Transcript Chapter 15
Personal Finance Fin 235
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Mutual Fund Basics
What is a Mutual Fund?
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A pooling of investor capital to purchase a well diversified group of stocks and/or bonds Securities may be from a single national market or may be diversified across numerous international markets.
Shares typically sell at their Net Asset Value (NAV) a.
Funds may be open-end or closed-end Open-End: Issuer buys and sells on a continuous basis b.
Closed-End: Issuer sells once. Then shares will trade in secondary markets; e.g. NYSE, OTC, etc.
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Mutual Fund Basics
No-Load Funds No Load funds do not charge sales fees.
Fund managers are compensated by management fees Load Funds 1.
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Charge sales commissions on purchases or sales of shares.
Sales charges discourage frequent trading (which imposes additional expenses on funds.
Contingent Fees: a function of how long shares are held.
12-b1 Fees 1.
Imposed to cover marketing expenses
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Why Mutual Funds?
Mutual Funds allow small investors to hold well diversified portfolios of securities with a very small amount of capital.
Mutual Funds provide small investors with a wide variety of investment objectives
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Exchange Traded Funds
Why ETF’s?
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Many mutual funds have minimum hold periods ETF’s can be traded like stocks – most are very liquid ETF’s provide a similar variety of investment objectives similar to mutual funds.
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Mutual Fund Classifications
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Objectives 1.
Capital Appreciation 2.
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Income Index Stock Funds 1.
Aggressive Growth: small cap, large cap, value 2.
Income Global: investing in foreign companies Index: tracking a particular index – S&P 500 Sector: Chemicals, Transports, Real Estate, etc.
Country Funds: Canada, UK, France, Japan, etc.
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Specialized Funds
Asset Allocation: Cash, Stocks, Bonds, International Balanced Funds: stocks and bonds Fund of Funds: hold shares in other mutual funds Life Cycle: changing riskiness of investments as investors get older.
Money Market Funds: a place to park your capital when not invested ion the market – earn interest.
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Selecting a Mutual Fund
Advisory Services 1.
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Lipper Analytical Services Morningstar, Inc.
Value Line a.
Financial Publications Quarterly performance rankings Mutual Fund Prospectus 1.
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Everything you need to know about the fund Must provide on request and to all new buyers.
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Mutual Fund Transactions
Typical Transactions 1.
Dividends 2.
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Purchase additional shares Hold in money market Remit to investor a.
Capital Gains Same as Dividends.
Dividends and Capital Gains distributions taxed as ordinary income to investor.
Regular monthly purchases: 401(k), 403(b), IRA Withdrawals: checks sent directly to investor.
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Homework
Do The Math: 1 (a, b, c) Be Your Own Personal Financial Planner 1.
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1- Your Mutual Fund Preferences (w/s 61) 3 – Calculating Mutual Fund Returns (w/s 63)