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Mutual Funds

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  1. Mutual Funds Financial Literacy

  2. What We Will Cover • What is a Mutual Fund? • Advantages and Disadvantage of Mutual Funds • Costs of Mutual Funds • Types of Mutual Funds • ETFs • Buying a Mutual Fund

  3. What is a Mutual Fund? • Investors pool their money • A fund manager buys a variety of stocks • Each investor owns a share of the fund (the total of all the stocks in the fund) • When the fund increases in value, the investor makes money

  4. How Mutual Funds Work Many investors (hundreds or thousands) put their money into the mutual fund pool. A professional manager will pick the stocks and bonds to buy

  5. Net Asset Value • Mutual funds do not change price during the trading day • The price you buy and sell for is called net asset value (NAV) rather than stock price • It is updated only once a day, at the end of the trading day • Formula for NAV is: Total value of securities minus debts divided by number of shares

  6. Open-Ended Funds • This type of fund may issue as many shares as it wishes, and anyone can invest • 95% of funds are open-ended

  7. Closed-End Funds • Closed-end funds can issue a limited number of shares • Investors buy and sell shares among themselves

  8. Advantages of Mutual Funds • Diversification • You purchase a small amount of many stocks without having to physically buy each stock • Professional Management • Fund managers are professionals with access to better information than the average investor

  9. Advantages of Mutual Funds • Minimal transaction costs • Individual investors save on brokerage fees compared to individual stock purchases. In a retirement account there is no brokerage fee • Liquidity • Easy to buy and sell • Flexibility • There are over 8000 funds to choose from, allowing you to invest in an area you want

  10. Disadvantages of Mutual Funds • Lower-than-market performance • On average, mutual funds underperform the market • Costs • Always charge an annual fee • May also charge a sales fee • These fees will eat away your profits

  11. Disadvantages of Mutual Funds • Risk • Depending on the segment of the market the mutual fund invests, it may do very well or very poorly • Systemic Risk • A market crash will have a negative effect on your fund

  12. Costs of Mutual Funds • “Load” funds charge a commission to buy or sell the funds • Usually 4-8% of the investment • “Front-end load” means you pay a commission when you buy • “Back-end load” means you pay a commission when you sell the fund

  13. Costs of Mutual Funds • “No-load” funds mean you don’t pay a sales commission • Some funds will charge a fee if you sell within a specific period of time, such as 90 days

  14. Costs of Mutual Funds • Owners of mutual funds pay an annual expense • Known as the expense ratio • Typically it is .25 to 2 percent of the investment value • Try to buy a fund with the lowest expense ratio (annual fee) possible • Expenses can eat up all or most of your profits, especially if the fund isn’t performing well

  15. Costs of Mutual Funds • Annual fee • You will have to pay an annual fee even if your mutual fund did not make money that year

  16. Costs of Mutual Funds • Taxes • Generally you will have to pay taxes on the profits every year, except in a retirement account

  17. Costs of Mutual Funds • 12b-1 fee • These are marketing expenses passed on to the investor • They do not benefit the investor at all • Try to find funds that have minimum or no 12b-1 fees • They will eat into your profits and do not provide any benefit to the investor

  18. Types of Mutual Funds • Stock funds • Most popular types of funds • These funds invest mostly in stocks, but may also invest in cash, bonds, and money market funds

  19. Types of Stock Funds • Aggressive Growth Funds • The fund buys stocks that will (hopefully) increase dramatically in price • Very volatile • Small-Company Growth Funds • Investments are limited to small companies • Volatile

  20. Types of Stock Funds • Income Funds • Concentrate more on strong companies paying dividends (the dividends are the “income” in income funds) • Less risky than aggressive growth funds • Growth-and-Income Funds • Concentrate on stocks providing dividends plus the potential for growth • Less volatile

  21. Types of Stock Funds • Sector Funds • Specializes in stocks from a specific industry • Computer, financial services, biotech precious metals, etc. • International • Invests mostly in stocks outside the U.S.

  22. Types of Mutual Funds • Balanced funds • Holds both stocks and bonds • Asset Allocation • Balanced funds with market timing

  23. Types of Mutual Funds • Life Cycle Funds (relatively new) • Attempt to tailor holdings to the investor’s age and risk tolerance • The fund is managed based on how close you are to retirement

  24. Types of Mutual Funds • Bond funds • Invest in bonds rather than stocks • Emphasize income over growth • Types of bond funds (remember than when you buy a bond, you are actually lending money to the company or the government) • U.S. Government bonds • Municipal bonds (bonds issued by city or state) • Corporate bonds (from a company)

  25. Index Funds • Index funds will directly mirror an index: • DOW (DIA and others) • S & P 500 (SPX and others) • Nasdaq (QQQ and others) • Inverse index funds will directly mirror the opposite of the market

  26. ETFs (Exchange Traded Funds) • ETF’s are available for any segment of the market, just as mutual funds are • Lower expenses than mutual funds

  27. ETF’s • There are also inverse ETF’s which will make you money when the market goes down • However, you will lose money when the market goes up

  28. Buying a Mutual Fund • Determine your goals • What are you investing for? • Retirement • Education • Income • Growth • Meeting your objectives • Make sure the fund meets your goals (above)

  29. Evaluate the Fund • identifies funds by investment strategy and management style • Look closely at past performance and expenses • Compare funds in the same category; do not compare a growth fund to an international fund, for example • Look for “star” ratings (4-star and 5-star ratings)

  30. Buying a Mutual Fund • You can purchase through your company’s 401(k) website • You can purchase directly from the mutual fund company • You can purchase from your broker • You can purchase through your bank • Many funds will let you invest with as little as $100 in a retirement account