Post on 22-Dec-2015
Mutual Funds
For more Information:
CNNMoney.com
Wiki
What This Lecture Covers
What are mutual funds Who can invest in mutual funds Your tolerance for risk Types of stock funds S&P 500 Bond funds Choosing funds Buying funds and NAV Commission When a fund does poorly
What Are Mutual Funds?
Includes stocks, bonds, real estate, and/or other securities
Each investor (there are 100s-1000s) gets a part of the total investment
Who Can Invest in Mutual Funds
Anyone with a few hundred to a few thousand dollars
This gives people a bigger portfolio for much less money than it would cost them to invest in each company individually
Assess Your Tolerance for Risk
Know your tolerance for risk – can you handle big ups and downs, or do you need the stability of a low-risk fund
Stock Funds
There are many types Value Funds: lower P/E ratios Growth Funds: buy shares in companies that are
growing Growth-and Income, Equity-income, Balanced
Funds – long-term growth Sector Funds: pick shares in certain sectors – ie.
technology, health care, and so forth Index Funds: buy shares in an certain index – for
example S&P 500
Value Funds
Large-cap: look for companies that have fallen, so their prices are lower
In this case, may have to wait awhile to get a potential profit
Small-cap: look for small companies worth less that have not been picked by other investors
Growth Funds
Aggressive: buy taking risks; may do better than others over the long run, but can fall too
Others: some may invest in companies that are growing quickly, but more typically focus on big, established names
When experiencing a bull market, may not do as well, but when in a bear market, may not suffer as much
Growth-and-income, Equity-Income, Balanced Funds
Consistent long-term growth All have some dividend-paying stocks,
income-producing securities (like bonds) Lowest yields because focus on growth Balanced have 50-60% in stocks, and the
rest in bonds (so highest yields)
Sector Funds
As said before, will focus on a particular sector
Volatile – as may do really well one year and not the next
S&P Index and Index Funds
Many funds follow the performance of the S&P 500 by containing the same stocks as the index, and in the same proportions, which allows them to match its performance (before fees and expenses).
A company added to the list may see an increase in its stock price as the managers of the mutual funds must purchase that company's stock in order to keep the funds the same as that of the S&P 500 index.
S&P 500
a stock market index consisting of 500 Large-Cap corporations from the United States.
Large-Cap means the companies have equity of approximately $5 billion dollars
owned and maintained by Standard & Poor's All stocks are traded on NYSE or NASDAQ
Bond Funds
Government bonds Corporate bond funds High-yield bond funds (junk bonds) Municipal bond funds
US Government Bond Funds
Credit risk is not a worry, since investing in government
However, returns are usually smaller than others, because less risky
Can fluctuate with interest rates Short-term is for those who do not want to
worry about a change in interest rates
Corporate Bond Funds
Issued by companies that can be well-known or obscure
You want to check the credit quality of the bonds
Longer the maturity, the greater chance for success or loss
High-Yield Bond Funds
Junk bonds Consist of new or small businesses, as well
as larger, known companies that are not doing well
Higher risk, so higher potential yields Do well when economy is doing well and
vice-versa
Municipal Bond Funds
Issued by cities, states, and other local governments
These are tax-exempt – do not pay taxes on any dividends
Assessing Risk of Funds
Look at three things: a fund’s biggest quarterly loss Beta: how much a fund fluctuates against the
S&P 500 Standard deviation: how much a fund differs
(higher or lower) from its average return. Higher deviation means more risk
Choosing Stock Funds
Funds differ in the fees that they charge; all your profit could disappear with the fees
Index funds are recommended because they usually have lower fees; they tend to change less than “active” funds
Choose a fund that is consistent – not just one that is doing well right now
Buying
Prices are determined by its NAV NAV is the total value of the securities the
fund owns divided by the number of shares For example, if the fund is worth $40 million,
and there are a million shares, its NAV is $40 The NAV will change every day – you use it
to buy and sell
Commission
When buying, you may pay a commission if you purchase from a– Broker– Financial planner– Insurance agent– Other adviser
When a Fund Does Poorly
Try not to get rid of a fund if it is not performing as well
Wait and watch first Seek advice if it continues to stay below its
old value