Investing in Mutual Funds

What is a Mutual Fund?

An investment alternative where money from investors is pooled to buy stocks, bonds, and other financial securities selected by professional managers.

Why Investors Purchase Mutual Funds Professional management.

Who is the fund’s manager?Managers can change.Be aware of the scandal involving late

trading. Diversification.

Investors funds are used to purchase a variety of investments. This variety provides some safety

Closed- and Open-End Funds Closed-end funds (7% of funds).

Shares are issued by an investment company only when the fund is organized.

After all original shares are sold you can purchase shares only from another investor who is willing to sell.

Traded on exchanges and over-the-counter. Open-end funds (91% of funds).

Shares are issued and redeemed by the investment company at the request of investors.

Investors can buy and sell shares at the net asset value (NAV).

Exchange-Traded Funds

Invests in the stocks contained in a specific stock market index, like the Standard and Poor’s 500 stock index.

Performance of shares in the fund tend to mirror the performance of the index.

Low management fees since there is less need for decisions made by a portfolio manager.

Net Asset Value (NAV)

Value of the fund’s portfolio - Liabilities

Number of shares outstanding

For most mutual funds, NAV is calculated at the close of trading each day.

Load Funds and No-Load Funds

Load Fund.Investors pay a commission (sales charge) up to

8.5% every time they purchase shares. This is sometimes called a front load. (Class A shares)

Average charge is 3-5% for which an investor can get purchase advice and explanations.

No-Load Fund.Investors pay no sales charge up front.You deal directly with the fund with 800

numbers or web sites, or from discount brokers.

Classification of Mutual Funds

Stock funds.Aggressive growth funds buy stocks in small, fast-

growing companies.Equity income funds invest in stock of companies

with a long history of paying dividends.Growth buy stock in companies with higher-than-

average revenue and earnings growth.

Contd..Global funds buy stock in companies in the U.S. and

other countries, while international funds buy stock only in companies outside the United States.

Index buys stocks that mirror an index.Large-cap funds invest in companies with

capitalization of $5 billion or more.Mid-cap funds buy stock in companies whose

capitalization is between $1 and $5 billion.

Classification of Mutual Funds

Regional funds buy stock in companies in a specific region of the world.

Sector funds buy stock in companies in a particular industry such as biotechnology.

Small-cap funds buy stock in lesser-known companies with a capitalization of less than 500 million.

Socially responsible funds avoid investing in companies that produce harmful products

Classification of Mutual Funds

Bond funds.High-yield (junk) bond funds buy corporate

bonds that are higher risk and higher yield.Index bond funds invest in a sampling of bonds

included in an index.Intermediate corporate bonds (5-10 years).Intermediate U.S. bond funds buy treasury notes

with maturities of 5-10 years. Long-term corporate bonds (> 10 years).

Classification of Mutual Funds

Long-term U.S. bond funds: U.S. Treasury and U.S. zero-coupon bonds with maturities > than 10 years.

Municipal bonds: Invest in municipal bonds that provide investors tax-free interest income.

Short-term U.S. bond funds invest in U.S.Treasury issues of 1-5 years.

Short-term corporate bond funds: Investment grade bonds with maturities of 1-5 years.

World bond funds buy bonds of foreign companies and governments.

Classification of Mutual Funds

Other funds.Asset allocation funds: invest in various asset

classes, such as stocks, and bonds, with precise amounts within each type.

Balanced funds: Invest in both stocks and bonds, with the primary objectives of conserving principal, providing income as well as growth.

Money market funds: Invest in CD’s, government securities, and other safe investments.

Families of Funds

A family of funds exists when one investment company manages a group of mutual funds.

Each fund in the family has a different financial objective.

Exchange privileges allow you to move your money from one fund to another within the fund family with little or no charge.

Steps to Evaluate Mutual Funds

Are you ready to invest in mutual funds? Determine your risk tolerance. Determine your investment objectives. Obtain the money you need invest. A fund’s objective should match your

investment objective. Evaluate any mutual fund before buying or

selling (www.morningstar.com) Consider managed funds vs. indexed funds

Other Sources of Fund Information Mutual fund prospectus tells the funds

objective and:A statement describing the risk factors.A description of the fund’s past performance.A statement describing the type of investments in the

fund’s portfolio.Information on how to open an account.

Contd..Dividends, distributions and taxes.Information about the fund’s management.The process for investors to buy or sell shares.Services provided to investors.The turnover ratio of the fund’s investments