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Chapter 4 Appendix Mutual Fund Evaluation Term Project

Chapter 4 Appendix Mutual Fund Evaluation Term Project. A small man – anyone with a portfolio of, say, under $100,000 – is unlikely to do as well investing his own money as he can do in a no-load fund - Paul Samuelson. Outline. Introduction Classification of mutual funds. Introduction.

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Chapter 4 Appendix Mutual Fund Evaluation Term Project

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  1. Chapter 4 AppendixMutual Fund Evaluation Term Project

  2. A small man – anyone with a portfolio of, say, under $100,000 – is unlikely to do as well investing his own money as he can do in a no-load fund - Paul Samuelson

  3. Outline • Introduction • Classification of mutual funds

  4. Introduction • A mutual fund is an existing portfolio of assets into which someone may invest directly • Facilitates diversification

  5. Introduction (cont’d) • Mutual funds are extremely popular investment vehicles for both the small and the large investor • Many institutions place a substantial part of their money with mutual funds • By the end of 2000, about 8,300 mutual funds with assets totaling $6.9 trillion

  6. Classification of Mutual Funds • Open-end versus closed-end • Net asset value versus market value • Load versus no-load • Management fees • Buying mutual fund shares • Mutual fund objectives

  7. Open-End Versus Closed-End • There are two types of investment companies: • Open-end funds: • May grow in size as new investors open accounts • May grow in size as existing investors add to their accounts • Have no set number of shares outstanding • Buy back their shares from investors (redemption)

  8. Open-End Versus Closed-End (cont’d) • There are two types of investment companies (cont’d): • Closed-end funds: • Have a fixed number of shares that trade like shares of common stock • Are unmanaged portfolios of stock with each share representing partial ownership of the portfolio • May trade on an exchange • Can be sold to other investors

  9. Net Asset Value Versus Market Value • You buy and sell an open-end fund based on its net asset value • Open-end fund: equals the fund’s assets minus its liabilities divided by the number of shares currently existing in the fund • Closed-end fund: trades at market-determined portfolio prices that may be more or less than the net asset value

  10. Load Versus No-Load • Load funds: • Have a sales charge associated with the purchase of new shares • A commission split between: • A mutual fund salesperson • An investment firm • A national distributor • Typically ranges between 1.0% and 8.5%

  11. Load Versus No-Load (cont’d) • No-load funds: • Have no sales charge • Shares are bought and sold at net asset value

  12. Examples of Exchange-Traded Funds

  13. Management Fees • Management fees include: • Postage costs • Clerical time • Commissions on the underlying assets • Redemption fee • A fee to pay redemption expenses, ranging between 1% and 2%

  14. Management Fees (cont’d) • Management fees include (cont’d): • Management fee • Paid to fund manager • Taken directly from the fund’s assets • Averages about 0.5% of fund’s total assets

  15. Buying Mutual Fund Shares • Fund prospectus outlines: • The fund’s purpose • The management team • The mailing address and phone number • The fund’s intended investment activity • Funds also provide descriptive brochures and a letter to inquiries

  16. Buying Mutual Fund Shares (cont’d) • New account application asks for: • Name, address, tax ID • Investor’s choice of shareholder options: • Dividend reinvestment • Automatic monthly investment • Systematic withdrawal • IRA designation • Telephonic fund switching option

  17. Mutual Fund Objectives • The fund objective is the type of investment anticipated: • Capital appreciation and growth funds seek appreciation in the value of shares • Income funds seek current income from fixed-income securities and from dividends • Growth and income funds seek a combination of income and capital appreciation

  18. Mutual Fund Objectives (cont’d) • The fund objective is the type of investment anticipated (cont’d): • Balanced invest in growth and income securities • Bond funds invest in debt only • Money market funds seek stability of principal through investment in short-term debt instruments

  19. Mutual Fund Objectives (cont’d) • The fund objective is the type of investment anticipated (cont’d): • Tax-free funds invest in municipal securities that are free from federal and sometimes state taxes • Special-purpose funds may focus on a particular industry or region

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