LESSON 14 .1

Investing in Mutual Funds

Mutual Funds

What is a Mutual Fund? Professionally managed group of investments bought

using a pool of money from many investors

What factor is the driving force behind the type of investments purchased for a mutual fund? The fund’s stated investment objective? Like…..

Aggressive Growth (aggressive growth stocks) Conservative Growth (bonds or money-market securities)

Facts about Mutual Funds

Most Mutual Fund Companies offer a family of funds You can purchase one type of fund like a stock fund

and then later move to different fund within the fund family like a bond fund.

All fund investors share in any profits made by the company’s funds

Mutual Fund prices are not determined by what people are willing to pay for them (like stocks are)but are determined by the Net Asset Value

How do mutual fund investor’s earn money? Through dividends Through capital gains

For most funds, you will need to make an initial purchase of $500 to $3,000

Once you buy into a fund, you can make additional purchases as often as you like. Many people make regular purchases of $50 t0 $100 a month.

Mutual Funds

What are some advantages to buying in Mutual Funds? You don’t have to worry about following stock and bond

markets Your investment is liquid When you invest, you are diversifying because mutual

funds purchase a variety stocks and bonds When you have enough money to invest in more than

one fund, you can further diversify by buying shares in funds with different investment objectives

You need not have a lot of money to invest Funds allow you to invest in expensive stocks or bonds

that you wouldn’t be able to afford outright.

Mutual Fund Risk/Return Categories

GrowthIncomeGrowth and IncomeMoney Market

Growth Funds

Goal of Fund Manager: Buy stocks that will increase in value over time

Strategy of Fund Manager: Select stocks in companies that reinvest all their

profits rather than paying out dividends to investors

For aggressive growth, select stocks that of new or out-of-favor companies that will likely achieve above-average increases in value. (accept high risk of loss in exchange for a chance to earn high returns)

Conservative growth – select stocks of stable companies that offer gains in a slower steadier rate

Income Fund

Goal of Fund Manager Buy bonds that produce current income in the form of

interest(investors look for income now rather than capital

gains later as is seen in Growth Funds)

Risk level:Low-to-moderateless risky than growth funds

Tax-Exempt bondsSome income funds specialize in tax-exempt bonds

Growth and Income Funds

Goal of Fund Manager: Earn returns from both dividends and capital gains

Strategy of Fund Manager: Buy both growth and income stocks Buy both stocks and bonds and therefore earn returns

from current income as well as from capital gainsRisk Level

Moderate (between the riskier growth funds and less risky income funds) (less risky than funds that only invest in stocks)

Money Market Funds

Goal of Fund Manager Provide modest current income with little risk Preservation of principal Provide high liquidity

Strategy of Fund Manager Invests in safe liquid securities such as Treasury Bills

and bonds that mature in three weeks to six monthsRisk Level

Little

Mutual Funds of Various Risk Categories

Global Funds A fund that purchases

international securities as well as U.S. securities

These funds are generally more risky than U.S. Stock Funds. Risk is dependent on type of securities it is invested in and the investment objective of the fund

Index Funds A fund that invests in

stocks of a particular index (Dow Jones. NASDAQ or S&P 500)

A fund based on stocks of the DOW would be less risky that one based on stock of NASDAQ since the DOW is made up of Blue Chip stocks.

Facts to consider when Evaluating Funds

Do you want money now from your investmentCan you wait till later to earn money from future

capital gainsDo you need a tax-free or tax-deferred

investmentCan you afford to take on more risk for a chance

at big returnsDo you prefer a safe but lower return investmentExamine the funds ProspectusExamine related costs and feesUse online resources to conduct research

Determining the Net Asset Value of a Fund

FormulaNAV – Value of Portfolio – Liabilities Number of Outstanding Shares

The NAV is calculated at the end of each day since the value of the Portfolio changes as stocks and other securities are traded throughout the day

A Funds Prospectus

Definition – A legal document that offers securities or mutual fund shares for sale

What a Prospectus contains: The terms of sale A summary of the funds portfolio of investments A summary of the funds objectives Financial statements showing past performance of the

fund

Costs and Fees Associated with Mutual Funds

When you buy a mutual fund, you will likely have to pay a sales fee called a Load Front-end load (paying a sales charge when fund is

purchased) Back-end load (paying a charge when an investment is

sold) Load can range from 2 to 8 percent of the value of

shares purchased

However, there are mutual funds available for sale that are no-load and you will not be required to pay a charge

Con’t of related Costs and Fees

Mutual funds often charge an annual Management Fee (averages 1 to 1 ½ % of fund’s total assets)

Mutual funds often charge a 12b-1 fee to cover costs of marketing and distributing a fund

Mutual Fund Research

www.morningstar.com

http://finance.yahoowww.mfea.com

Publications: Forbes Fortune Money

Sites of Fund Families (examples) Vanguard Fidelity Dreyfus

Common Fund Types/Objectives

GRO – GrowthBND – BondSML – Small Company GrowthG&I – Growth and IncomeWOR (means world)– GlobalMTG - Mortgage

Name Name of sponsoring Mutual Fund Company followed by name of the fund

Inv Obj The related investment objective

NAV Net Asset Value (Dollar Value of one share of the fund based on closing quotes)

Offer PRice

The NAV plus sales commission. (NL means no-load)

NAV Chg The gain or loss in the price for a share

YTD How much the fund has gone up or down since January 1 of the current year

Total Return 26 wks

The average earnings the fund has returned to investors in the last six months, stated as a percentage return on investment

4 Yrs Average earnings the fund has returned to investors for the last 4 years, stated as a percentage return on investment

MUTUAL FUND LISTINGS