GarmanForgue Personal Finance Eleventh Edition Chapter 15 Investing

Garman/Forgue Personal Finance Eleventh Edition Chapter 15: Investing Through Mutual Funds PPT slide program prepared by Amy Forgue and Ray Forgue. 1 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Introduction Mutual funds pool the invested funds of many investors and use them to invest in a diversified portfolio. 2 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Figure 15 -1: How a Mutual Fund Works 3 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 4 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Your Next Five Years 2. Invest only in no-load mutual funds that have low expenses and have no or a low 12 b-1 fee. 3. Get the right mix of asset classes in your long-term fund investments through a sound asset allocation plan. 5 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 6 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Learning Objective #1 Describe the features, services, and advantages of investing in mutual funds. 7 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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 8 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 9 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Figure 15 -2: Investor Returns from Mutual Funds 10 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

11 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 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 12 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 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 • Professional management • Liquidity • Low transaction costs • Uncomplicated investment choices 13 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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 14 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Figure 15 -3: The Wisdom of Automatic Dividend Reinvestment 15 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Unique Mutual Fund Services • Telephone and internet exchange privileges – Exchange (or switching, conversion, or transfer) privilege • Automatic investment • Effortless establishment of retirement plans 16 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Unique Mutual Fund Services • Beneficiary designation • Multiple income withdrawal options (or systematic withdrawal plans) 17 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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) 18 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 19 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Learning Objective #2 Differentiate mutual funds by investment objectives. 20 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Mutual Fund Objectives • Managed Funds • Mutual fund objectives: Income, growth, and growth and income. 21 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

22 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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 23 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Fund Objectives, Types, and Characteristics • Funds with a Growth Objective – Aggressive growth (or maximum capital gains) funds – Growth and income funds – Value funds – Large-cap, midcap, small-cap, and microcap funds 24 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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 25 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Fund Objectives, Types, and Characteristics • Funds with a Growth and Income Objective – Growth and income funds – Equity-income funds – Socially conscious funds – Balanced funds 26 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Fund Objectives, Types, and Characteristics • Funds with a Growth and Income Objective – Asset allocation funds – Life-cycle funds – Mutual funds 27 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 28 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 29 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Concept Check 15. 2 • Distinguish between asset allocation and target-date funds. • Explain why investors like index mutual funds. 30 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 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. 31 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 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 32 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 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 33 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Load and No-Load Funds • Some no-load mutual funds assess 12 b-1 fees. – 12 b-1 (or distribution) fee – Trailing commissions 34 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Load and No-Load Funds • Many funds also assess deferred load and redemption fees. – Deferred (or back-end) load – Redemption charge (or exit fee) 35 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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? 36 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 37 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Learning Objective #4 Establish strategies to evaluate and select mutual funds that meet your investment goals. 38 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as 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 39 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Table 15 -1: Mutual Fund Performance 40 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

How to Select the Funds in Which You Should Invest • Review your investment philosophy and investment goals. • Eliminate funds inappropriate for your investment goals. 41 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Figure 15 -5: Balancing Risk and Returns on Mutual Funds 42 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 43 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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) • http: //screener. finance. yahoo. com/funds. html • http: //screen. morningstar. com/Fund. Selector. AOL. html – Profile prospectus (or fund profile) 44 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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 45 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Figure 15 -6: How Mutual Funds Are Quoted 46 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 47 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 48 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

Worst Financial Blunders in Investing in Stocks and Bonds 3. Chase performance by investing in “hot” funds. 49 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 50 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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. 51 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or an a password-protected website for classroom use.

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