Professional Documents
Culture Documents
Mutual Funds
Mutual Funds
CHAPTER 4
Mutual Funds
Chapter Sections:
Advantages and Drawbacks of Mutual Fund Investing
Investment Companies and Fund Types
Mutual Funds Operations
Mutual Funds Costs and Fees
Short-Term Funds
Long-Term Funds
Mutual Fund Performance
Closed-End Funds, Exchange Traded Funds, and Hedge Funds
Mutual Funds
STOCKS BONDS “CASH”
Balanced
mutual Bond
Stock funds mutual
mutual funds
funds Money
market
mutual
funds
a “mutual” fund
a.k.a. investment company
Open-end mutual funds are sold at net asset value (with a sales
load added to load funds). Since closed-end mutual funds are
bought and sold on the open market, their price usually either
reflects a premium or discount to the net asset value (usually a
discount). They are very rarely priced at their net asset value.
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Advantages / Disadvantages?
Open-end investment company
Always able to buy and sell – no market forces
Very popular – wide range of choices
Large purchases or redemptions can make
management of the fund more difficult
Mutual fund company can “close the fund” to new investors
Closed-end investment company
Must pay broker’s commission (like a stock)
Must be bought/sold via the marketplace
Often sold at premium or discount to NAV
Easier to manage assets for investment advisors
(continued)
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Custodian
The company that actually holds the securities
Often a bank or trust company
Transfer Agent
Keeps track of purchase and redemption requests
from shareholders
Independent Public Accounting Firm
Certifies the fund’s financial reports
Trading Costs
Not disclosed in the annual prospectus
So how does an investor know how much the
trading costs are?
You can ask the mutual fund or just look at the…
Annual Turnover
Measure of how much trading a mutual fund does
Measured in percentage of the amount a portfolio
“turns over” each year
100% turnover, 50% turnover, etc.
The higher the turnover, the higher the trading costs
Also gives you an idea how long they hold investments
100% turnover: They hold on average one year
50% turnover: They hold on average two years
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This is a very famous, now infamous, mutual fund. They just recently
changed from “Primary Class” shares to “Class C” shares and added Class
A shares.
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Vanguard
Example of Shareholder Fees: 500 Index
Fund
Transaction fees
This is an index fund. This
Maximum sales charge None
fund does no research. They
Maximum sales charge on None simply buy all the 500 stocks
reinvested dividends in the S&P 500 Index. The
Maximum deferred sales None term for this is “passive
charge management.” (More later)
Redemption or exchange fees None Index funds are usually
Annual Operating Expenses Class A “true” no-load mutual fund
Management Fees 0.14% and usually (but not always)
Distribution and/or Service Fees have very low fees.
(a.k.a. 12b-1)
There is a $20 annual fee if
Other Expenses 0.03% your account value is less
Total: 0.17% than $10,000.
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Fidelity
Example of Shareholder Fees: Spartan 500
Index Fund
The class C shares of this “no load” fund wind up costing more than the
class A shares! Again, the Financial Intermediary Class seems to be a
better deal but it does not include the advisor’s annual fee. The
Institutional Class looks great. How can I get them? Well, for starters,
are you a large pension fund, university endowment, or tax-exempt
charity? Oh, and by the way, do you have at least $1 million to invest?
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Vanguard
Examples of Dollar Costs: 500 Index
Fund
10-Year Growth of
Investment
Return $10,000
Fees are important, but they certainly do not tell you the whole
story. When comparing mutual funds, you must look at many
attributes, not the least of which are the rates of return,
preferably over longer periods of time.
*8.24% and 7.75%, respectively, without sales charge (a.k.a. NAV, net asset value)
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Growth-and-Income Funds
Mutual funds that seek both long-term growth and
current income, with primary emphasis on capital
gains
Sometimes own bonds to augment the income
Sometimes referred to as “Blend” (of Growth & Value)
Value Funds
Mutual funds that seek stocks that are undervalued
in the market by investing in shares that have low
P/E multiples and high dividend yields
Often look for companies out-of-favor with investors
Some folks lump growth-and-income funds and
value funds together
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Equity-Income Funds
Mutual funds that emphasize current income and
capital preservation by investing primarily in high-
yielding, income-producing common stocks
Railroads, Foods, Utilities, REITs, etc.
They will also invest in bonds to generate income
when the investment advisor believes that stock
prices have risen to levels that threaten
preservation of capital
Many Equity-Income Funds did very well during the 2000 to
2002 bear market after lagging the market badly during the late
1990’s bull market. Every type of fund was clobbered in 2008.
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Balanced Funds
Mutual funds whose objective is to generate a
balanced return of both current income and long-
term capital gains
Invest in both stocks and bonds
Normally 60% stocks and 40% bonds
But allocation can change as the investment
environment changes
The prospectus of the American Balanced Fund states that the
fund is “managed as the complete U. S. investment program of
a prudent investor.” They can never be more than 75% stocks,
25% bonds or less than 50% stocks, 50% bonds.
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In the late ’90’s, index funds became a victim of their own success.
53
And they have cool names like “Spider,” “Diamond,” and “Cube”
56
And although it is still a very small fund with high annual fees, it
has done very well for its investors (www.vicefund.com)
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Style
Value Blend Growth
Large
Size
Medium
Small
Fund Families
A family of funds exists when one investment
company manages a group of mutual funds
Funds in the family vary in their objectives
You can move your money from one fund to
another within a fund family
Almost always with no charge
But, if the fund is in a taxable account, you could
generate a taxable transaction
Recently, fees are being charged for “excessive”
transfers within the fund family
Done to discourage “market timing” by investors
Financial publications
Morningstar, Lipper, etc.
Business Week, Forbes, Kiplinger's Personal
Finance, and Money are sources of information
on mutual funds
Mutual fund surveys usually include:
Fund’s overall rating compared to other funds
Fund’s rating compared to funds in the same
category
Fund size, sales charge and expense ratio
Risk of loss factor and toll-free number
History for past three, five, and ten years
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Dollar-Cost Averaging
A system of buying an investment at regular
intervals with a fixed dollar amount
With Dollar-Cost Averaging, there is always
“Good News”
“The market is up! Good News!”
Your account is worth more
“The market is down! Good News!”
Next month, you will get more shares at a
lower price when the $50 or $100 comes out of
your paycheck or checking account
Your average cost-per-share should be
lower than your average price-per-share
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Hypotheticals
Most mutual fund companies have a system for
running “hypotheticals”
a.k.a. “Illustrations” “Hypothetical illustrations”
Examples of returns of investments
Lump sum principals, or
Streams of investments
a.k.a. Dollar-Cost Averaging
Or combinations of both
Must be approved by SEC and FINRA
And contain disclaimers about past versus future
performance
Let’s run some hypotheticals!
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CHAPTER 4 – REVIEW
Mutual Funds
Chapter Sections:
Advantages and Drawbacks of Mutual Fund Investing
Investment Companies and Fund Types
Mutual Funds Operations
Mutual Funds Costs and Fees
Short-Term Funds
Long-Term Funds
Mutual Fund Performance
Closed-End Funds, Exchange Traded Funds, and Hedge Funds