The Growth of the Mutual Fund Industry

1
The Growth of the Mutual Fund Industry

• Mutual Fund Statistics
• Almost 1 in 2 U.S. households invest in the stock
  market directly or through mutual funds
• Over 8,000 mutual funds
• Over 7 trillion of assets

2
Why Learn About Mutual Funds?

• To choose investments in a retirement plan
• To invest an insurance or divorce settlement
• To get started as a new investor
• To build a portfolio
• To invest a year-end bonus or tax refund
• To put what you read hear in perspective

3
What is a Mutual Fund?

• A mutual fund is
• a portfolio of stocks, bonds, or other
• securities
• collectively owned by many investors
• managed by a professional investment company

4
Mutual Funds Make Money in Two Ways

• Current income (dividends or interest earned on
  the portfolio investments)
• Capital gains (selling securities that have gone
  up in value)

5
How the Investor Makes Money

• Income distribution (dividends and interest that
  are passed on to investors)
• Capital gains (an increase in a funds value)
• Combination total return

6
Forms of Mutual Fund Companies

• Open-end issues and redeems shares at any time
• Closed-end trades like a stock and issues a
  fixed number of shares

7
What Is Net Asset Value (NAV)?

• The NAV is the price your fund pays you per share
  when you sell.
• Value of fund
• Number of shares NAV
• Example 52,500,000
• 3,500,000 15 per share

8
Why Mutual Funds vs. Individual Securities?

• Individual securities
• Require time and expertise to analyze
• Usually have higher transaction costs
• Offer less probability of adequate
  diversification
• OK if
• you have stock-picking expertise
• you have 20-30K to buy 10-20 stocks
• you are buying Treasuries

9
Advantages of Mutual Funds

• 1) Full-time, professional management
• 2) Reduced risk through diversification
• 3) Earn competitive returns
• 4) Small amount needed to start
• 5) Retain ready access to your money

10
More Advantages of Funds

• 6) Inexpensive way to invest
• 7) Convenience
• 8) Automatic withdrawal plans available
• 9) Lower incidence of bankruptcy and fraud
• 10) Monitoring fund investments is easy

11
Disadvantages of Mutual Funds

• Funds follow market declines
• No guaranteed rate of return
• Unwanted taxable distributions
• Record-keeping for tax purposes can be difficult

12
The Mutual Fund Marketplace

• Stock funds
• Bond funds
• Money market funds

13
Types of Funds by Investment Objective

• Growth
• Income
• Growth income
• Capital preservation

14
Match Your Goal to the Right Fund Categories
with a growth objective

• Growth
• Aggressive growth
• Small cap
• Specialty (Sector)

• International
• Global
• Index

15
Match Your GoalCategories with an Income
Objective

• Income
• Corporate bond
• Municipal bond
• High-yield (junk) bond

• Government bond
• GNMA
• Global bond

16
Match Your GoalFunds with Growth Income
Objective

• Equity-income
• Growth income
• Balanced

17
Match Your Goal Funds with a Preservationof
Capital Objective

• Taxable money market
• Tax-free money market

18
Match Your GoalFunds with All Four Objectives

• Lifestyle
• Asset allocation
• Fund of funds

19
Risk and Return Relationship

• The higher the level of risk, the higher the
  expected return
• Sector
• Aggressive Growth
• International
• Growth
• Stock Index
• Lifestyle
• Growth Income
• Equity-Income
• Balanced
• Income
• Bond
• Money Market

20
Mutual Fund Costs

• Sales charges/loads
• Sales commissions
• Operating expenses
• Management fees
• Marketing costs
• Overhead expenses

21
Types of Funds by Sales Charge

• No-load -- No sales commission
• Load -- 4-8.5 commission
• Back-end load -- Declining 6-1
• Low-load -- 1- 3

22
Mutual Fund Operating Expenses

• Management and administrative fees
• 12b-1 fee for marketing and distribution
• Redemption fee
• CHECK OVERALL EXPENSE RATIO

23
Mutual Fund Economics

• Costs and Fees A Shrs B Shrs C Shrs
• Sales Load 5.5 None
  None
• Redemption Fee None 0.5 None
• Marketing Fee .25 .75 1.00
• Management 1.30 1.15 1.20
• Annual Expense 1.55 1.90 2.20

24
Avoid Above-AverageExpense Ratios

• Stock funds gt 1.4
• Bond funds gt 1.00
• Money market funds gt 0.5

25
Seven Steps to Finding the Right Fund

• 1) Identify type of fund that matches goal
• 2) Do more reading
• 3) Research specific funds
• 4) Determine selection criteria
• 5) Get and read the prospectus
• 6) Make your purchase
• 7) Establish a schedule to buy more

26
Step 1 -- Identify Types of Funds That Will Help
You Reach Your Goals

• Focus your search
• Begin building your portfolio
• Establish an asset allocation strategy

27
Step 2 -- Do More Reading

• Mutual Funds For Dummies - Eric Tyson
• Guide To Successful No-Load Investing - Sheldon
  Jacobs
• The Right Way To Invest In Mutual Funds - Walter
  Updegrave
• Bogle on Mutual Funds and Common Sense on Mutual
  Funds - John Bogle

28
Step 3 -- Research Specific Funds

• Personal finance publications
• Business newspapers
• Mutual fund trade associations
• Library references
• Fund-provided information
• Professional advisors

29
Personal Finance Publications

• Money
• Kiplingers Personal Finance
• Forbes
• Business Week
• Smart Money

30
Newspapers Trade Associations

• The Wall Street Journal
• Barrons
• The New York Times
• USA Today
• Investment Company Institute
• Mutual Fund Education Alliance

31
Library Fund-Provided Info

• Morningstar
• Value Line
• Lipper Analytical

• Annual reports
• SAI
• Prospectus

32
Internet Sites

• ltwww.morningstar.comgt
• ltwww. networth.galt.comgt
• ltwww. brill.comgt
• ltwww. ici.orggt
• ltwww. mfea.comgt
• ltwww.sec.gov/mfcc/mfcc-int.htmgt

33
Step 4 -- Determine Your Selection Criteria

• Fund objective (relative to your goal)
• Cost to purchase (no-load vs. load)
• Fund fees/expense ratio
• Investment minimum
• Manager tenure
• Performance (1, 3, 5 years)
• Longevity

34
Step 5 -- Get a Prospectus for Each Fund from

• Mutual fund families
• Mutual fund supermarkets/networks
• Full-service discount brokers
• Financial planners
• Banks
• Internet

35
Step 6 -- Make Your Purchase

• By mail
• Local investment center
• Toll-free 800 number for assistance
• Through a broker or financial planner
• On-line

36
Step 7 -- Continually Buy More

• Use a dollar-cost-averaging system--Investing a
  fixed number of dollars, e.g., 50 or 100, at
  periodic intervals, usually monthly or quarterly

37
Dollar-Cost-Averaging

• Month Amount Invested Share Price Shares
  Purchased Cumulative Value
• January 150 30 5 150.00
• February 150 30 5
  300.00
• March 150 25 6 400.00
• April 150 25 6
  550.00
• May 150 20 7.5 590.00
• June 150 15 10
  592.50
• July 150 15 10
  742.50
• August 150 15 10
  892.50
• September 150 20 7.5
  1,340.00
• October 150 25 6
  1,825.00
• November 150 30 5
  2,340.00
• December 150 30 5 2,490.00
• TOTAL 1,800 280
  83 2,490.00
• Average Cost 21.69 per share Average Price
  23.33

38
Final Hints

• Invest for your goals
• Research funds carefully with a questioning
  attitude
• Review progress quarterly, comparing apples with
  apples
• Read your mail
• Keep excellent records

39
Take These Action Steps

• Make a list of long- and short-term financial
  goals and match them with an appropriate mutual
  fund
• Learn about mutual fund choices available through
  your employers retirement plan
• Decide on your selection criteria
• Identify specific mutual funds that match your
  investment goals

40
Take These Action Steps

• Call at least three mutual fund organizations for
  a prospectus.
• Do follow-up research and compare at least three
  mutual funds using Morningstar or Value Line.
• Complete a mutual fund application and make an
  investment.