X' MUTUAL FUNDS

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X. MUTUAL FUNDS
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A. The Mechanics of Mutual Funds

• Mutual funds pool money from many investors
• Mutual fund investors own a part of all of the
  securities in the mutual fund pool
• The fund manager is responsible for tracking the
  securities in the pool
• Profits are paid in two ways
• Income Distributions Dividends and interest
  paid by the underlying securities are
  subsequently paid to investors
• Capital Gains Distributions Payment to
  investors of profits obtained from sales of
  securities

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A. The Mechanics of Mutual Funds

• Passive Funds Primarily index funds
• Active Funds Run by a professional manager
  active funds have
• Professional managers
• An investment objective, and
• An investment program designed to meet the
  investment objective

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A. The Mechanics of Mutual Funds

• Open and Closed End Funds
• Open end sold by brokerage firms and by fund
  distributors, issues or purchases shares
  depending upon demand, uses client funds to buy
  or sell securities
• Closed end raise money only once, invest in a
  variety of securities, and offer a fixed number
  of shares traded Over the Counter or on the
  market price varies with the price of the
  underlying securities and with market demand
  (discount or premium from Net Asset Value)

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B. TYPES OF MUTUAL FUNDS

• Stock Funds invest in equity securities, can be
  growth, value, dividend, sector, market cap, etc.
• Bond Funds invest in Treasury bonds, municipal
  bonds, passive trading of securities, active
  trading of securities, high yield bonds,
  corporate bonds, etc.
• Commodity Funds invest in stocks of commodities
  or in commodity futures
• Balanced Funds contain a mix of stocks and
  bonds (generally 60 stocks, 40 bonds)

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B. TYPES OF MUTUAL FUNDS

• Target Date Funds change investment allocation
  as a target date approaches (ex. - 529 funds)
• Money Market Funds cash equivalent securities
  like a savings account
• International Funds invest in Europe, China,
  Asia, Far East, Latin America, emerging markets,
  etc.
• Miscellaneous socially responsible funds, sin
  funds, green funds, etc.

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C. DEFINITIONS

• Turnover Rate the number of times per year that
  the equivalent of all of the underlying
  securities in the fund are purchased or sold
• Volatility the historic deviation of rates of
  return above and below the average rate of return
• Prospectus similar to a stock prospectus,
  explains fund objectives, investment strategy,
  fees, historic before and after tax returns, and
  fund risk profile

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C. DEFINITIONS

• Net Asset Value (NAV)
• (market cap of fund shares accrued
• interest accrued dividends accrued
  expenses)
• number of fund shares
• Premium The price of a share of a closed end
  mutual fund minus the share Net Asset Value
  exists where demand for fund shares exceeds the
  value of the underlying holdings

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C. DEFINITIONS

• Discount Where the shares of a closed end fund
  trade below the funds net asset value, exists
  where demand is less than the value of the
  underlying holdings
• Liquidity The ability to get into and out
  of an investment (buy and sell) ETFs are
  generally highly liquid, mutual funds are not
• Diversification Where a fund holds a variety of
  securities

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C. DEFINITIONS

• Rating An independent analysts opinion of how
  the fund has performed compared to benchmarks
• Ranking The relative standing of a mutual fund
  compared to others with similar investment
  strategies
• Sharpe Ratio Calculated as a funds rate of
  return the rate of return on 3 month Treasury
  bills divided by the standard deviation of fund
  returns
• Sharpe Ratio (Fund Return 3 mo. Treasury
  Yield)
• Standard Deviation of Fund Returns

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C. DEFINITIONS

• Standard Deviation The amount by which the
  annual returns of a fund vary above and below the
  funds average return
• Rating Firms
• Standard and Poors
• Morningstar
• Lipper

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C. DEFINITIONS

• Fund Style
• Growth/Blend/Value Invests in growth stocks, a
  blend of growth and value stocks, and value
  stocks
• Dividend (Yield) Invests in securities with the
  highest dividend payments
• Contrarian Against the accepted (current trend)
  in management
• Style Drift When a fund manager changes styles
  to make up for below market returns
• Portfolio Overlap Where a holder of several
  mutual funds owns duplicate underlying shares of
  stock

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D. FEES AND CHARGES

• Fees have the greatest impact on fund returns
  other than the managers performance
• Sales Charges (Loads)
• Front End Load A sales charge on fund purchase,
  reduces the number of shares purchased
• Back End Load (Redemption Fee or Contingent
  Deferred Sales Charge) Paid when shares are
  sold usually declines to 0 after 5-7 years
  designed to prevent investor churn

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D. FEES AND CHARGES

• Fund Classes
• A Front end load
• B Back end load
• C Level load no sales charges, but higher
  fees than A or B higher annual fees and charges
  instead of front end or back end loads
• Exchange Fees A charge for moving assets
  between different funds issued by the same group

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D. FEES AND CHARGES

• Early Redemption Charge Exit fee, can be 5 days
  to 1 year
• Breakpoint A point where more money is invested
  to reduce the front end load
• Right of Accumulation Where an investor can
  combine past and new investments to reach a
  breakpoint
• Letter of Intent A promise by the investor to
  increase the amount invested to reach a
  breakpoint

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D. FEES AND CHARGES

• Other Types of Fees Total annual fees are
  quoted as an Expense Ratio must be listed in
  the fund prospectus, generally range from 0.1 to
  2.75
• 12-b 1 Fees Marketing and distribution expenses
  limited by NASD rule to 1 of assets per year
  or less, with marketing fees at 0.75 or less
  and with shareholder services capped at 0.25 of
  assets
• Management Fees Charge to pay the advisory firm
  that invests fund assets

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E. MEASURING FUND RETURNS

• Percentage change in share price (market value)
  is the measure of fund returns for closed end
  funds
• Percentage Closing Share Price
• Rate of Return Opening Share Price -1

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E. MEASURING FUND RETURNS

• Net Asset Value Value of Fund Investments
• Number of Shares
• Percentage Closing Net Asset Value
• Change in NAV Opening Net Asset Value -1

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E. MEASURING FUND RETURNS

• Distributions Can be both interest (dividends
  and interest on investments) and capital gains
  (mutual funds gain from sale of underlying
  investments)
• Yield Distribution per Share
• Price per Share

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E. MEASURING FUND RETURNS

• Total Return Change in NAV Distributions
• Cost of Initial Investment
• Reported as a geometric mean, taking into account
  annual compounding of distributions
• Must be viewed in comparison with standard
  indices or with indices of competing funds with a
  similar investing style

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F. ANNUITIES

• Defined as an investment contract between the
  purchaser and an insurance company, funded (money
  invested) either by a lump sum or by a series of
  scheduled payments
• Types of Annuities
• Fixed annuities interest rate set upon purchase
• Variable annuities contain a selection of sub
  accounts, with the yield on the annuity varying
  depending upon the investment performance of the
  types of securities represented in the sub
  account

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F. ANNUITIES

• Advantages of annuities over mutual funds
• Income taxes no income taxes are paid on
  capital gains until the annuity matures
  (presumably when the investor is retired and in a
  lower tax bracket)
• Withdrawals from an annuity, unlike withdrawals
  from a pension plan or an IRA, can be postponed
  until after age 701/2, allowing transfer of
  wealth to heirs

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F. ANNUITIES

• Special types of annuities (ex. 403(B)
  annuities) are tax deferred for both
  contributions and interest
• Annuities may contain a death benefit, which is a
  guaranteed payment upon death regardless of
  market conditions

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F. ANNUITIES

• Disadvantages of annuities
• Annual fees are generally higher than mutual fund
  annual fees as a percentage of the amount
  invested
• Surrender fees a back end load, generally
  starting at 7 for the first year, declining by
  1 per year thereafter

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F. ANNUITIES

• Annuity ratings
• As an insurance product, the state of issue may
  guarantee the companys obligations, including
  annuities, in the event that the company becomes
  insolvent (goes bankrupt)
• The insurance companies issuing annuities are
  rated by Standard and Poors and Morningstar