C HAPTER 16

1. CHAPTER16 Investing in Mutual Funds Personal Finance 6e Kapoor Dlabay Hughes 16-1

2. What is a Mutual Fund? • An investment chosen by people who pool their money to buy stocks, bonds, and other financial securities selected by professional managers who work for investment companies. • Each fund has a specific objective. • Over 6,000 funds to choose from. • Many people choose mutual funds for their retirement account [401(k), 403(b), IRA and Roth IRA] investments. 16-2

3. Why Investors Purchase Mutual Funds • Professional management. • Who is the fund’s manager? • Managers can change. • Diversification. • Investors funds are pooled and used to purchase a variety of investments. This variety provides some safety. 16-3

4. Closed- and Open-end Funds • Closed-end funds (10% of funds). • Shares are issued by an investment company only when the fund is organized. • After all original shares are sold you can only purchase shares from another investor. • Open-end funds (90% of funds). • Shares are issued and redeemed by the investment company at the request of investors. • Investors can buy and sell shares at the net asset value. 16-4

5. Net Asset Value (NAV) Value of the fund’s portfolio - Liabilities Number of shares outstanding Offer price = NAV + sales commission 16-5

6. Load Funds and No-Load Funds • Load Fund. • Investors pay a commission (sales fee) every time they purchase shares. • Average fee is 3-5% for which an investor can get purchase advice and explanations. • No Load-Fund. • Investors pay no sales fee, because there are no sales people. • You deal directly with the investment company via 800 numbers or web sites. 16-6

7. Management Fees and Other Charges • Management fee. • Charged yearly (.25%-1% average) based on a percentage of the funds asset value. • Contingent deferred sales load. • Charged upon withdrawal of funds (1-6%). • Decreases with time held. • 12b-1 fees. • Annual fee to defray advertising and marketing costs of the fund. 16-7

8. Classification of Mutual Funds 16-8

9. Stock funds. Aggressive growth. Equity income. Global. Growth. Growth and income. Index. International. Mid cap. Regional. Sector. Small cap. Utility. Classification of Mutual Funds 16-9

10. Treasury Note Classification of Mutual Funds (continued) • Bond funds. • High-yield (junk) bonds. • Insured municipal bonds. • Intermediate corporate bonds. • Intermediate U.S. bond funds. • Long-term corporate bonds. • Long-term U.S. bonds. • Municipal bonds. • Short-term U.S. bonds. • Short-term corporate bonds. 16-10

11. Classification of Mutual Funds (continued) • Stock and bond funds. • Balanced funds. • Invest in both stocks and bonds with the purpose of conserving capital. • Stock and bond blend funds. • Multipurpose objectives including flexible income, flexible portfolios, global securities, and convertible securities. 16-11

12. Fund Families • A family of funds exists when one investment company manages a group of mutual funds. • Funds in the family vary in their objectives. • You can move your money from one fund to another within a fund family with low or no charge. 16-12

13. Steps to Evaluate Mutual Funds • Perform a financial checkup to make sure you are ready to invest. • Obtain the money needed to purchase mutual funds. • Determine your investment objectives. • Find a fund with an objective that matches your objective. • Evaluate, evaluate, and evaluate any mutual fund before buying or selling. 16-13

14. Reading a Mutual Fund Quotein the Newspaper • Net asset value and asset value change. • Company and fund name. • Fund objective. • Total return over various time periods. • Ranking among funds with the same objective. • Sales load or no load (NL). • Percent of annual average net expenses. 16-14

15. Other Sources of Fund Information • Mutual fund prospectus. • A statement describing the risk factors. • A description of the fund’s past performance. • A statement describing the type of investments in the fund’s portfolio. • Information about dividends, distributions and taxes. • Information about the fund’s management. • Mutual fund annual report. • Performance, investments, assets and liabilities. 16-15

16. Other Sources of Fund Information (continued) • Financial Publications. • Business Week, Forbes, Kiplinger'sPersonalFinance and Money are sources of information on mutual funds. • Business Week’s mutual fund survey includes: • Fund’s overall rating compared to other funds. • Fund’s rating compared to funds in the same category. • Fund size, sales charge and expense ratio. • History for past ten years. • Risk of loss factor and toll-free number. 16-16

17. Other Sources of Fund Information (continued) • Use web sites to research a fund. • www.quote.yahoo.com • www.businessweek.com • www.morningstar.net • www.smartmoney.com • Check mutual fund companies Internet sites. • www.troweprice.com • www.vanguard.com • www.americanfunds.com 16-17

18. 6% 14% 15% 65% *Who Owns Mutual Fund Shares? Households Private Pension Funds Bank Trusts and Estates Other 16-19 *U.S. Bureau of the Census, 1998.

19. Mutual Fund Transactions • Return on investment (may be taxable). • Income dividends. • Capital gain distributions. • Reinvestment plans are available. • Sell shares at a higher price than you paid. • Purchase options. • Closed-end through the stock exchange. • Open-end, no-load directly from the investment company by phone or through the mail. 16-19