Personal Finance Unit 3 Chapter 10 2007 GlencoeMc

Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 0

Section 10. 3 Mutual Funds Main Idea Based on its name, what do you think is the definition of a mutual fund? Understanding the many kinds of mutual funds will help you decide which funds might be smart investments for you. Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 136

Section 10. 3 Mutual Funds Defining Mutual Funds A mutual fund is an investment alternative in which investors use the services of professional managers to pool their money to buy: § Stocks § Bonds § Other securities By buying shares in a mutual fund, even an investor with limited resources can own part of an entire portfolio of diverse securities. Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 2

Section 10. 3 Mutual Funds Why Investors Buy Mutual Funds Reasons for purchasing a mutual fund include: § Professional management § Diversification § Reduction of shareholders’ risk Because of these advantages, mutual funds have become extremely popular investments. Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 3

Section 10. 3 Mutual Funds Types of Mutual Funds An investment company is a firm that invests the pooled funds of many investors in various securities. The firm receives a fee for this service. Mutual funds managed by investment companies are classified as: § Closed-end funds § Open-end funds Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 4

Section 10. 3 Mutual Funds closed-end fund a mutual fund with a fixed number of shares that are issued by an investment company when the fund is first organized Closed-End Funds About 6 percent of all mutual funds are closedend funds offered by investment companies. Shares of closed-end funds are traded: § On the floors of stock exchanges § In the over-the-counter market Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 5

Section 10. 3 Mutual Funds open-end fund a mutual fund with an unlimited number of shares that are issued and redeemed by an investment company at the investors’ request net asset value (NAV) the amount that one share of a mutual fund is worth Open-End Funds Most mutual funds are open-end funds. Shares of open-end funds can be: § Bought and sold on any business day by contacting the investment company that manages the mutual fund § Bought and sold at the net asset value (NAV) If you buy shares of an open-end fund from an investment company, you gain access to a wide variety of services. Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 6

Section 10. 3 Mutual Funds load fund a mutual fund for which you pay a commission every time you buy or sell shares Load Funds Mutual funds are classified as either: § Load funds § No-load funds The advantage of a load fund is that the fund’s representatives will offer advice and guidance about when shares of the fund should be bought or sold. Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 7

Section 10. 3 Mutual Funds no-load fund a mutual fund that has no commission fee No-Load Funds No-load funds: § Do not charge commissions when you buy shares § Have no salespeople § Offer the same investment opportunities as load funds Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 8

Section 10. 3 Mutual Funds Management Fees and Other Charges Management fees are a fixed percentage of the fund’s asset value. Instead of charging investors a fee when they purchase shares, some mutual funds charge: § A back-end load, a fee that is charged for withdrawing money from the fund § A 12 b-1 fee, a fee that helps to pay for the marketing and advertising of a mutual fund Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 9

Section 10. 3 Mutual Funds Categories of Mutual Funds It can be helpful to sort mutual funds into three main groups: § Stock mutual funds § Bond mutual funds § Mixed mutual funds The managers of mutual funds match their investment portfolios to the investment objectives of their customers. Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 10

Section 10. 3 Mutual Funds Stock Mutual Funds Most mutual funds are part of the stock mutual funds group. These funds fall into 14 categories, which include: § Aggressive growth funds § Equity income funds § Global stock funds § Growth and income funds § International funds § Large-cap funds § Regional funds § Utility funds Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 11

Section 10. 3 Mutual Funds Bond Mutual Funds Mutual funds in the bond mutual funds group invest only in bonds. The bond fund categories are based on the type of bond the mutual funds purchase and include the following: § High-yield (junk) bond funds § Insured municipal bond funds § Intermediate corporate bond funds § Long-term U. S. bond funds § Municipal bond funds § Short-term corporate bond funds Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 12

Section 10. 3 Mutual Funds Mixed mutual funds invest in a mix of stocks and bonds or in various other types of securities. These funds fall into three categories: § Balanced funds § Money-market funds § Stock/bond blend funds A variety of mutual funds managed by one investment company is called a family of funds. Personal Finance Unit 3 Chapter 10 © 2007 Glencoe/Mc. Graw-Hill 13