1. Investing In Your Future © Thomson/South-Western ChapterChapter MUTUAL INTERESTS 6 6.1 MUTUAL FUNDS 6.2 INVESTIGATE MUTUAL FUNDS 6.3 CHOOSE MUTUAL FUNDS

2. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 2 Lesson 6.1 Mutual Funds Goals Describe mutual funds and explain the advantages of mutual fund investing. Discuss the different types of mutual funds.

3. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 3 WHAT ARE MUTUAL FUNDS? an assortment of stocks, bonds and other investments a shareholder owns a portion of the fund’s entire investment portfolio professional fund managers manage the fund shareholders obtain a share of the profits

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5. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 5 MUTUAL FUND PRICES AND NET ASSET VALUE (NAV) NAV = Value of Portfolio - Liabilities Number of Shares calculated at the end of each business day Unlike stocks, most mutual fund prices are not determined by what people are willing to pay for them at a given time

6. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 6 WHY ARE SO MANY PEOPLE BUYING THEM? Diversification Professional Fund Management Convenience It’s not unusual for mutual funds to hold stocks in over a hundred different companies.

7. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 7 FAMILY OF FUNDS (Example: Fidelity) If you own shares in a fund that belongs to a family of funds, you can transfer from one fund to another whenever your investment needs change.

8. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 8 THE MUTUAL FUND UNIVERSE Mutual funds have winners and losers. Professional fund management does not guarantee success.

9. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 9 GOALS AND RISK When selecting a mutual fund, you should: determine your goals decide the level of risk you are comfortable with research the fund’s performance prior to investing

10. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 10 CATEGORIES OF MUTUAL FUNDS common stock funds balanced funds (stocks and bonds) municipal (tax exempt) bond funds corporate bond funds government bond funds money market funds

11. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 11 IMPORTANCE OF COMMON STOCK FUNDS Stock Market funds provide the greatest growth potential and carry the greatest risk aggressive growth (small companies with high growth potential) long-term growth (sometimes called steady- growth companies) growth and income (mixed portfolio of stocks and bonds) sector funds (stocks from one industry/sector) international funds

12. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 12 INDEX FUNDS index funds buys a little bit of everything invests in a representative sample of the entire stock market In recent years, 90% of professionally managed mutual funds have not outperformed the S&P 500

13. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 13 Lesson 6.2 Investigate Mutual Funds Goals Describe an expense ratio and why it is important. Explain where to go for information on mutual funds.

14. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 14 LIGHTEN THE LOAD load funds charge an up-front sales commission about 3.5% on average no-load funds do not charge a sales fee back-end loads a charge is deducted when fund shares are sold

15. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 15 ADVICE FROM A FINANCIAL ADVISOR If you learn to make your own mutual fund decisions and buy primarily no- load funds, you will have more money to invest.

16. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 16 EXPENSE RATIO expense ratio expressed as a percentage of assets deducted each fiscal year for fund expenses management fees 12b-1 fees administrative fees operating costs all other asset based costs

17. Investing In Your Future © Thomson/South-Western Expense Ratio Expense Ratios range from 0.3% to 5%. You should probably avoid funds with expense ratios higher than 1.5%. Operating expenses have a dramatic impact on the long-term performance of a fund. Chapter 6 Slide 17

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19. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 19 IN-DEPTH INFORMATION In-depth information sources are a crucial resource to consult prior to investing in mutual funds.

20. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 20 MORNINGSTAR MUTUAL FUNDS evaluates a fund’s performance over a 10 year period one-page, compact presentation available on subscription basis www.morningstar.com

21. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 21 STANDARD & POOR’S/LIPPER MUTUAL FUND PROFILES contains the following information: industry percentages top holdings performance data expenses and fees available by subscription www.lipperweb.com

22. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 22 OTHER INFORMATION SOURCES August issue of Forbes magazine www.forbes.com Money magazine survey of 2500 mutual funds Business Week magazine bwnt.businessweek.com/mutual fund/

23. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 23 www.betterinvesting.org/funds Mutual Fund Educational Alliance www.mfea.com BetterInvesting’s Mutual Fund Education and Resource Center

24. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 24 www.bobbrinker.com Investing for Beginners www.beginnersinvest.about.com Brill’s Mutual Funds Interactive www.Brill.com Moneytalk web site

25. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 25 Lesson 6.3 Choose Mutual Funds Goals Find information in the Morningstar Mutual Fund Reports. Analyze a mutual fund’s portfolio and asset allocation. Evaluate statistical information related to performance, fees and costs, and risk.

26. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 26 USE THE EQUITY MUTUAL FUND CHECK LIST BetterInvesting Equity Mutual Fund Check List how the fund invests what the fund invests in the tenure and effectiveness of current management tax considerations what percentage of your investment is used to pay the fund’s expenses

27. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 27 WHERE TO FIND INFORMATION Morningstar’s Mutual Funds publication 1,700 funds www.morningstar.com Equity Funds Fixed-Income Funds

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29. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 29 DETERMINE WHAT KIND OF MUTUAL FUNDS TO CONSIDER Investment choices should be based on your goals and timetables. bear market a period of declining prices BetterInvesting recommends that long term investors focus on equity funds that invest in growth companies.

30. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 30 CHOOSE A GROWTH FUND Limiting your choice of growth funds to those that have strong performance comparable to the S&P 500 index in the 3-year, 5-year, and longer periods will give you a good starting point.

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32. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 32 SAMPLE MORNINGSTAR REPORT +/-S&P 500 figures measure the difference between a stock fund’s total return (%) and the total return of the S&P 500 index

33. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 33 Important Facts know who will be investing your money and know their performance history Turnover Rate how often the manager buys and sells stocks in the portfolio capital gains are taxed

34. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 34 Important Facts (continued) There has never been a proven relationship between high expenses and high returns. Past performance is never a guarantee of future results.

35. Investing In Your Future © Thomson/South-Western Chapter 6 Slide 35 REVIEW YOUR PORTFOLIO You should stay current on changes affecting your portfolio. Be skeptical of what you hear and read in the financial media. In investing, knowledge is power.