Transcript Chapter 12 Supplement C Mutual Funds Chapter 12 Supplement C: Mutual Funds

Chapter 12 Supplement C
Mutual Funds
Chapter 12 Supplement C: Mutual Funds
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Introduction to Mutual Funds
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Mutual funds are open-end investment
companies that sell shares of stock to the
public and use the proceeds to invest in a
portfolio of securities on behalf of its
shareholders
Mutual funds are actually a subcategory of
what is referred to as regulated investment
companies
Chapter 12 Supplement C: Mutual Funds
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Types of Investment Companies
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Unit Investment Trust (UIT)
Exchange Traded Funds (ETFs)
Closed-end Investment Company
Open-end Investment Company (mutual
funds)
Chapter 12 Supplement C: Mutual Funds
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Mutual Fund Fees
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Loads or Sales Charges
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Front-end load
Back-end load
Other Mutual Fund Fees
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12b-1 fees
Management fees
Expense ratio
Chapter 12 Supplement C: Mutual Funds
 2005 Kaplan Financial
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Mutual Fund Classification
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Load vs. No-Load Funds
Classes of Load Fund Shares
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Class A shares
Class B shares
Class C shares
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 2005 Kaplan Financial
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How Do Fund Expenses Impact
Performance?
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High quality performance funds may
have high or low expense ratios
However, the higher the expenses of
the mutual fund, the more the fund
manager will have to overcome to
achieve strong return performance
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Advantages of Mutual Funds
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Low initial investment
Diversification
Ease of access
Professional management
Tax efficiency of fees
Liquidity
Transaction cost efficiency
Variety
Services
Chapter 12 Supplement C: Mutual Funds
 2005 Kaplan Financial
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Disadvantages of Mutual Funds
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Performance
Fees, Loads, and Expenses
The abundance of choices
Liquidity
Execution
Classification system (misclassification)
Built-in gains
Chapter 12 Supplement C: Mutual Funds
 2005 Kaplan Financial
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Types and Objectives of Mutual
Funds
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Money Market Mutual Funds – provide
investors the opportunity to earn
competitive money market returns with
the added benefits of ease of access
and liquidity.
Fixed-Income Mutual Funds – diversify
the investment portfolio and provide
investors with current income.
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Types and Objectives of Mutual
Funds (cont.)
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Equity Mutual Funds – provide investors
easy, efficient access to common stock
securities.
Hybrid or Balanced Funds – invest in a
balanced fashion, such that a portion of
the portfolio is invested in cash, fixedincome securities, and equity securities.
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 2005 Kaplan Financial
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How Do Investment Advisers
Select Mutual Funds?
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Prospectus:
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Fund objective
Investment policy/strategy
Manager tenure
Historical performance
Portfolio turnover
Fees and expenses
Buying and selling shares
Minimum initial investment
Investor services
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How Do Investment Advisers
Select Mutual Funds? (cont.)
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MPT statistics and performance
measures:
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Coefficient of determination (R2)
Beta
Jensen’s Alpha
Sharpe ratio
Treynor ratio
Chapter 12 Supplement C: Mutual Funds
 2005 Kaplan Financial
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MPT Statistics
R2 = % change in portfolio explained by
changes in a market index
Beta = Indicates volatility of portfolio as
compared to the market
 = Rp- [Rf + B (Rm – Rf )]
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MPT Statistics (cont.)
Sp = Rp – Rf
p
Tp = Rp – Rf
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Chapter 12 Supplement C: Mutual Funds
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Managing Mutual Fund
Portfolios
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Issues to look for:
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Changing asset size
Style shift
Manager changes
Capital gain exposures
Chapter 12 Supplement C: Mutual Funds
 2005 Kaplan Financial