Chapter 15

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Chapter 15 Mutual Funds

• Pool money from investors with similar objectives
  and purchase a diversified portfolio run by a
  professional manager
• Shares issued to investors
• Fluctuate with value of portfolio
• Investments broadly or narrowly diversified
• Nearly 8 trillion assets ½ families own

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Advantages

• Diversification through pooling
• Professional management
• Minimum transaction costs
• Liquidity open-end funds will buy back
• Flexibility 8,600 funds different goals

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Disadvantages

• Lower performance than market expenses
• Costs vary- load fees, management, 12-b1
• Risk not all funds truly safe (junk bonds)
• Can't avoid market risk
• Trade frequently causing short-term gains

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Open-End Funds

• Stand ready to issue new shares or buy back
  outstanding shares at Net Asset Value on a daily
  basis.
• NAV value of all assets, less liabilities
  divided by number of shares
• Current value of investments determine value of
  each share
• Open-end funds are largest type

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Other Types of Funds

• Closed-end has fixed number of shares
• Traded between investors not sold back to mgr
• Value may be above or below NAV
• Unit trusts fixed pool of investments, often
  bonds.
• Passively managed bonds held to maturity
• Real Estate Investment Trusts (REIT's)
• Equity, mortgage, and hybrid funds

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Costs of Mutual Funds

• Load charges sales commissions on shares
• 4 to 6 to 8.5 when you buy or
• Back-end loads paid when sold sliding scale
• No-load funds no sales charge
• Deal directly with management company rather than
  broker
• No-load funds perform as well as load funds

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Other Fees

• Management Fees about 1 of assets
• Paid to pick the winners but low correlation
• Expenses no limit but should actual cost
• For administrative, trading, shareholder service
• Affected by turnover ratios
• 12b-1 marketing fees range from zero to 1
• Advertising and promotion expense paid by fund

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Types of Funds and Objectives

• Money market mutual funds (MMMF's)
• Stock funds many types and objectives
• Balanced funds stocks and bonds for steady
  income and moderate growth
• Asset allocation switch between stocks and
  bonds depending on market outlook
• Bond funds income over growth
• High to low quality municipal bond funds

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Mutual Fund Services

• Automatic investment or withdrawals
• Reinvestment of dividends and interest
• Can wire transfer funds Phone switching between
  funds
• Check writing on MMMF's - 250 min
• Bookkeeping services and tax reporting

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Buying a Mutual Fund

• Determine your goals
• Find fund to meet objectives prospectus
• Evaluate fund's performance and costs
• Past performance does not predict future
• Fund doing well one year might not next year
• Sources of info Morningstar is best

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Buying a Mutual FundKey Questions to ask

1. Investment goals
2. Investment strategy
3. Risks and returns
4. Fees and expenses
5. Investment manager

• 6. Buying shares
• 7. Selling shares
• 8. Distributions taxes
• 9. Services

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Prospectus

• Goals and strategies
• Manager's experience
• Performance over last ten years
• Fees, expenses and turnover ratios
• Shows assets in portfolio