Mutual Funds

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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