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Investing in Mutual Funds

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by

Stephanie Pape

on 27 June 2013

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Transcript of Investing in Mutual Funds

MUTUAL
FUNDS

investing in
A Mutual Fund is...
A financial services organization that receives money from shareholders and invests it on their behalf in a portfolio of securities.
When an investor buys shares in a mutual fund,
they actually become part owners of a widely diversified portfolio of securities.
Pooled Diversification: individuals
pool their resources for the collective
benefit of all contributors
Why invest in Mutual Funds?
1. Diversification
Diversification is the primary motive for investing in a mutual fund
If you have small amount of money to invest, achieving diversity in your portfolio can be very difficult.
With a mutual fund, you end up owning part of a well diversified portfolio of securities, and you greatly reduce your risk exposure.
2. Professional Management
3. Financial Returns
4. Convenience
Full time experts manage the funds.
These professionals should know way more than the average investor.
Mutual funds have provided relatively attractive returns in the long run.
Can be purchased almost anywhere.
Don't require much capital.
Downside?
No choice in security selection or sale of securities.
Management and Purchase fees
Each fund is a separate corporation or trust owned by shareholders

Management company - runs daily operations
Investment advisor - oversees portfolio
Distributor - sells fund shares
Custodian - safeguards fund’s assets
Transfer agent - executes transactions and maintains shareholder records

How Mutual Funds are Organized and Run

Question
Which of the following is NOT a reason to invest in a Mutual fund?
Open-End Investment Companies
(also known as a Mutual Fund)
Investors buy and sell shares from the fund itself – no trading among individuals
Unlimited number of shares
Price based on current market value
Closed-End Investment Companies
Regularly also called a mutual fund
Operate with a fixed number of shares, like a normal corporation
All trading is done between investors on the open market.

Net Asset Value (NAV)

Calculated at least once a day.

Represents the underlying value of a share of stock in a particular fund.
NAV =
current price of fund assets - liabilities
number of outstanding shares

Exchange Traded Funds (EFT)
A mutual fund traded on a stock exchange
Indexed fund-set up to match the performance of certain stocks
Number of outstanding shares can increase/decrease like an open-end mutual fund
Cost Considerations
Load Fund
Low-load Fund
Back-end Load
No-Load fund
12(b)-1 fee
Management Fee
Mutual Funds are required by the SEC to fully disclose all of their fees.
No Load funds are generally the best option
Maximum Allowable Fees
8 1/2%
Fees collected regardless of a funds performance
Growth: focus on capital accumulation, long term, for the aggressive investor.
Aggressive Growth: highly speculative, stocks of small unseasoned companies, very risky
Value: stocks of stable undervalued undiscovered companies. Better for more conservative investors.
Balanced: hold a balance of stocks and bonds, bonds for current income and stocks for long term capital growth

Types of Funds
Services Offered by Mutual Funds
Automatic Reinvestment Plan - fund earnings and distributions automatically reinvested in additional shares of fund
Automatic Investment Plan - mutual fund periodically drafts money from investor's bank account
Regular Income - fund automatically pays out predetermined amount to investor
Conversion Privileges - shareholders easily move from one fund to another within the fund family

Returns consist of
Dividend/interest income
Realized capital gains distributions from sale of fund’s assets
Change in fund's share price
Mutual Fund Performance

Question
a. Diversification
b. Professional Management
c. Control over securities in the fund
d. Financial Returns
e. Convenience
A firm that can issue an unlimited number of shares that it buys and sells at a price based on the current market value of the securities it owns is known as...

a. Open-end investment company
b. Closed-end investment company
c. Exchange traded fund
Types of Funds
Money Market
Index
Sector
Socially Responsible
International
Asset Allocation

Equity-Income
Growth & Income
Bond
Question
What fund holds a portfolio of both stocks and bonds and generates a well-balanced return of current income and long-term capital gains?
a. Growth Fund
b. Balanced Fund
c. Value Fund
d. Bond Fund
Past performance does not
guarantee future returns!
but it can give you a sense of historical risk of the fund
Full transcript