1. Investing in Mutual Funds

2. What is a Mutual Fund?
 An investment alternative where money
from investors is pooled to buy stocks,
bonds, and other financial securities selected
by professional managers.

3. Why Investors Purchase Mutual
Funds
 Professional management.
 Who is the fund’s manager?
 Managers can change.
 Be aware of the scandal involving late
trading.
 Diversification.
 Investors funds are used to purchase a
variety of investments. This variety
provides some safety

4. Closed- and Open-End Funds
 Closed-end funds (7% of funds).
 Shares are issued by an investment company only when
the fund is organized.
 After all original shares are sold you can purchase shares
only from another investor who is willing to sell.
 Traded on exchanges and over-the-counter.
 Open-end funds (91% 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
(NAV).

5. Exchange-Traded Funds
 Invests in the stocks contained in a specific
stock market index, like the Standard and
Poor’s 500 stock index.
 Performance of shares in the fund tend to
mirror the performance of the index.
 Low management fees since there is less
need for decisions made by a portfolio
manager.

6. Net Asset Value (NAV)
Value of the fund’s portfolio - Liabilities
Number of shares outstanding
For most mutual funds, NAV is calculated at
the close of trading each day.

7. Load Funds and No-Load Funds
 Load Fund.
 Investors pay a commission (sales charge) up to
8.5% every time they purchase shares. This is
sometimes called a front load. (Class A shares)
 Average charge is 3-5% for which an investor
can get purchase advice and explanations.
 No-Load Fund.
 Investors pay no sales charge up front.
 You deal directly with the fund with 800
numbers or web sites, or from discount brokers.

8. Classification of Mutual Funds
 Stock funds.
 Aggressive growth funds buy stocks in small, fast-
growing companies.
 Equity income funds invest in stock of companies
with a long history of paying dividends.
 Growth buy stock in companies with higher-than-
average revenue and earnings growth.

9. Contd..
 Global funds buy stock in companies in the U.S. and
other countries, while international funds buy stock
only in companies outside the United States.
 Index buys stocks that mirror an index.
 Large-cap funds invest in companies with
capitalization of $5 billion or more.
 Mid-cap funds buy stock in companies whose
capitalization is between $1 and $5 billion.

10. Classification of Mutual Funds
 Regional funds buy stock in companies in a
specific region of the world.
 Sector funds buy stock in companies in a particular
industry such as biotechnology.
 Small-cap funds buy stock in lesser-known
companies with a capitalization of less than 500
million.
 Socially responsible funds avoid investing in
companies that produce harmful products

11. Classification of Mutual Funds
 Bond funds.
 High-yield (junk) bond funds buy corporate
bonds that are higher risk and higher yield.
 Index bond funds invest in a sampling of bonds
included in an index.
 Intermediate corporate bonds (5-10 years).
 Intermediate U.S. bond funds buy treasury notes
with maturities of 5-10 years.
 Long-term corporate bonds (> 10 years).

12. Classification of Mutual Funds
 Long-term U.S. bond funds: U.S. Treasury and
U.S. zero-coupon bonds with maturities > than
10 years.
 Municipal bonds: Invest in municipal bonds that
provide investors tax-free interest income.
 Short-term U.S. bond funds invest in
U.S.Treasury issues of 1-5 years.
 Short-term corporate bond funds: Investment
grade bonds with maturities of 1-5 years.
 World bond funds buy bonds of foreign
companies and governments.

13. Classification of Mutual Funds
 Other funds.
 Asset allocation funds: invest in various asset
classes, such as stocks, and bonds, with precise
amounts within each type.
 Balanced funds: Invest in both stocks and bonds,
with the primary objectives of conserving
principal, providing income as well as growth.
 Money market funds: Invest in CD’s,
government securities, and other safe
investments.

14. Families of Funds
 A family of funds exists when one
investment company manages a group of
mutual funds.
 Each fund in the family has a different
financial objective.
 Exchange privileges allow you to move your
money from one fund to another within the
fund family with little or no charge.

15. Steps to Evaluate Mutual Funds
 Are you ready to invest in mutual funds?
 Determine your risk tolerance.
 Determine your investment objectives.
 Obtain the money you need invest.
 A fund’s objective should match your
investment objective.
 Evaluate any mutual fund before buying or
selling (www.morningstar.com)
 Consider managed funds vs. indexed funds

16. Other Sources of Fund
Information
 Mutual fund prospectus tells the funds
objective and:
 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 on how to open an account.

17. Contd..
 Dividends, distributions and taxes.
 Information about the fund’s management.
 The process for investors to buy or sell shares.
 Services provided to investors.
 The turnover ratio of the fund’s investments