X MUTUAL FUNDS.ppt by suchufp


									X. MUTUAL FUNDS
A. The Mechanics of Mutual Funds
1. Mutual funds pool money from many
2. Mutual fund investors own a part of all of the
   securities in the mutual fund “pool”
3. The fund manager is responsible for tracking
   the securities in the pool
4. Profits are paid in two ways:
  a. Income Distributions – Dividends and interest paid
     by the underlying securities are subsequently paid
     to investors
  b. Capital Gains Distributions – Payment to investors
     of profits obtained from sales of securities
  A. The Mechanics of Mutual Funds

5. Passive Funds – Primarily index funds
6. Active Funds – Run by a professional
   manager – active funds have:
  a. Professional managers
  b. An investment objective, and
  c. An investment program designed to meet
     the investment objective
  A. The Mechanics of Mutual Funds
7. Open and Closed End Funds
  a. Open end – sold by brokerage firms and by
     fund distributors, issues or purchases
     shares depending upon demand, uses client
     funds to buy or sell securities
  b. Closed end – raise money only once, invest
     in a variety of securities, and offer a fixed
     number of shares – traded Over the
     Counter or on the market – price varies
     with the price of the underlying securities
     and with market demand (discount or
     premium from Net Asset Value)
1. Stock Funds – invest in equity securities, can
   be growth, value, dividend, sector, market
   cap, etc.
2. Bond Funds – invest in Treasury bonds,
   municipal bonds, passive trading of securities,
   active trading of securities, high yield bonds,
   corporate bonds, etc.
3. Commodity Funds – invest in stocks of
   commodities or in commodity futures
4. Balanced Funds – contain a mix of stocks and
   bonds (generally 60% stocks, 40% bonds)

5. Target Date Funds – change investment
   allocation as a target date approaches
   (ex. - §529 funds)
6. Money Market Funds – cash equivalent
   securities – like a savings account
7. International Funds – invest in Europe,
   China, Asia, Far East, Latin America,
   emerging markets, etc.
8. Miscellaneous – socially responsible
   funds, sin funds, green funds, etc.
          C. DEFINITIONS
1. Turnover Rate – the number of times per
   year that the equivalent of all of the
   underlying securities in the fund are
   purchased or sold
2. Volatility – the historic deviation of rates of
   return above and below the average rate of
3. Prospectus – similar to a stock prospectus,
   explains fund objectives, investment
   strategy, fees, historic before and after tax
   returns, and fund risk profile
            C. DEFINITIONS
4. Net Asset Value (NAV) –
   (market cap of fund shares + accrued
   interest + accrued dividends – accrued
               number of fund shares

5. Premium – The price of a share of a closed
   end mutual fund minus the share Net Asset
   Value – exists where demand for fund shares
   exceeds the value of the underlying holdings
            C. DEFINITIONS
6. Discount – Where the shares of a closed end
   fund trade below the fund’s net asset value,
   exists where demand is less than the value of
   the underlying holdings
7. Liquidity – The ability to get “into” and “out
   of” an investment (buy and sell) – ETFs are
   generally highly liquid, mutual funds are not
8. Diversification – Where a fund holds a variety
   of securities
              C. DEFINITIONS
9. Rating – An independent analyst’s opinion of
   how the fund has performed compared to
10.Ranking – The relative standing of a mutual
   fund compared to others with similar
   investment strategies
11.Sharpe Ratio – Calculated as a fund’s rate of
   return – the rate of return on 3 month
   Treasury bills divided by the standard
   deviation of fund returns

Sharpe Ratio = (Fund Return – 3 mo. Treasury Yield)
                 Standard Deviation of Fund Returns
12.Standard Deviation – The amount
   by which the annual returns of a
   fund vary above and below the
   fund’s average return
13.Rating Firms:
  a. Standard and Poors
  b. Morningstar
  c. Lipper
             C. DEFINITIONS
14.Fund Style
  a. Growth/Blend/Value – Invests in growth stocks, a
     blend of growth and value stocks, and value stocks
  b. Dividend (Yield) – Invests in securities with the
     highest dividend payments
  c. Contrarian – Against the accepted (current trend)
     in management
  d. Style Drift – When a fund manager changes styles
     to make up for below market returns
15.Portfolio Overlap – Where a holder of several
   mutual funds owns duplicate underlying
   shares of stock
Fees have the greatest impact on fund
   returns other than the manager’s

1. Sales Charges (Loads)
  a. Front End Load – A sales charge on fund purchase,
     reduces the number of shares purchased
  b. Back End Load (Redemption Fee or Contingent
     Deferred Sales Charge) – Paid when shares are
     sold – usually declines to 0 after 5-7 years –
     designed to prevent investor “churn”
2. Fund Classes
  a. A = Front end load
  b. B = Back end load
  c. C = Level load – no sales charges, but
     higher fees than A or B – higher
     annual fees and charges instead of
     front end or back end loads
3. Exchange Fees – A charge for
   moving assets between different
   funds issued by the same group
4. Early Redemption Charge – Exit fee, can
   be 5 days to 1 year
5. Breakpoint – A point where more money
   is invested to reduce the front end load
  a. Right of Accumulation – Where an investor
     can combine past and new investments to
     reach a breakpoint
  b. Letter of Intent – A promise by the investor
     to increase the amount invested to reach a
6. Other Types of Fees – Total annual fees
   are quoted as an “Expense Ratio” –
   must be listed in the fund prospectus,
   generally range from 0.1% to 2.75%
  a. 12-b 1 Fees – Marketing and distribution
     expenses – limited by NASD rule to 1% of
     assets per year or less, with marketing fees
     at 0.75% or less; and with shareholder
     services capped at 0.25% of assets
  b. Management Fees – Charge to pay the
     advisory firm that invests fund assets

1. Percentage change in share price
   (market value) is the measure of fund
   returns for closed end funds

Percentage        Closing Share Price
Rate of Return=   Opening Share Price   -1
2. Net Asset Value = Value of Fund Investments
                          Number of Shares

Percentage        Closing Net Asset Value
Change in NAV =   Opening Net Asset Value   -1
3. Distributions – Can be both interest
   (dividends and interest on investments)
   and capital gains (mutual fund’s gain
   from sale of underlying investments)

4. Yield = Distribution per Share
              Price per Share
5. Total Return = Change in NAV + Distributions
                    Cost of Initial Investment
  a. Reported as a geometric mean, taking into
     account annual compounding of
  b. Must be viewed in comparison with
     standard indices or with indices of
     competing funds with a similar investing
               F. ANNUITIES
1. Defined as an investment contract between
   the purchaser and an insurance company,
   funded (money invested) either by a lump
   sum or by a series of scheduled payments
2. Types of Annuities
  a. Fixed annuities – interest rate set upon purchase
  b. Variable annuities – contain a selection of sub
     accounts, with the yield on the annuity varying
     depending upon the investment performance of the
     types of securities represented in the sub account
             F. ANNUITIES
3. Advantages of annuities over mutual
  a. Income taxes – no income taxes are paid
     on capital gains until the annuity matures
     (presumably when the investor is retired
     and in a lower tax bracket)
  b. Withdrawals from an annuity, unlike
     withdrawals from a pension plan or an IRA,
     can be postponed until after age 701/2,
     allowing transfer of wealth to heirs
         F. ANNUITIES
c. Special types of annuities (ex. §403(B)
   annuities) are tax deferred for both
   contributions and interest
d. Annuities may contain a death benefit,
   which is a guaranteed payment upon
   death regardless of market conditions
           F. ANNUITIES
4. Disadvantages of annuities
  a. Annual fees are generally higher than
     mutual fund annual fees as a
     percentage of the amount invested
  b. Surrender fees – a back end load,
     generally starting at 7% for the first
     year, declining by 1% per year
           F. ANNUITIES
5. Annuity ratings
  a. As an insurance product, the state of
     issue may guarantee the company’s
     obligations, including annuities, in the
     event that the company becomes
     insolvent (goes bankrupt)
  b. The insurance companies issuing
     annuities are rated by Standard and
     Poors and Morningstar

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