Download Chapter Fifteen

Garman/Forgue
Personal Finance
Eleventh Edition
Chapter 15:
Investing Through
Mutual Funds
PPT slide program prepared by
Amy Forgue and Ray Forgue.
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Introduction
Mutual funds pool the invested funds of
many investors and use them to
invest in a diversified portfolio.
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Figure 15-1: How a Mutual Fund
Works
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Your Next Five Years
In the next five years, you can start
achieving financial success by doing the
following related to investing through
mutual funds:
1. Match your investment philosophy and
financial goals to a mutual fund’s
objectives.
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Your Next Five Years
2. Invest only in no-load mutual funds that
have low expenses and have no or a low
12b-1 fee.
3. Get the right mix of asset classes in
your long-term fund investments through a
sound asset allocation plan.
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Your Next Five Years
4. Sign up for automatic reinvestment of
your mutual fund dividends.
5. Invest regularly in mutual funds through
your employer’s retirement plan.
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Learning Objective #1
Describe the features, services, and
advantages of investing in mutual
funds.
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Why Invest in Mutual Funds?
• Net Asset Value (or NAV): Per-share
value of a mutual fund.
– Assets of the fund less its liabilities
– Divided by the number of shares
outstanding
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Why Invest in Mutual Funds?
• Current Income from
– Ordinary income dividend distributions
– Capital gains distributions
• Capital Gains: when you sell your
shares for a higher price than when
purchased.
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Figure 15-2: Investor Returns
from Mutual Funds
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permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.
Advantages of Investing
Through Mutual Funds
• Most mutual funds are open-end
funds.
• Diversification to protect from
– Random (or nonsystematic) risk
• Affordability
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Advantages of Investing
Through Mutual Funds
• Professional management
• Liquidity
• Low transaction costs
• Uncomplicated investment choices
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Unique Mutual Fund Services
•
•
•
•
Convenience
Ease of buying and selling shares
Check writing and electronic transfers
Distribution of or automatic
reinvestment of income and capital
gains
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Figure 15-3: The Wisdom of
Automatic Dividend Reinvestment
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Unique Mutual Fund Services
• Telephone and internet exchange
privileges
– Exchange (or switching, conversion, or
transfer) privilege
• Automatic investment
• Effortless establishment of retirement
plans
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Unique Mutual Fund Services
• Beneficiary designation
• Multiple income withdrawal options
(or systematic withdrawal plans)
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Other Types of Investment
Companies
• Closed-End Mutual Fund
• Real Estate Investment Trust (or
REIT)
• Unit Investment Trust (or UIT)
• Exchange-Traded Fund (or ETF)
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Concept Check 15.1
• Explain how net asset value is calculated
and how it is used by mutual funds.
• List five advantages of investing in mutual
funds.
• Name five services that are unique to
mutual funds.
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Learning Objective #2
Differentiate mutual funds by
investment objectives.
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Mutual Fund Objectives
• Managed Funds
• Mutual fund objectives: Income, growth,
and growth and income.
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Fund Objectives, Types, and
Characteristics
• Funds with an Income Objective
– Money Market Funds
• Tax-exempt money market funds
• Government securities money market
funds
– Bond funds
• Bond (or fixed-income) funds
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Fund Objectives, Types, and
Characteristics
• Funds with a Growth Objective
– Aggressive growth (or maximum capital
gains) funds
– Growth funds
– Growth and income funds
– Value funds
– Large-cap, midcap, small-cap, and
microcap funds
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Fund Objectives, Types, and
Characteristics
• Funds with a Growth Objective
– Sector funds
– Regional funds
– Precious metals and gold funds
– Global funds
– International funds
– Emerging markets funds
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Fund Objectives, Types, and
Characteristics
• Funds with a Growth and Income
Objective
– Growth and income funds
– Equity-income funds
– Socially conscious funds
– Balanced funds
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Fund Objectives, Types, and
Characteristics
• Funds with a Growth and Income
Objective
– Asset allocation funds
– Life-cycle funds
– Mutual fund funds
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Fund Objectives, Types, and
Characteristics
• Index Funds: These funds are
unmanaged.
• Index funds track the market as a whole for
the particular market covered by the index
used.
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Concept Check 15.2
• How can investor use a money market
fund?
• Distinguish among mutual funds with an
income objective, growth objective and
growth and income objective, and give
two examples of each.
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Concept Check 15.2
• Distinguish between asset allocation
and target-date funds.
• Explain why investors like index
mutual funds.
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permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.
Learning Objective #3
Summarize the fees and charges
involved in buying and selling mutual
funds.
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permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.
Mutual Fund Investing Fees and
Charges
• Shareholder Fees
• Annual Fund Operating Expenses
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permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.
Load Versus No-Load Funds
• Load funds always charge transaction
fees.
– Front-end load
– Loads are a percentage of the
amount invested
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Load and No-Load Funds
• Some no-load mutual funds assess
12b-1 fees.
– 12b-1 (or distribution) fee
– Trailing commissions
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Load and No-Load Funds
• Many funds also assess deferred load
and redemption fees.
– Deferred (or back-end) load
– Redemption charge (or exit fee)
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Fees and Charges of Mutual
Fund Investing
• Disclosure of fees in standardized
expense table.
• Also look for the fund’s expense
ratio.
• What’s best: load or no load? Low fee
or high fee?
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Concept Check 15.3
• Give three examples of fees and charges
associated with load funds.
• Which is better for most investors, load or
no-load funds?
• Summarize the effects of loads and fees
on investment returns.
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Learning Objective #4
Establish strategies to evaluate and
select mutual funds that meet your
investment goals.
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permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.
Figure 15-4: The Process of
Selecting Mutual Funds
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Table 15-1: Mutual Fund
Performance
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How to Select the Funds in
Which You Should Invest
• Review your investment philosophy and
investment goals.
• Eliminate funds inappropriate for your
investment goals.
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Figure 15-5: Balancing Risk and
Returns on Mutual Funds
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How to Select the Funds in
Which You Should Invest
• Create a portfolio of funds in which to
invest.
• Choose no-load funds with low
management fees.
• Obtain investment information and
advice.
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How to Select the Funds in
Which You Should Invest
• Screen, compare, and select funds
that meet your criteria.
– Fund screener (or fund screening
tool)
– Profile prospectus (or fund profile)
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How to Select the Funds in
Which You Should Invest
• Monitor your portfolio of mutual fund
investments.
– Use portfolio monitoring on the
Internet.
– Check fund quotations in newspapers.
• Mutual fund bid price
• Mutual fund ask price
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Figure 15-6: How Mutual Funds
Are Quoted
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Concept Check 15.4
• Explain why it is important to review your
investment philosophy and goals when
selecting mutual fund investments.
• Explain how you would eliminate funds
inappropriate for your investment goals,
given your situation and assuming you
are working full time.
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Worst Financial Blunders in
Investing through Mutual Funds
Based on others’ financial woes, you will
make mistakes in personal finance when
you:
1. Buy funds with high fees and
expenses.
2. Withdraw dividends rather than
reinvesting.
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Worst Financial Blunders in
Investing in Stocks and Bonds
3. Chase performance by investing in “hot”
funds.
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Do It NOW!
You know more about personal finance
after reading this chapter, so get started
right now by:
1. Identifying five services provided by
mutual funds (see pages 460-63) that
appeal to you.
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Do It NOW!
2. Identifying three of your long-term
financial goals and determining whether
you would seek a fund with a growth
objective or growth and income objective
for each goal.
3. Select one mutual fund from those
listed in Table 15-1 on page 471 to follow
for one or two months, then reassessing
your selection if warranted.
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What Do You Recommend
Now?
Now that you have read the chapter on
mutual funds, what would you recommend
to David and Sarah Gent in the case at the
beginning of the chapter regarding:
1. Redeeming their CDs and investing their
retirement money in mutual funds?
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What Do You Recommend
Now?
2. Investing in growth and income
mutual funds instead of income funds?
3. Buying no-load rather than load
funds?
4. Buying target-date mutual funds
instead of balanced mutual funds?
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What Do You Recommend
Now?
5. Buying mutual funds through their
employers’ 401(k) retirement
accounts, rather than saving through a
taxable account as they have been
doing?
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