Bài giảng Personal Financial - Chapter 13: Investing in Mutual Funds

13 Investing in Mutual FundsMutual Fund = an investment vehicle offered by investment companies to those who wish to:Pool money Buy stocks, bonds, and other financial securities Have buy/sell decisions made by fund managerMany mutual funds chosen for inclusion in retirement account investments (e.g., 401(k)s)13-*Objective 1Explain the Characteristics of Mutual Fund InvestmentsInvestment CompanyPools the money of many investors – its shareholders – to invest in a variety of securitiesEmploys fund manager who is compensated for selecting securities appropriate to the fund’s stated objective“Financial Intermediary”13-*How a Mutual Fund WorksWhy Investors Purchase Mutual FundsProfessional ManagementWho is the fund’s manager?How has the fund performed under the current managers?DiversificationInvestor’s funds are used to purchase a variety of investments (shares of many different companies)Risk reduction13-*Characteristics of FundsClosed-End Funds (7% of all Mutual Funds)Fixed number of shares issued when the fund is organizedTrade like shares of common stock on stock exchangesTrade price set by supply & demandActively managed Most sell at a discount relative to their net asset valueExchange-Traded Funds (6% of all Mutual Funds)Invests to replicate the composition of a specific securities indexPerformance mirrors index performance Low management feesTrade on exchanges throughout the day like stockPrices determined by supply and demandCan be sold short and traded with limit ordersOpen-End Mutual Funds (87% of all Mutual Funds)Shares issued and redeemed on demandActively managed13-*Net Asset Value Net Asset Value (NAV):Current market value of assets held by a fund AUM = “Assets Under Management”Net Assets = Fund Assets (AUM) - Liabilities NAV calculated at the close of trading13-*Example: $52,500,000 value of fund net assets 3,500,000 number of shares = $15 per shareOpen-End FundsOpen-End Funds ≈ Majority of fundsShares issued and redeemed by investment company at the request of investorsInvestors free to buy and sell shares at the net asset value (NAV)No broker or stock exchange requiredWide variety of services Automatic deposit and withdrawalExchanges among family of funds13-*Costs: Load Funds vs. No-Load FundsLoad FundSometimes called an “A” fundCommission (sales charge) up to 8.5% Average = 3 to 5%Paid every time shares purchased Purchased through brokerage firms or registered representativesSalespeople prepared to explain the fund and help determine if it meets the investor’s financial goalsNo-Load FundNo up-front sales chargeNo salespeople Investor deals directly with the investment company via 800 numbers or Web sites, or from discount brokers13-*Costs: Load Funds vs. No-Load FundsContingent Deferred Sales Charge (CDSC)“Back-end load” “B” fund“Redemption fee”Charged upon withdrawal of funds (1-5%)Generally decreases on a sliding scale depending on number of years shares are heldDisappears after about 5 yearsKnowing your holding period is key factor13-*Costs: Management Fees and Other ChargesManagement FeeCharged yearly (.25%-1.5% of NAV average) based on a percentage of AUM12b-1 FeeAnnual fee to defray advertising and marketing costsCannot exceed 1% of AUM per yearExpense RatioTotal expenses associated with management fees and operating costs of the fund13-*Typical Mutual Fund Fees13-*Objective 2Classify Mutual Funds by Investment Objective13-*Stock Funds13-*Bond Funds13-*Other Funds13-*Balancing Risk and Returns on Mutual FundsA Family of Funds One investment company manages a group of mutual funds portfoliosEach fund has a different financial objectiveExchange privileges allow movement from one fund to another within the family with low or no chargeListed alphabetically in newspapers13-*Names of popular investment companies?Objective 3Evaluate Mutual Funds Managed Funds vs. Index FundsManaged Fund  fund manager makes all decisions regarding what securities are included in the fund’s portfolioIndex Fund  securities held by the fund replicate those contained in a specific index like the S&P 50013-* Sources of Fund InformationInternet sites provide current values mutual fund companies’ Internet siteswww.troweprice.comwww.vanguard.comProfessional Advisory ServicesLipper Analytical ServicesMorningstar, Inc.Value LineMutual fund newsletters13-*Mutual Funds Have Different Investment Objectives Prospectus – a mutual fund’s investment objectives and policies must be stated in this document.Two Types: Traditional prospectus (long) Profile prospectus (short)Mutual Fund Prospectus Data Fund objective(s)Statement describing risk factorsDescription of fund’s past performanceStatement describing type of investments in fund’s portfolioInformation about dividends, distributions, and taxesInformation about fund’s managementProcedure to buy and sell sharesServices provided to investorsTurnover Ratio of the fund’s investments: how often the fund’s portfolio changes13-*Other Sources of Fund InformationMutual Fund Annual ReportPerformance, investments, assets & liabilitiesFinancial PublicationsBusiness Week, Forbes, Kiplinger's Personal Finance, WSJ, and Money Business Week’s mutual fund survey includes: Fund’s overall rating compared to all other funds, and to funds in the same categoryFund size, sales charge, and expense ratioHistorical returns for the past ten years13-*Objective 4Describe How and Why Mutual Funds are Bought and SoldThe Mechanics of a Mutual Fund TransactionOpen an account:On Your Own: $250 to $3,000 and up depending on the fund family and the fund At Work: Select mutual funds for a tax-deferred retirement savings account13-*Return on Investment3 Ways to Make Money on Mutual FundsIncome DividendsEarnings paid from dividend and interest incomeTaxed as ordinary incomeCapital Gains Distributions Distributions when the fund buys and sells securitiesTaxed as long-term gainsCapital Gains (or Losses)Capital gains (or losses) when you sell shares at a price different than price you originally paidTaxed as short- or long-term gains 13-*Purchasing Open-End Fund SharesRegular Account TransactionsEasiest Simply buy shares in amount and when desiredVoluntary Savings PlansAllows for smaller than usual purchases on a recurring basisContractual Savings PlansRequire regular purchases over a specified periodReinvestment PlansAutomatically reinvests dividends and capital gains in the fund13-*The Wisdom of Automatic Reinvestment Closed-End Funds and Exchange-Traded Funds Traded on stock exchanges and in over the counter marketSold like common stock sharesOpen-End Funds Shares sold to the fund sponsoring companySystematic withdrawal methodsWithdraw fixed dollar amount each period until account is exhaustedLiquidate or “sell off” a certain number of shares each periodWithdraw a fixed percentage of asset growth; principal untouchedWithdraw all income dividends and capital gains distributions; principal untouchedWithdrawal Options13-*Wrap UpChapter QuizConcept Check 13-1- NAV ProblemConcept Check 13-2- Importance of Fund ObjectiveConcept Check 13-3- Managed Fund vs. Indexed FundConcept Check 13-4- Purchasing Closed-End Funds and ETFs