1. Mutual Funds Portfolio of assets

2. Mutual Funds and Relatives Open end Closed end ETF Money market funds REIT UITs Hedge funds Managed money

3. Advantages Instant diversification Record keeping Professional management Administrative & Trading costs Convenience Fees deducted pretax

4. Advantages of Bond funds Individual High initial cost Diversification Liquidity Mutual fund Monthly distributions

5. History 1 st US fund – 1924 Securities Act of 1933 Full disclosure Investment Company Act of 1940 Fund promotions, Pricing, Reporting, and Investing

6. Low growth until 1970s 1970s – Regulation Q and Money Market Funds 1980s – IRA, 401k, and distribution channels

7. Structure Independent Directors Shareholders MF Securities Management company

8. Returns Period return $100 100%$200 -50%$100 -20%$80

9. Arithmetic return (100% - 50 – 20) / 3 = 10% Geometric return $100(1 + R) 3 = $80; R = -7.168% Cumulative return = -20%

10. Geometric return = [(1+R 1 )(1+R 2 )…(1+R N )] 1/N - 1 R G = [(1.10)(1.20)(1.30)] 1/3 – 1 R G = 19.72% As long as there is variance in returns, arithmetic is always larger than geometric

11. Blume’s Formula T = years of data N = years for projection

12. R G = 9% R A = 12% T = 25 years of data N = 10 years

14. Net Asset Value (NAV) NAV =

15. SharesPrice A100$40$4,000 B200$80$16,000 C300$35$10,500 Total$30,500

16. Liabilities = $750 NAV = NAV = $24.79 Notice, shares of MF do not necessarily equal total shares of stock

17. NAV is calculated once a day (typically 4PM eastern time) All transactions at that day’s NAV

18. Returns and Distributions Increase in share price (NAV) Income distributions (dividends and interest payments) Short-term capital gains distributions Capital gains distributions Usually in December

19. General Concepts Diversification Rule – 1940 Act 75% of assets can hold no more than 10% of voting securities in any one issue AND No more than 5% in any single issue Remaining 25% can be in a single issue IRS rules – less diversification

20. Conduit Theory 90% of investment income 98% of dividends + interest - expenses MF report aftertax returns Highest marginal tax rate

21. 1998 – Plain English prospectus Mid 2002 – Fund name 80% of assets invested in fund name Electronic delivery of prospectus 2001 – Majority of directors must be independent

22. Code of Ethics Prevent fraudulent and manipulative practices “Access” persons must file reports of personal trading – no front running Records of personal trading

23. Material changes approved by Board of Directors, including majority of independent directors SAI states Code of Ethics and if personal trading is allowed

24. Open-End Funds Continuous public offering Redemption Priced at next NAV Usually paid next business day, but can be delayed for up to 7 days in unusual circumstances

25. Sales Charges Front end load 8 ½ percent max Back end load Contingent deferred sales charge (CDSC) Typically declining

26. Front end loads Percentage of NAV NAV = $13.91 Offer price = $15.20 Load = $15.20 - 13.91 = $1.29 Load = $1.29 / $15.20 = 0.085

27. 3% Front-end load, NAV = $8.71 Offer price = NAV / (1 – FL) Offer price = $8.71 / (1 -.03) = $8.979

28. Fees & Expenses 12b-1 fee 0.75% max The SEC does not limit the size of 12b-1 fees that funds may pay. But under NASD rules, 12b-1 fees that are used to pay marketing and distribution expenses (as opposed to shareholder service expenses) cannot exceed 0.75 percent of a fund’s average net assets per year. Distribution, marketing, advertising, direct mail SEC proposed reducing/eliminating this fee (July 2010, 0.25% max) Management fee Other Transfer agent, website, 800 number Annual expense ratio

29. Other fees Redemption fee Exchange fee Annual account maintenance

30. Share Classes A shares Front-end, low 12b-1 B shares Back-end, high 12b-1 fee C shares No (or 1% CDSC) load, high 12b-1 fee No Load Less than 0.25% 12b-1 fee and shareholder service fee

31. A shares 5%, front end load, 0.75% management fee, 0.25% 12b-1 fee B shares 0.75% management fee, 1.00% 12b-1 fee

32. $100 investment, 10% return A shares in one year $95[1 + (.10 -.0075 -.00250)] = $103.55 B shares in one year $100[1 + (.10 -.0075 -.01)] = $108.25

33. A shares in ten years $95[1 + (.10 -.0075 -.00250)] 10 = $224.90 B shares in ten years $100[1 + (.10 -.0075 -.01)] 10 = $220.94

34. When is breakeven? $95[1 + (.10 -.0075 -.00250)] t = $100[1 + (.10 -.0075 -.01)] t $95(1.09) t = $100(1.0825) t $95 / $100 = 1.0825 t / 1.09 t ln(95/100) = t ln (1.0825/1.09) t = 7.43 years