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CHAPTER 13: INVESTING IN MUTUAL FUNDS

CHAPTER 13: INVESTING IN MUTUAL FUNDS. ABC XYZ MUTUAL FUND. Mutual Fund Basics. INVESTORS pool their money and. buy shares in the MUTUAL FUND. FUND MANAGER selects and purchases a variety of investment instruments. Types of Investment Companies :.

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CHAPTER 13: INVESTING IN MUTUAL FUNDS

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  1. CHAPTER 13: INVESTING INMUTUAL FUNDS

  2. ABC XYZ MUTUAL FUND Mutual Fund Basics INVESTORS pool their money and buy shares in the MUTUAL FUND. FUND MANAGER selects and purchases a variety of investment instruments.

  3. Types of Investment Companies: • Open-End Investment Companies (mutual funds) • Dominant type of investment company; shares purchased from and sold back to company. • New shares issued as money flows in. • Net Asset Value (NAV) is the current market price of all securities owned by the fund (less any liabilities) divided by the number of shares outstanding.

  4. Closed-End Investment Companies • Operate with a fixed number of shares outstanding. • All trading is done between investors on the open market. • Shares frequently trade at a discount or premium to net asset value.

  5. Advantages of Mutual Funds: • Diversification— risk is lowered; one share buys a slice of everything in the fund. • Professional management— pay someone else to make investing decisions. • Financial returns— relatively attractive returns over the long term. • Convenience— easy in & out, small outlays, help with record keeping.

  6. Disadvantages of Mutual Funds: • No choice in securities selection— if you don’t agree with choices, you must change funds. • No control of sale of securities within fund—timing of sales has tax implications for investor.

  7. Exchange-Traded Funds • Trade on listed exchanges like closed-end funds. • Number of shares outstanding can be increased or decreased, depending on demand.

  8. Unit Investment Trusts • Usually sold by brokerage houses. • Investors purchase a share in an unmanaged pool of investments. • No trading of securities within the portfolio once the trust assets have been purchased. • Tend to have relatively high transaction costs and yearly fees.

  9. Real Estate Investment Trusts (REITs) • Closed-end investment companies whose trust assets are limited to real estate investments. • Offer a more diverse and marketable way to invest in real estate. • Equity REITs invest in properties; mortgage REITs invest in mortgages; hybrid REITs invest in both.

  10. Mutual Fund Cost Considerations: • Loads = sales commissions • Front-end load funds (or simply "load funds") charge a commission when shares are purchased. • Low-load funds charge commissions of 1–3% when shares are purchased. • Back-end load funds charge a commission when shares are sold.

  11. Growth Aggressive Growth Value Equity-Income Balanced Growth & Income Bond Money Market Index Sector Socially Responsible International Asset Allocation Types of Funds

  12. Making Mutual Fund Investments Selecting a Mutual Fund: • Match the fund's objectives with your investment objectives. • Consider your tolerance for risk and your investment time horizon. • Read the prospectus!

  13. Assess the fund's services. • Check the fees charged. • Consider the fund's longer-term returns as well as its shorter-term returns.

  14. THE END

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