Investment Objectives and Risks of Stock and Bond Funds

1. Investment Objectives and Risks of Stock and Bond Funds • Investor must clearly evaluate his/her own goals. • What is the purpose of the investment? • What is the time horizon? • What is your risk tolerance?

2. Mutual Fund Investment Objectives • A fund’s objective is established when the fund is created. Objective can be changed with a majority vote of the shareholders. • A fund’s objective denotes the type of assets a fund manger will buy or sell; such as: • primary method by which the manager seeks to generate value for shareholders (capital appreciation, dividend payment, interest income, etc.)

3. Mutual Fund Investment Objectives • the class or classes of assets (stocks, bonds, money market securities) and types of securities (growth stoc, income stock, municipal bonds, corporate bonds, etc.) • Reasons for proliferation of fund objectives: • Competition - sponsors imitating successful funds by competitors; • Shareholder retention - sponsors profit from higher

4. Mutual Fund Investment Objectives • retention of shareholders. Greater variety of objectives offer the likelihood of customers staying within the same fund family; • Refinement of investment objective - ‘splicing’ allows investor with a specific risk tolerance and time horizon to invest in appropriate fund. • Greater variety allows investors a broader arena for optimizing returns, but makes selecting a fund that is suitable to investment goal more complex.

5. Types of Mutual Funds

6. Types of Mutual Funds (Money Market) • MONEY MARKET FUNDS: Invests in high quality, low risk, short-term debt securities (T-bills, banker’s acceptance, negotiable CD’s, etc.). • Low risk of default and high liquidity. Managers are limited to buying short-term securities rated investment grade by Moody’s and S&P. • Attempts to maintain NAV of the fund at $1 per share; achieve this by purchasing debt securities that are trading at a discount to their face value.

7. Types of Mutual Funds (Money Market) • Interest accrues daily • Money market funds are neither insured nor guaranteed by the U.S. Government. Funds are not insured by the FDIC. • Like other securities, MMF are insured by Securities Investor Protection Corporation (SIPC). SIPC is a government sponsored private corporation that provides limited protection (up to $100,000) for customer if their broker/dealer goes bankrupt.

8. Types of Mutual Funds (Money Market) • Five Basic Types Of Money Market Funds: • 1.GOV’T SECURITIES MONEY MARKET FUNDS • Invests in T-bills, T-notes, and agency securities; • 90 days or less to maturity; • Income earned is subject to federal income tax but may be exempt from state and local taxes; • Considered to be the safest type of MMF.

9. Types of Mutual Funds (Money Market) • 2. U.S. TREASURY MONEY MARKET FUND • Invests only in U.S. government securities issued directly by the U.S. Treasury with short term maturity; • Agency securities are not included; • Income earned is subject to federal taxes, but exempt from state and local taxes.

10. Types of Mutual Funds (Money Market) • 3. TAXABLE MONEY MARKET FUND • Invests in bank obligations such as, negotiable CDs, short-term debt obligations traded between institutions. Agency securities are not included; • Income earned is subject to federal , state and local taxes.

11. Types of Mutual Funds (Tax Exempt Money Market) • 4. NATIONAL TAX EXEMPT MONEY MARKET FUND • 75% of its assets is invested in high quality debt securities issued by municipality. • 90 days or less to maturity; • Income earned is exempt from federal income taxes, but is subject to state and local taxes;

12. Types of Mutual Funds (Tax Exempt Money Market) • 5 SINGLE STAT, DOUBLE TAX EXEMPT MONEY MARKET FUND • Invests in municipal securities issued by a single state; • Income earned is exempt from federal and state taxes, but may be subject to local taxes.

13. Types of Mutual Funds (Equity Funds) • EQUITY FUNDS invest primarily in common stocks • Returns are generated through capital gains and dividend yields • Portfolio manager selects stocks whose profile matches the fund’s investment objective • Stocks are categorized based on features, such as dividend history, potential for capital gains, asset size, cyclical nature of the stock, etc.

14. Types of Mutual Funds (Categories of Common Stocks) • Basic Categories of Common Stocks: • Blue Chip - large and most successful public companies (IBM, GE, DuPont, …); ability to maintain and grow profits, as well as increase dividends over a long period time through different market conditions. • Establish Growth - large in asset size; stocks traded over several years; steady increase in sales and earnings and therefore stock price; most pay

15. Types of Mutual Funds (Categories of Common Stocks) • little or no dividends (Microsoft; Coca-Cola, McDonald’s, …). • Returns are generated from price increase; price volatility is greater than Blue Chips. • Income Stocks - pay a higher percentage of earnings as dividends (utility companies); investors adhere to “buy-hold” philosophy; less volatile than the market.

16. Types of Mutual Funds (Categories of Common Stocks) • Emerging Growth Stocks - little or no track record of steady growth of sales and earnings; growth and earnings potentials have recently been recognized investors (e-commerce, internet, biotech,…); pay no dividends; have commercially viable product; if successful, considerable fortune to be made. • Defensive Stocks - share prices are less adversely affected during declines in the economy, yet offers a reasonable rate of return when the economy is doing well.

17. Types of Mutual Funds (Categories of Common Stocks) • Capitalization: Current value of a publicly traded company ( #shares at current market price) • Large Cap: current market value of $5 billion or more; • Mid-Cap: current market value of between $1 billion to $5 billion; • Small-Cap: current market value of between $300 million to $1 billion; • Micro-Cap: current market value of $300 million or less.

18. Equity Fund Objectives

19. Types of Mutual Funds (Equity Fund Objectives) • AGGRESSIVE GROWTH: invest in stocks whose market prices are expected to rise rapidly; also invests in a single sector or industry; employs speculative investment strategies, such as margin and selling short; primary portfolio holdings in: • Emerging growth stocks; • mid cap stocks; • small cap stocks. • IPO • Tend to provide high gains during rally and steep drops during market declines; high volatility.

20. Types of Mutual Funds (Equity Fund Objectives) • CAPITAL APPRECIATION: speculative in nature; invest in stocks whose prices are expected to rise; price increase may be due to increase in earnings expectation or purely demand/supply led. • Investment horizon may be short-term or long-term; relatively high turnover and therefore higher transaction costs. • Employ speculative investment strategies, such as margin and options; may also maintain large cash holding. • High price volatility.

21. Types of Mutual Funds (Equity Fund Objectives) • EQUIY INCOME:primary objective is to provide current income. • Portfolio consists of large cap, blue chip and defensive stocks that pay large dividends. • Volatility moves in tandem with or lower than overall market. • Low shareholder turnover during a downturn; high dividend makes the yield higher as the share price declines. • If stocks starts to pay low dividends, less incentive to hold on to the fund.

22. Types of Mutual Funds (Equity Fund Objectives) • GROWTH:primary objective is capital appreciation; dividend payments are decidedly a secondary objective. • Portfolio consists primarily of large cap and mid cap growth stocks; may also contain a small percentage of emerging growth and small cap growth if the manager recognizes significant potential for growth.

23. Types of Mutual Funds (Equity Fund Objectives) • Volatility among growth funds varies widely: • Type of stock that the fund manager considers as a growth stock- Coca-Cola vs. Amazon.com. Both considered growth stock, but varied risk. • Investment Style: more speculative ( profiting from short-term gains) style leads to more volatility; • Important to read the fund prospectus carefully to determine the nature of risk involved.

24. Types of Mutual Funds (Equity Fund Objectives) • GROWTH AND INCOME:capital appreciation and current income are equally important. • Portfolio consists of large cap, income and established-growth stocks; stocks must have potential for growth and ability to pay steady and increasing dividends. • The blend of growth and income stock creates a portfolio volatility that is less than the overall market.

25. Types of Mutual Funds (Equity Fund Objectives) • INTERNATIONAL OR FOREIGN:primary objective is capital appreciation from commons stock companies located outside the US; dividend payments are not usually a consideration. • Foreign funds are ‘spliced’ in different ways: • Country/Region • Diversified Emerging market • Europe Fund • Pacific Fund • Latin America Fund

26. Types of Mutual Funds (Equity Fund Objectives) • WHY INVEST IN FOREIGN STOCKS: • Foreign stocks constitute a greater percentage of the value of the world’s stock market than do US stocks; • Many foreign economies are in the early stages of development - opportunity for significant capital gains; • Portfolio Diversification - not all foreign markets move in tandem with the US market.

27. Types of Mutual Funds (Equity Fund Objectives) • Risk of foreign funds varies depending on the type of fund and the period of investment. Expose to currency risk. • Asset allocation models recommend 5 to 20 percent holding of foreign funds.

28. Types of Mutual Funds (Equity Fund Objectives) • GLOBAL FUND: invests in equity securities issued throughout the world; maintains 25% - 50% of assets in US companies. • Safe way to invest in international markets: • US multinationals pay dividends in dollars - investors are shielded form currency risk; • US multinationals’ shares are traded on the US stock markets; performance closely follows the US market performance and not the foreign markets.

29. Types of Mutual Funds (Equity Fund Objectives) • Fund Volatility: volatility depends on the mixture of foreign and US equities. As high as 75% of assets can be held in foreign equities. Depending on the mixture, the fund volatility may track or move opposite to the US markets.

30. Types of Mutual Funds (Equity Fund Objectives) • SECTOR FUND:primary objective is capital appreciation. • Portfolio consists of stocks of companies of a single industry/sector/geographical region. • RISK is high - specialized concentration can produce spectacular returns and losses. Example: investment in Telecom or Internet sectors in 1999-2000 vs. 2001-03.

31. Types of Mutual Funds (Equity Fund Objectives) • Popular Sector Funds: • Communications • Financial Services • Health Care • Natural Resources • Precious Metals • Real Estate • Technology • Utilities

32. Types of Mutual Funds (Bond Fund Objectives) • BOND FUNDS: considered to be safer than stock funds. Attracts conservative investors with low risk tolerance. • Historically, returns are less than stock funds. Principal source of return is interest payments with limited potential for capital gains. • Market price of bonds do not increase as company’s sales and earnings grow; bond prices are inversely related to interest rates.

33. Types of Bond Funds

34. Types of Bond Funds

35. Types of Mutual Funds (Bond Fund Objectives) • BOND FUND objectives are defined using criteria such as: • Types of bonds - corporate, government, yankee (dollar denominated, issued in the US by foreign corp. or gov’t), euro (dollar denominated, issued outside the US), etc. • Bond rating • Average length of maturity • Taxation of interest income from bonds - taxable or tax exempt fund.

36. Types of Mutual Funds (Bond Fund Objectives) • BOND FUNDS: considered to be safer than stock funds. Attracts conservative investors with low risk tolerance. • Historically, returns are less than stock funds. Principal source of return is interest payments with limited potential for capital gains. • Market price of bonds do not increase as company’s sales and earnings grow; bond prices are inversely related to interest rates.

37. Types of Mutual Funds (Taxable Bond Fund Objectives) • CORPORATE BOND FUNDS: invest primarily in US issued corporate bonds, but may invest in debt securities issued by foreign corporations. Fixed income securities include: • Debentures : unsecured bonds; • Mortgage bonds : secured by real estate and property • Equipment Truest Certificates (ETC): secured by the equipment of the issuers. Airlines use ETCs extensively.

38. Types of Mutual Funds (Taxable Bond Fund Objectives) • CORPORATE BOND FUNDS are further categorized as: • General Corp Bond Fund: buys only investment grade bonds of US based corp. (Aaa -Baa/AAA-BBB); • High Quality Corporate Bond Fund: majority of assets are invested in bonds rated A or better; manager tries to maintain a rating of Aa or AA among all bonds;

39. Types of Mutual Funds (Taxable Bond Fund Objectives) • High Yield Corporate Bond Fund: majority of assets are invested in bonds rated BB of Ba, or lower. • Interest income from these securities are taxable at the federal, state and local levels.

40. Types of Mutual Funds (Gov’t Bond Fund Objectives) • GOVERNMENT BOND FUNDS: invest in long-term debt securities issued by the US gov’t or by its agencies (GNMA, SLMA). Agency securities are not backed by the gov’t but the agency itself. Agency securities are as safe as the US gov’t issues. • Interest income from US gov’t bonds are subject to federal taxes, but are exempt from state and local taxes. • Taxation of agency issues vary - Mortgage backed securities are fully taxed; all other issues are taxed as gov’t issues.

41. Types of Mutual Funds (Gov’t Bond Fund Objectives) • TYPES OF GOVERNMENT BOND FUNDS include: • Adjustable Rate Mortgage fund: majority of assets are invested in mortgage backed securities (GNMA, FNMA, FHLMC) secured by pool of adjustable rate mortgages. • General Government Bond Fund: invests in T-notes, T-bonds, STRIPS, TIPS, mortgage backed securities and other US government and agency securities.

42. Types of Mutual Funds (Gov’t Bond Fund Objectives) • US Treasury Government Bond Fund: all assets are invested in bonds and notes issued by the US government. One of the safest mutual funds available.

43. Types of Mutual Funds (Taxable Bond Fund Objectives) • INTERNATIONAL BOND FUNDS: invest largely in debt securities issued by foreign corporations or governments; denominated in foreign currencies; attempts to earn income from interest payments and capital gains. • Foreign securities are substantially more volatile than domestic debt; exposed to currency risk.

44. Types of Mutual Funds (Taxable Bond Fund Objectives) • MULTI-SECTOR BOND FUNDS: invest in long-term debt securities including government bonds, corporate bonds, foreign bonds, and eurobonds. It may also invest in high-yield (junk) bond issued by US based corporations. • WORLD BOND FUNDS: invest in long-tern debt securities around the globe; large percentage of assets are invested in sovereign debt. Interest payments, and to a lesser extent, capital gains are the main sources of income.

45. Types of Mutual Funds (Tax Exempt Bond Fund Objectives) • NATIONAL TAX EXEMPT BOND FUND ( known asNational Municipal Bond Fund): invests in long-term municipal debt securities of town, cities, states and municipalities in the US. • Income consist primarily of interest payments; interest is exempt from federal taxes; subject to state and local taxes.

46. Types of Mutual Funds (Tax Exempt Bond Fund Objectives) • SINGLE STATE TAX EXEMPT BOND FUND: consists of debt securities issued by and within one state. New York and California, because of the size of their bond issues are used most frequently. • Interests are double tax exempt - exempt from federal and state taxes for resident of the single state. May also be triple tax exempt depending on the tax code of the local municipality.