Mutual Funds Chapter 14

1. Mutual FundsChapter 14

2. Pool $ from Investors Investor A = $1,000. Investor D = $1,000. Investor C = $1,000. Investor E = $1,000. Investor B = $1,000. Investor F = $1,000.

3. What is a Mutual Fund? • A professionally managed group of investments bought using a pool of money from many investors • Individuals buy shares in the mutual fund

4. What is a Mutual Fund? • Fund managers use this money to buy stocks, bonds and securities • InvestmentObjectives determine the kinds of securities purchased

5. Family of Funds • Variety of funds covering a whole range of investment objectives • Fidelity has over 175 different mutual funds • Advantage of using a “family fund” - can trade in and out of funds within group • provides an opportunity to diversify • i.e. $5,000 to invest: 25% in aggressive stocks, 25% in growth, 50% in income fund

7. Professional Fund Managers Buy & Sell based on: market conditions economic conditions trends + other factors Investors share in dividends & capital gains

8. Buying Mutual Funds • Initial purchase $500 - $3,000 • Can add additional monies at any time

9. Advantages of Mutual Funds • Professional Management - managers follows the stocks and bonds • Vanguard Health Care Fund Investor Shares (VGHCX) • Let’s take a look at the managers

10. ManagementWellington Management Company, LLP • Firm Description • Founded in 1928, Wellington Management Company, LLP, Boston, Massachusetts, is among the nation’s oldest and most respected institutional investment managers. The firm has advised Vanguard Health Care Fund since 1984. • Investment Manager Biography • Edward P. Owens, CFA, Senior Vice President and Partner • Portfolio manager. • Advised the fund since 1984. • Worked in investment management since 1974. • B.S., University of Virginia. • M.B.A., Harvard Business School.

11. Direct research 

12. Advantages of Mutual Funds • Liquid • Diversification - purchasing a variety of stocks and bonds • Low investment minimum - pooling your money with other investors

13. Types of Mutual Funds GROWTH FUND- investment goal is to buy stocks that will increase in value over time -- companies that reinvest profits rather than give dividends -- earn profits via capital gains -- assume high risk for chance of high return Aggressive growth fund - new or out-of-favor companies Other growth funds - slower, steadier rate of growth -- risky

15. Types of Mutual Funds INCOME FUND - investment goal is to buy securities that consistently pay good dividends -- companies that usually pay dividends rather than reinvest in company -- invests in bonds that pay regular interest

16. Types of Mutual Funds -- looking for income rather than capital gains -- moderate risk

17. Types of Mutual Funds GROWTH AND INCOME FUND - investment goal is to earn return from dividends + capital gains -- moderate risk

18. Types of Mutual Funds BALANCED FUND - attempts to minimize risk by investing in a mixture of: stocks (preferred and common) bonds (corporate and municipal) -- provides both income and growth -- low-risk Goal: current income and long-term growth with safety

19. Types of Mutual Funds BOND FUNDS - invests in bonds to try to achieve stable income with minimal risk Invests in: government corporate tax-exempt bonds -- most low-to-moderate risk -- risky if investing in junk bonds

20. Types of Mutual Funds GLOBAL FUNDS - purchases international stocks and bonds as well as US securities Appreciate when: > stock markets abroad are strong > world conditions favor certain overseas markets

21. Types of Mutual Funds – Global cont. > fluctuations in currency exchange rates -- can be an income fund, growth fund, aggressive growth fund, etc.

22. Types of Mutual Funds INDEX FUNDS - (index is an average of the price movements of certain selected securities) -- tries to match the performance of a particular index by investing in the companies included in that index -- S & P 500 / Dow Jones Industrial Average SPY mutual funds follow S&P 500 index

23. Types of Mutual Funds - Index -- risk level depends on index it is tied to - tied to DOW = low risk (blue chips)

24. Types of Mutual Funds MONEY MARKET FUNDS - invests in safe, liquid securities, such at Treasury Bills and bonds that mature in 3-6 months -- maximum safety

25. Research • Go to www.morningstar.com • Click on “funds”

26. Minimum Investment Required

27. Minimum Investment Required

28. Evaluating Mutual Funds To choose --> you must know YOUR OWNinvestment objectives & risk tolerance Do you want income from your investments now, or can you wait for capital gains in the future?

29. Evaluating Mutual Funds Do you need a tax-free or tax-deferred investment to reduce your current income taxes? Are you comfortable with risking your investment for a chance at big returns, or do you prefer a safe but lower return?

30. Net Asset Value (NAV) • Prices NOT determined by what people are willing to pay • Prices ARE determined by NAV • NAV = total value of a fund’s investment portfolio minus its liabilities, divided by the number of outstanding shares of the fund

31. Net Asset Value (NAV) Value of Portfolio - Liabilities NAV = Number of Shares $100,000 - $90,000 500 = $20 -- calculated at the END of each business day

33. Prospectus • Legal document that offers securities or mutual fund shares for sale Contains:  terms  summary of funds portfolio investments  objectives  financial statements - showing past performance

35. Before Buying • Read the prospectus carefully • Compare objectives with your own • Compare past performance with that of other funds

36. Costs and Fees LOAD - sales fee paid for mutual fund FRONT-END LOAD - sales charge paid when you buy an investment BACK-END LOAD - sales charge paid when you sell an investment -- fees can range from 2 to 8% of the value of shares purchased NO-LOAD FUND- no sales fee (no salesperson - direct purchase)

37. Costs and Fees • Annual Management/Administrative Fee - charge to manage fund • 1 to 1-1/2% of funds total assets • 12b-1 Fee - charge for marketing and distributing fund (part of expense ratio)

40. Pg. 389 • Review How to Read the Mutual Funds Listings

41. Direct Real Estate Investments Real Estate - land and any buildings on it --> often increase higher than inflation over time --> least liquid --> sometimes speculative ( possible loss)

42. Direct Real Estate Investments Commercial Property - land and buildings that produce lease or rental income (office buildings, stores, hotels, apartments)

43. Direct Real Estate Investments Invest DIRECTLY or INDIRECTLY Direct - investor holds legal title to the property

44. EXAMPLES OF DIRECT:Raw Land Vacant land / unimproved property speculative investment - hold and sell later for profit must pay cash - banks unwilling to make loans

46. Detached Houses • Purchase single-family home and rent • Bank reluctant to make loans (not owner-occupied) • larger down payment • higher interest rate

47. Duplex • A building with two separate living quarters • same responsibilities to renters as the owner of a single-family home

48. Condominium • An individually owned unit in an apartment-style complex with shared ownership of common areas • Owner of condo owns the individual apartment as well as a proportional share of common areas, such as the lobby, yard, and hallways • Monthly fee for upkeep of common areas

49. Recreation & Retirement Property • Retirement - buy second home for vacation or retirement years • Rent property when owners are not there • Recreation - beach, mountain cabins, and vacant land • Rent the property

50. EXAMPLES OF INDIRECT: • Investors appoint a trustee to hold legal title on behalf of all the investors in a group • Trustee - individual or institution that manages assets for someone else real estate syndicates / real estate investment trusts / mortgage pools