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Reference Guide

Mutual Funds - Reference Guides

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l e a r n • r e f e r e n c e • r e v i e w permacharts TM Mutual Funds WHAT IS A MUTUAL FUND? PURCHASING & REDEEMING • Mutual funds are open-end or closed-end investment companies INDIRECT METHOD that manage pools of other people’s money • Money is pooled to create more buying power; pooled money is • Shares are purchased through a broker or other agent at a invested in a diversified portfolio of securities in accordance with price above the NAV the investment objectives expressed by the mutual fund • Shares are then redeemed through a broker at a price that is • Number of funds managed by firms ranges from one to more than below the NAV 100 • Most loads range from 3% - 8.5% of NAV • Mutual funds enable individuals to become part-owners of the fund The load Difference between the price and the through the purchase of shares (or fractional shares) (commission) NAV on both sides of the • The value of each share is represented by Net Asset Value (NAV), transaction which tends to change daily • NAV = market value of all cash and securities ÷ number of shares Front-end loads Charge an initial commission on the outstanding purchase only • Ownership in the mutual fund also entitles owners to a pro rata Back-end (deferred) Charge the commission on the portion of the income produced by the securities and assets (98% load funds redemption or exit • The back-end of realized capital gains or earned income must be distributed to load is usually reduced by 1% for shareholders) each year the investor holds the fund • The prospectus describes the goal(s), risk, fees, portfolio holdings, minimum investment, and other operational characteristics of the fund; it must be obtained by investors before shares can be purchased DIRECT METHOD HISTORY • Shares are purchased directly from the fund by the investor at the NAV • Mutual funds can be traced back to 19th century English and • Shares are redeemed directly to the fund at the NAV Scottish investment trusts No-load funds Do not charge either buying or selling • The first modern mutual fund company, Massachusetts Investment commissions Trust, was formed in Boston in 1924 (now State Street Research) • Currently, more than 5000 individual mutual fund portfolios representing over $2.2 trillion are registered with the Securities Exchange Commission • Over 950 new funds were created in 1997 w Type of Fund Total Assets ($billions) w Stock 890 FUNCTIONS w Bond 710 PROFESSIONAL MANAGEMENT Taxable money market 515 • Most mutual funds have a full-time staff of security analysts . and portfolio managers to select and monitor the p Tax-exempt money market 115 investments to maximize returns e r DIVERSIFICATION • Pooling money allows investors to obtain indirect ownership m in a broader, less risky portfolio of securities than if they TYPES OF FUNDS attempted to directly form one with their own limited a resources c OPEN-END DIVISIBILITY h • Most common in that they continually issue and redeem shares at a their NAV (plus applicable sales load) • Most allow the purchase and redemption of fractional • Number of outstanding shares in the fund increases and decreases shares r as investors buy or redeem their shares t • Sometimes closed to new investors when their asset size grows to ADMINISTRATION such a large level where fund management becomes ineffective s • When a fund is closed, a similar fund is often created for new investorsovide periodic reports describing shareholder and fund . transactions c • Collect dividends and interest CLOSED-END • Automatically reinvest dividends in more shares o • A publicly-traded company (fund) listed on an exchange or traded m over-the-counter; raises money only once at the time of the • Issue annual statements summarizing dividends and capital offering, where the number of outstanding shares is fixed gains distributions for tax purposes • Does not issue additional shares or redeem shares at NAV TRANSACTION COSTS • Price differs from NAV and fluctuates due to investor demand and changes in the value of the securities in the portfolio • Since mutual funds buy and sell large quantities of • Typically sells at a discount to NAV securities, the result is substantial savings on brokerage • Many funds specialize in the securities of a particular country (for commissions example, Germany, India, Mexico) 1 MUTUAL FUNDS • A-846-X © 1998-2008 Mindsource Technologies Inc. l e a r n • r e f e r e n c e • r e v i e w permachartsM BOND FUNDS BALANCED FUNDS TAXABLE GOVERNMENT • Invest in a combination of common and preferred stocks and bonds • Invest in U.S. Treasury bonds and bonds issued by agencies • Goal is to obtain income primarily from common and preferred of the federal government (GNMA, FNMA) stock dividends and bond interest • Some gains in the value of the underlying securities • Goal of such funds is to produce steady, predictable • Risk is low to moderate depending on the mixture of holdings income • Risk is very low since bonds are backed by the government TAXABLE CORPORATE (BLUE CHIP) • Invest in the debt of highly rated companies with an excellent record of paying interest and principal when STOCK FUNDS due EQUITY INCOME (BLUE CHIP) • Goal is to provide steady, predictable income • Invest in stock of mature, well-established companies that pay a • Risk is low to moderate, depending on maturities of fund predictable and high dividend holdings • Goal of the fund is to produce a return from a combination of price TAXABLE MONEY MARKET rise (capital gain) and dividends (income) • Risk is moderate • Invest in short-term (1 year maturity) debt issues, for example, certificates of deposit, commercial paper, and GROWTH & INCOME Treasury Bills • Invest in companies with solid records and consistent dividends • Goal is to provide steady income from the interest • May have more potential for price appreciation than the Blue Chips payments of the holdings • Risk is very low due to the short maturities and high credit • Goal of fund is to earn returns from both gains and dividends quality of the issues • Somewhat more emphasis on gains than with Blue Chips • Risk is moderate TAX-FREE GOVERNMENT (MUNICIPAL) • Invest in debt issued by towns, cities, counties, and states to CAPITAL APPRECIATION (AGGRESSIVE GROWTH) finance general or specific projects • Invest in stock of young, emerging companies with little track record • Goal is to generate steady tax-free income from securities of performance, but exhibit promise for future returns exhibiting varying degrees of risk • Goal of the fund is to produce significant long-term gains from price • Risk is generally low to moderate depending on the appreciation maturities and ratings of the holdings • Risk is high TAXABLE CORPORATE (HIGH YIELD OR JUNK) GROWTH • Invest in high risk, speculative grade bonds of companies • Invest in the stock of companies that are not as well established as with high exposure to default Blue Chips but have experienced some success • Goal is to produce high returns through high interest • Most companies do not pay much of a dividend (if at all) m income • Goal of fund is to produce return primarily from future capital gainso • Risk is high due to issuer’s deteriorated financial condition • Risk is moderate to high c . s t r SPECIALIZED FUNDS a INDEX FUNDS INTERNATIONAL FUNDS h • Invest in a portfolio designed to imitate that of a • Invest in foreign stocks and bonds of established and emerging countries c particular market index, like the Standard and Poor’s • Fund composition includes very broadly diversified portfolios comprised of securities 500 from various countries except the United States (International Fund) a • Goal is to provide the same return as the market index • Securities from any combination of countries including the United States (Global m • This enables passive investors to earn an average Fund) r return • Securities limited to a particular region of the world, like Europe (Regional Fund) • Risk is moderate, as the fund is deliberately compris• Securities from only one country, like Mexico (Country Fund) e of securities similar to those in the market index • Goal is to provide investors with access to foreign markets p • Risk is moderate to high, as the fund has additional exposure to foreign exchange . SECTOR FUNDS and political risks • Instead of investing in one company, and hoping w that it produces successful returns, a sector fund buys the whole industry (or a substantial part of one SOCIALLY RESPONSIBLE FUNDS w industry) • Invest in companies that exhibit characteristics and a corporate behavior consistent with the strong social or political beliefs of certain investors w • Goal is to provide more diversification than that of an individual security by focusing portfolio on an • Most funds avoid controversial companies (for example, tobacco, alcohol, gambling) industry, rather than on a company • Goal is to enable investors with a strong social conscience a portfolio of securities • Risk is high since the companies forming the portfoliothat will not violate their beliefs are in the same industry and, therefore, highly • Risk is moderate to high since pool of available investments is restricted to those correlated (that is, they tend to move in the same that meet the standards of the fund direction) 2 MUTUAL FUNDS • A-846-X © 1998-2008 Mindsource Technologies Inc. l e a r n • r e f e r e n c e • r e v i e w permachartsM PERFORMANCE MEASURES QUOTATIONS • Investors can gauge the performance of a mutual fund by READING QUOTATIONS 1 Comparing it to specific funds in the same classification • Most local newspapers report the daily performance of the most popular mutual funds in a fairly standard 2 Comparing it to the average for the classification presentation 3 Comparing it to a market index which represents an overall average (such as, Standard & Poor’s 500 Index) Fund Name 1 NAV 2 Net Change 3 4 Comparing it to alternative investments (such as, money market Vanguard Funds account, individual stocks or bonds, Treasury Bills) Wellington $30.35 +.02 Windsor $17.70 -.01 NET ASSET VALUE (NAV) Windsor II $29.50 -.11 • Represents the dollar value of each share in the mutual fund 1Name of mutual fund company followed by the
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