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Mutual Funds and The Stock Market Game. What is a Mutual Fund?.
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What is a Mutual Fund? A mutual fund is a collection of stocks, bonds and other securities owned by a group of investors and managed by a professional investment advisory firm. This investment advisor (also called the mutual fund’s manager) collects money from many investors and invests the pool of money for all of them.
Mutual Fund Ownership in the U.S. • 96 million individual investors own mutual funds, and held 87% of the total mutual fund assets at year-end 2006. • 55 million households (about half of all US households) owned mutual funds at year-end 2006.
What Advantages Are There to Investing in Mutual Funds? • Mutual funds provide professional management. The fund’s manager makes the buy and sell decisions, based on the fund’s management philosophy. • Mutual funds offer diversification. A mutual fund often invests in one hundred or more securities.
What Types of Funds are Available? • Mutual funds are also called open-end funds. This means that the fund will usually sell as many shares as investors want to buy. • Closed-end funds, like mutual funds, are collections of securities managed by a professional investment advisor. But unlike mutual funds, there are a fixed number of shares available and these shares are traded on the stock exchange. • Exchange-traded funds, are also like mutual funds in that they are collections of securities managed by a professional advisor, and like closed-end funds are traded on the stock exchange.
What Types of Mutual Funds are Available? There are many types of mutual funds: • Stock funds • Bond funds • Sector funds • International Funds • Money market funds • Hybrid funds (also known as balanced and life cycle funds)
How Do You Make Money on a Mutual Fund? A mutual fund investor can make money in several ways: • The fund earns income from interest or dividends on its investments which it distributes to its investors. • The fund produces capital gains by selling securities at a profit and distributes those gains to its investors. • You sell your shares of the mutual fund at a higher price than you paid for them.
Why Should Mutual Funds be a Part of The Stock Market Game? • Investment companies as a whole are the largest investor in U.S. corporate stock, holding 25% of the outstanding stock of U.S. companies at the end of 2006. • The number of defined benefit plans has decreased to 42 thousand in 2006 from 170 thousand in 1985. Conversely, the number of defined contribution plans has increased to 450 thousand in 2006, up from 30 thousand in 1985.
Incorporating Mutual Funds Into The Stock Market Game Teachers can incorporate mutual funds into The Stock Market Game by talking about two important goals: • Saving for college • Saving for retirement
Mutual Funds’ Role in Education Savings • Mutual funds accounted for 96 % of the $90.1 billion invested in Section 529 Plans at year-end 2006. • Mutual Funds managed $5 billion in Coverdell ESAs (formally the Education IRA).
Mutual Funds’ Role in Retirement Savings U.S. Retirement Assets Year-End 2006: • $4.2 trillion in IRAs • $4.1 trillion in defined contribution plans (e.g., 401(k), 403(b), 457, and Keoghs) • $2.3 trillion in defined benefit plans • $3.0 trillion in state and local government employee retirement plans • $1.1 trillion in federal government defined benefit and Thrift Savings Plans • $1.6 trillion in annuity reserves
Mutual Funds’ Role in Retirement Savings • Of the $4.2 trillion invested in IRAs at year-end 2006, about half ($2 trillion) was invested in mutual funds. • Of the $4.1 trillion invested in defined contributions plans at year-end 2006, half ($2.1 trillion) was invested in mutual funds.
