Mutual FundsMutual Funds

ObjectivesObjectives

WHAT IS A MUTUAL FUND?

HOW DO MUTUAL FUNDS OPERATE?

HOW MUCH DOES MUTUAL FUND INVESTING COST?

HOW SHOULD MUTUAL FUND PERFORMANCE BE EVALUATED?

WHAT ARE OTHER TYPES OF INVESTMENT COMPANIES?

WHAT IS A MUTUAL FUND?

HOW DO MUTUAL FUNDS OPERATE?

HOW MUCH DOES MUTUAL FUND INVESTING COST?

HOW SHOULD MUTUAL FUND PERFORMANCE BE EVALUATED?

WHAT ARE OTHER TYPES OF INVESTMENT COMPANIES?

What is a Mutual Fund?What is a Mutual Fund?

A MUTUAL FUND IS AN INVESTMENT COMPANY THAT SELLS SHARES REPRESENTING

AN INTEREST IN A PORTFOLIO OF SECURITIES.

A MUTUAL FUND IS AN INVESTMENT COMPANY THAT SELLS SHARES REPRESENTING

AN INTEREST IN A PORTFOLIO OF SECURITIES.

Advantages of Mutual FundsAdvantages of Mutual Funds

DIVERSIFICATION

SMALLER MINIMUM INVESTMENTS

PROFESSIONAL MANAGEMENT

DIVERSIFICATION

SMALLER MINIMUM INVESTMENTS

PROFESSIONAL MANAGEMENT

How Do Mutual Funds Operate?How Do Mutual Funds Operate?

Net Asset Value (NAV) (Total portfolio value - liabilities) / # of

sharesManagement is usually contracted to

an outside firm with fees ranging from 1/4% to 1/2% a year.

Often management companies will start many funds and will provide advisory services, etc. for them.

Services Offered by Mutual Services Offered by Mutual FundsFunds

AUTOMATIC REINVESTMENT OF DISTRIBUTIONS

AUTOMATIC INVESTMENT PLANS CHECK WRITING EXCHANGE PRIVILEGES PERIODIC STATEMENTS

AUTOMATIC REINVESTMENT OF DISTRIBUTIONS

AUTOMATIC INVESTMENT PLANS CHECK WRITING EXCHANGE PRIVILEGES PERIODIC STATEMENTS

Taxation of Mutual FundsTaxation of Mutual Funds

Mutual fund taxes are passed through to investors. Mutual funds are generally considered to be unfriendly from a tax standpoint.

Why?

Mutual fund taxes are passed through to investors. Mutual funds are generally considered to be unfriendly from a tax standpoint.

Why?

Mutual Fund Fees and Mutual Fund Fees and ExpensesExpenses

LOAD CHARGESFRONT-END LOADBACK-END LOAD

EXPENSESMANAGEMENT OR ADVISORY FEESOPERATING EXPENSES

12B-1 FEE

LOAD CHARGESFRONT-END LOADBACK-END LOAD

EXPENSESMANAGEMENT OR ADVISORY FEESOPERATING EXPENSES

12B-1 FEE

EVALUATING FEES AND EXPENSESDIFFERENCES IN ANNUAL OPERATING EXPENSES

EVALUATING FEES AND EXPENSESDIFFERENCES IN ANNUAL OPERATING EXPENSES

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

$22,000

$24,000

$26,000

0 1 2 3 4 5 6 7 8 9 10

End of Year

Inve

stm

ent

Val

ue

Fund A: Annual operating expenses equal .75%.

Fund B: Annual operating expenses equal 2%.

Other Types of Investment Other Types of Investment

CompaniesCompanies

UNIT INVESTMENT TRUSTS

UNMANAGED PORTFOLIO OF A SPECIFIC TYPE OF SECURITY; INVESTORS PURCHASE UNITS.

CLOSED-END INVESTMENT COMPANIESMANAGED PORTFOLIO OF SECURITIES WITH A FIXED NUMBER OF SHARES OUTSTANDING.

UNIT INVESTMENT TRUSTS

UNMANAGED PORTFOLIO OF A SPECIFIC TYPE OF SECURITY; INVESTORS PURCHASE UNITS.

CLOSED-END INVESTMENT COMPANIESMANAGED PORTFOLIO OF SECURITIES WITH A FIXED NUMBER OF SHARES OUTSTANDING.

Open-end Fund (Mutual Open-end Fund (Mutual Fund)Fund)new shares sold as demanded. company will buy back the shares at

any time.

Closed-end Investment Closed-end Investment CompanyCompanyset number of shares / bought & sold

on exchangemarket price usually < NAV, but . . .

emerging markets funds

changes in the discount affect total return

dividend yield usually above average because of discount

must pay commission to buy or sell

Load vs. No-loadLoad vs. No-load

most all funds obtained through brokers will have a load

load = sales feeprice = NAV + sales fee of 7 1/2% to

8%usually no redemption feeno-load funds are sold at NAV low-load funds have a fee of only

about 3%

Tradeoffs Between Loads Tradeoffs Between Loads and Feesand Feesmany no-load funds charge up to 1

1/2% per year for managementsome low-loads do this also.all funds charge management fees of

from 1/2% to 1 1/2%.*** Read Prospectus ***

Types of Investment Types of Investment CompaniesCompaniesCommon stock funds

growthincomeindexmixedindustry specific (health care, airlines,

etc.)ecology mindedregional funds

Types of Funds, con’t.Types of Funds, con’t.

Balanced funds stocks and bonds percentages vary greatly See prospectus for strategy

Bond funds corporate, government, junk, capital gains

plays mixed, municipals (state specific), income

Money market funds

Performance Performance

After expenses, most funds do not consistently beat the market

Performance figures do not take taxes into account

The funds that tend to be the best in a given year do not tend to continue to perform at the top. Why?

Implications of Performance Implications of Performance StudiesStudiesFor investors with little money?For investors with more money?Advisability of diversification among

funds?