1. 4-1 Mutual Funds 1980, 5 million Americans owned mutual funds. Today over 100 million Americans in 55 million households owned mutual funds. In November 2013, mutual fund assets totaled $10.8 trillion.

2. 4-2 What is a mutual fund? Mutual funds combine or pool the resources (money) of a large group of investors. Buy and sell decisions are made by fund manager(s), who is paid for the service provided. Investors purchase shares of the fund to invest in it

3. 4-3 Investment Companies and Fund Types An Open-end fund is an investment company that stands ready to buy and sell shares in itself to investors, at any time.

4. 4-4 Investment Companies and Fund Types Net asset value (NAV) is the value of the assets held by a mutual fund, divided by the number of shares. In other words it’s the price per share.

5. 4-5 Mutual Fund Operations Organization and Creation Most mutual funds are created by investment advisory firms (like Vanguard or Fidelity Investments), or brokerage firms with investment advisory operations (Waddell and Reed). Investment advisory firms earn fees for managing mutual funds.

6. 4-6 Mutual Fund Costs and Fees Types of Expenses and Fees Sales charges or “loads” –loads are charged on purchases 4%-7%. These are basically commissions paid to the broker or advisor who sold you the funds –If you pick your own funds “No Load” funds are better. Management fees: –Usually range from 0.25% to 1.00% of the funds total assets each year. –Lower is better.

7. 4-7 Example: Fee Table

8. 4-8 Mutual Fund Costs and Fees Why Pay Loads and Fees? You may want professional advice. Many advisors earn their living by selling load funds and making a commission. Or, you may want a specialized type of fund. –Perhaps one that specialized in Italian companies –Loads and fees for specialized funds tend to be higher, because there is little competition among them.

9. 4-9 Stock Funds, I. Some stock funds emphasize capital appreciation (growth) –Capital appreciation –Growth Some emphasize income payouts (dividends) –Growth and Income –Equity income Some stock funds focus on companies in a particular size range. –Small company –Mid-cap Some stock fund invest internationally. –Global –International –Region –Country –Emerging markets

10. 4-10 Stock Funds, II. Sector funds specialize in specific sectors of the economy, such as: –Biotechnology –Internet –Energy Other fund types include: –Index funds-don’t pick winners and losers, simply buys the index. These funds have much lower expenses S & P 500 Wilshire 2000 Nasdaq 400 –Social conscience, or “green,” funds –Tax-managed funds

11. 4-11 Bond Funds Bonds invest in debt: government corporate safety versus return You can still lose money on bond fund investments!

12. 4-12 Stock and Bond Funds Funds that do not invest exclusively in either stocks or bonds are often called “blended” or “hybrid” funds. Examples include: –Balanced funds –Asset allocation funds –Target Retirement Year funds (e.g. 2030, 2050)

13. 4-13 Mutual Fund Objectives: Recent Developments, I. A mutual fund “style” box is a way of visually representing a fund’s investment focus by placing the fund into one of nine boxes: GrowthBlendValue Large Medium Small Size Style

14. 4-14 Mutual Fund Performance Mutual fund performance is very closely tracked by a number of organizations. Financial publications of all types provide mutual fund data. www.morningstar.com has a “Fund Selector” that provides performance informationwww.morningstar.com

15. 4-15 Mutual Fund Performance

16. 4-16 Mutual Fund Performance

17. 4-17 Mutual Fund Performance While looking at historical returns, the level of risk of the various fund categories should also be considered. e.g. Gold, Latin American, Russia Whether historical performance is useful in predicting future performance is a subject of ongoing debate. No strong correlation between fees and performance Exchange Traded Funds (ETFs) are funds that are traded on the stock exchange rather than purchased through a broker or directly from the fund company.