Chapter 16:

Investing Through Mutual Funds

Objectives
 Identify why people invest in mutual
funds.

 Distinguish among the four major

objectives of mutual funds.

 Classify mutual funds by portfolio.

 List the unique benefits of mutual funds.

Objectives
 Describe the various charges and fees
associated with investing in mutual funds.

 Explain how to select a mutual fund in

which to invest.

 Recognize valid reasons for selling a

mutual fund investment.
Investing Through Mutual Funds
MUTUAL FUND . . .

open-end investment company combining

funds of investors who have purchased
shares in a diversified portfolio of securities.
What is a Mutual Fund?

 A pool of money
 Managed by a professional investor
 Manager works for an investment firm
 Each fund has a specific objective
 Over 6,000 funds to choose from
Figure 15.1
Three Reasons Why People
Purchase Mutual Funds
Diversification
 funds of many investors are pooled and
used to purchase a variety of investments
Professional management
 who is the fund’s manager?
 managers can change
Convenience
 phone
 mail 16-3
Reasons for Investing Through Mutual
Funds
 New/more types of funds
 Few or no sales charges
 Some performed better than common
stock
 Widespread marketing
 Selection is easier
Reasons for Investing Through Mutual
Funds

 Dispense profits to investors

 Investors expect dividend income

 Investors expect price appreciation

Closed and Open End Funds

 Closed end fund (10% of funds)

 limited number of shares issued initially
 then can only purchase shares from
another investor willing to sell theirs
 Open end fund (90% of funds)
 no limitations on the number of shares
the investment company can issue
 shares are issued and redeemed by the
investment company
Net Asset Value

portfolio market value - liabilities

the number of shares outstanding

Offer price = NAV + sales commission

Objectives of Mutual Funds

 Current income

 Long-term growth

 Growth and income

 Balanced
Classification of Mutual Funds

 Common stock

 Balanced

 Bond

 Specialty

 Money market
Classification of Mutual Funds
COMMON STOCK:

 Aggressive growth  Small company

 Growth  Sector

 Value  Global/international

 Growth and income  Index

Unique Benefits of Mutual Funds
 Recordkeeping/reporting
 Easy purchase and sale

 Automatic reinvestment

 IRS-qualified tax-sheltered retirement

 Withdrawal plans

 Collateral for loans

Costs of Investing Through Mutual
Funds
 Hidden fees

 Deferred load
 Redemption
 12b-1

 Disclosure of Fees

 “Which is better, load or no-load?”

Management Fees and Other
Charges
One-time sales load fees

12b-1 fees

•Cannot exceed more than 1% of the funds assets per

year
•For a fund to be classified as no-load these fees cannot
exceed more than 0.25% of the funds assets per year.
Load vs. No Load Funds
 Load Fund
 pay a commission to a sales
agent when you buy shares
 usually 3-8%
 No Load Fund
 no sales charge paid
 purchased directly from the
investment company
 usually have an 800 number you can call
Management Fees and Other Charges

 Management fee
 charged yearly (.25 - 1%) based on a
percentage of the funds asset value
 Contingent deferred sales load
 charged upon withdrawal of funds (1-6%)
 decreases with time held
 12b-1 fees
 fee to defray advertising and marketing
costs of the fund
Strategies for Selecting a Mutual
Fund
 Match goals

 Locate sources of comparative

performance data

 Financial press (i.e. Wall Street Journal,

Barron’s)
 Magazines (i.e. Fortune, Kiplinger’s)
 Specialized mutual fund publications
Explanatory Notes
 f-Previous day’s quotation
 g-footnotes x and s apply
 j-footnotes e and s apply
 p-distribution costs apply, 12b-1
 r-redemption charge may apply
 s-stock split or dividend
 t-footnotes p and f apply
 v-footnotes x and e apply
Strategies for Selecting a Mutual Fund
 Interpret comparative performance
information over time

 Long-term/short-term performance
 Size of fund
 Fund performance in up/down markets

 Read prospectuses and annual reports

When To Sell
 Fund performs poorly compared with
similar funds
 Perception of economic trends indicates
business cycle will smooth out soon
 Fund grows too rapidly or becomes too
large
 Fund taken over by new manager
 Investment goals become more
conservative
 Need cash