stocks from a specific industry
Computer, financial services, biotech, etc.
International
Invests mostly in stocks outside the U.S.

20. Types of Mutual Funds Balanced Funds Asset Allocation
Holds both stocks and bonds
Asset Allocation
Balanced funds with market timing
Life Cycle Funds (relatively new)
Attempt to tailor holdings to the investor’s age and risk tolerance
The fund is managed based on how close you are to retirement

21. Types of Mutual Funds Bond funds
Invest in bonds rather than stocks
Emphasize income over growth
Types of bond fund (remember that a bond is debt (I.O.U. or loan) issued by a company or government that must be paid back)
U.S. Government bonds
Municipal bonds (bonds issued by city or state)
Corporate bonds

22. Index Funds or ETF’s
These funds track a market index such as the S & P 500, the DOW, or the Nasdaq
S&P 500 – SPDRS
NASDAQ – QQQ
Dow Jones – IYY
They have a low expense ratio
Inverse index funds will directly mirror the opposite of the market index.

23. ETFs (Exchange Traded Funds)
These are a hybrid between mutual funds and stocks
They trade like a stock on an exchange
They represent a basket of stocks that reflect the overall performance of the market.
The biggest are IYY (Dow Jones), QQQ (Nasdaq) and SPDRS (tracking the S & P 500)
They help you achieve overall diversification.

24. Inverse ETF's
There are also Inverse ETF's which will make you money when the market index declines (Bear Market).
However, you will lose money when the market index rises (Bull Market).

25. Buying a Mutual Fund Determine your goals Meeting your objectives
What are you investing for?
Retirement
Education
Income
Growth
Meeting your objectives
Make sure the fund meets your goals (above)

26. Evaluate the Fund
identifies funds by investment strategy and management style
Look closely at past performance and expenses
Compare funds in the same category; do not compare a growth fund to an international fund, for example
Look for “star” ratings (4-star and 5-star ratings)

27. Buying a Mutual Fund
You can purchase through your company’s 401(k) website
You can purchase directly from the mutual fund company
You can purchase from your broker
You can purchase through your bank
Many funds will let you invest with as little as $250 in a retirement account

28. Alternatives for a Retirement Program
401 K Plan – This is an employer-sponsored retirement plan that is limited to a maximum yearly contribution of $16,000 for employees under the age of 50, and $24,000 for employees over 50. The total maximum contribution, including the employer contribution is $53,000.
Traditional IRA – Individual Retirement Account. Similar to a 401 K Plan, this allows individuals to set aside pre-tax income for future use in retirement to either supplement a 401 K, or replace the same.
Roth IRA – This allows an individual to set aside a portion of their after-tax income for future use in retirement.
SEP – Simplified Employee Pension. Employers can contribute up to 15% of an employees salary, or $30,000, whichever is less. The employee can’t make contributions into an SEP.
SIMPLE – Savings Incentive Match Plan for Employees. You can put in $6,000 in, and you can still contribute into an IRA.
Profit-sharing Plan – The employer may contribute 15% of an employees net salary up to $160,000.