Mutual Funds – Internet Inquiry



Mutual Funds

POSSIBLE RESOURCES

Textbook – pages 327-338

- Mutual Funds Investment Center – Go to Getting Started, The Basics - Yahoo Finance - Mutual Funds

- Path to Investing

What is a Mutual Fund?

Investment where investors pool money to buy stocks, bonds, and other securities based on the selections of professional managers. Funds can have different focuses such as growth, income, socially responsible, etc.

Easy to invest in – good diversification because your money is spread over many different companies-

What are some of the benefits of investing in Mutual Funds?

Professionally managed / diversification / doesn’t fluctuate like the stock market because one of the companies in the mutual fund may go down but others may go up to offset the loss. Provides good results/easier to follow rather than buying all of the stocks in the fund separately and trying to watch and sell them separately

What is meant by the “NAV”?

Net Asset Value – the amount of one share of a mutual fund is worth. See page 329. Value of the Fund’s Portfolio minus liabilities divided by the number of shares outstanding

What is meant by a “Sales Load”? (Front-end and Back-end)

Sales load is the amount of commission paid for the mutual fund = each time you buy it. Front-end load (“A funds”) – commission is paid up front, back-end load (“B” funds) commission is paid when you sell or withdraw money from the fund – deferred commission generally on a 4%, 3%,2%, 1% basis – hold for 4 years and there is no fee to withdraw. No- load funds do not charge a commission to buy or to sell but watch the internal fees – some may be higher than those with commissions.

What kinds of expenses are associated with mutual funds?

Management fees – between 0.25 and 1%

12b-1 fee – approximately 1 % per year - used for marketing and advertising

How do you make money through mutual funds?

Through the payment of dividends from the companies your mutual fund invests in – also through capital gains when the fund manager sells one or more of the investments in the fund (ex. Simplified: The fund holds McDonalds and it was bought for $10 per share for the fund – the fund manager sells it for $15 per share and the mutual fund/it’s holders get the $5 difference)

What is a prospectus? Why should you get one?

A report that gives investors information about the particular mutual fund, its fees, strategies, background information about the fund managers. By law any investment firm that recommends a fund must provide a copy of the prospectus to the potential investor – updated yearly and sent to all fund holders.

What is the Morningstar Rating/Risk? How many stars is the best?

An independent company that rates mutual funds – Website It provides detailed information about the fund at a glance. It shows the names and weighting of the companies invested in, sector and industry information. Along with past performance of the fund. See page 341 for an example.

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Types of Mutual Funds

• Equity – invest primarily in stocks, provide diversification of different stocks – can be aggressive- focusing on growth , or income producing – focus on stable income potential through the acquisition of companies that provide a history of paying dividends.

• Fixed Income Funds- These will be made up of bonds, corporate and government, certificate of deposits and preferred stocks – all that pay a steady fixed rate of return for it’s investors.

• Balanced- mix of stocks and bonds- designed to capture the goods and bads of the market – protect the shareholder’s investment(if stocks are up and bonds are down the fund will generally be up – and vice versa - if bonds are up and stocks are down – then investor is still making some money or holding steady)

• Money Market- invest in C.D.’s, government securities and other “safe” investments. Easy to withdraw money if needed.

• Index Funds Mirror a particular index (example: the S&P 500, Dow Jones, Lipper Average) The find invests in the same companies the index is based on.

• Sector/Specialty Funds invests in companies within the same industry – example: technology funds, bio technology, healthcare, natural resources. Specialty funds include those for regional, international, emerging markets and such.

• Bond Funds Invest only in bonds – several strategies / focuses – see page 333 for different types

What are the characteristics of each type of fund? Advantages/disadvantages?

Each type of fund provides many advantages and disadvantages based on the investors overall goals and desired outcomes. The key to any investment plan is diversification – spread your money among several types of funds (equity, emerging market, small and large cap funds) to protect from the ups and downs of the economy and market.

Compare the yield, liquidity and risk of mutual funds versus stocks and bonds.

The returns of mutual funds can be as great if not greater than that of individual bonds and stocks- depending on the percentage held. Because you own only a portion of the particular stock or bond if the stock depreciates or loses value – the overall effect on the mutual fund will be less. Liquidity is easier as you liquidate a portion of your overall investment in the fund itself not just a particular stock. Risk can be less depending on the strategy and goal of the fund. Do not get lulled into thinking that mutual funds are risk free – you can still lose money!

Why would you choose to invest in mutual funds rather than bonds? Suggested answer:

Greater diversification – easier to withdraw a portion of the investment, professionally managed.

Why would you choose to invest in mutual funds rather than stocks?

Ditto as above

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