A Presentation on Mutual Funds: <![CDATA[ A Presentation on Mutual Funds]]> Questions to start with : <![CDATA[ Questions to start with What is a mutual fund?
How does one compute the net asset value (NAV)?
What expenses and charges might a mutual fund investor face?
What does research on mutual fund performance tell about fund expenses, portfolio turnover, and returns?]]> Questions to start with : <![CDATA[ Questions to start with What is a good procedure for determining which mutual funds to purchase?
When might it be appropriate to sell shares in a mutual fund?
What are the similarities between mutual funds and some other managed investments?]]> Mutual Fund Growth: <![CDATA[ Mutual Fund Growth Mutual funds have become very popular investment vehicles.
Nearly $7 trillion in total assets in 2000 vs $13 trillion in NYSE in 2002.
Total assets have grown 600% since 1990.]]> What is a mutual fund?: <![CDATA[ What is a mutual fund? Mutual funds are open-end investment companies.
The fund sells shares to the public and invests the proceeds in a pool of funds, which are jointly owned by the fund’s investors.]]> Computing Net Asset Value: <![CDATA[ Computing Net Asset Value For investors, the performance of their investment depends on what happens to the fund’s per share value, or net asset value (NAV).
NAV= Market Value of Assets – Liabilities
Number of Shares Outstanding
NAV1=NAV0+All Incomes-All Distributed
Example: NAV0=Rs.100, Distributed 1) Net Realized Gains=Rs.2 and 2) Net Investment Income=Re.1.
NAV1= Rs.100-Rs.2-Re.1=Rs.97]]> Mutual Fund Management: <![CDATA[ Mutual Fund Management Most funds are started by investment management companies who hire the fund manager to make investment decisions.
Fidelity, Vanguard, etc.
Usually offer many different funds and allow investors to switch between funds.
Funds (open-end) sell additional shares to those who want to invest, redeem shares at the NAV (less any fees) to those who want to sell their shares.]]> Why invest with mutual funds?: <![CDATA[ Why invest with mutual funds? Liquidity
Funds buy and sell their own shares quickly, even if fund investments are illiquid
Small minimum investment buys a typically well-diversified investment
Professional management and record-keeping
Expertise and services]]> Why invest with mutual funds?: <![CDATA[ Why invest with mutual funds? Choice and flexibility
Families of funds offer a variety of investments to match investor needs
Some funds track a broad market index which insures that investors will earn the “market return”
Increasingly popular mutual fund alternative]]> Mutual Fund Drawbacks: <![CDATA[ Mutual Fund Drawbacks Active trading contributes to high costs which lower fund returns
Tax consequences can be a disadvantage
Tax impacts of asset trading are passed through to investors
Tax bill can be large even when the NAV falls]]> Mutual Fund Returns: <![CDATA[ Mutual Fund Returns Three sources of return:
Income distributions (ID)
Bond interest, stock dividends
Capital gain distributions (CGD)
Realized gains/losses from selling assets
Changes in NAV (DNAV)
From unrealized gains/losses from assets]]> Mutual Fund Returns: <![CDATA[ Mutual Fund Returns Return = (ID + CGD –Payments + DNAV)/Beg.NAV
Ex. NAV0=Rs.35,NAV1=Rs.35.2, Net Realized Gain Rs.2, Net Investment Income =Rs..5. Return= (2+.5+35.2-35)/35=7.714%
Most mutual funds allow investors to either receive distributions in cash or to reinvest in additional shares.]]> Types of Mutual Funds: <![CDATA[ Types of Mutual Funds Funds can be classified according to the type of security in which they invest
Taxable Bond Funds
Municipal Bond Funds
Stock and Bond Funds
Money Market Funds]]> Common Stock Funds: <![CDATA[ Common Stock Funds Most popular type of fund
Wide variety with different objectives and levels of risk
Industry or sector funds
International or Global
Equity Index funds]]> Taxable Bond Funds: <![CDATA[ Taxable Bond Funds Generally seek to generate current income with limited risk
Can vary by maturity
Short-term, Intermediate-term, Long-term
Can vary by type of bond
Bond Index funds]]> Municipal Bond Funds: <![CDATA[ Municipal Bond Funds Provide investors with income exempt from Federal taxation
Often concentrate on single states to avoid state income taxation as well]]> Stock and Bond Funds: <![CDATA[ Stock and Bond Funds Seek to provide a combination of income and value appreciation.
Balanced funds (60% equity+40% of debt securities) Goal: to conserve principal, by maintaining a balanced portfolio of both stocks and bonds
Blended funds: Mutipurpose funds(e.g., balanced target maturity, convertible securities that invest in both stocks and bonds
Flexible funds: Flexible income, flexible portfolio, global flexible and income funds, that invest in both stocks and bonds]]> Money Market Funds: <![CDATA[ Money Market Funds Provide safe, current income with high liquidity
Invest in money market securities
T-bills, Bank CD’s, Commercial paper, etc.
NAV stays at Re.1; income either paid out or reinvested daily
Provide an alternative to bank deposits, but not FDIC insured]]> Mutual Fund Innovations: <![CDATA[ Mutual Fund Innovations Life-stage funds
Offer different mixes of securities based on the age of the investor
Offer a wide variety of funds with “one-stop” fund shopping
Transfer services between funds
Expenses/fees can be high]]> Mutual Fund Prospectus: <![CDATA[ Mutual Fund Prospectus Must be available to investors and should be review by investors.
Fund’s investment objective
Principal risks faced by investors
Recent investment performance
Expenses and fees
Lots of other detailed information]]> Mutual Fund Expenses and Considerations: <![CDATA[ Mutual Fund Expenses and Considerations Loads
Commission to the broker to financial advisor who sold the fund to the investor
For load funds, the offer price is the fund’s NAV plus the load (while no-load funds are sold at their NAV)
Ex. 4% load with NAV Rs.96, buy at Rs.100
Load range from around 3% (low-load) to 8.5%
12b-1 Fees: pay to the distributor (.25%-.75% )+ .25% servicing charge in some cases)
Fees deducted from the asset value of the fund to cover marketing expenses
An alternative to loads]]> Slide22: <![CDATA[ Offering Price= NAV/(1-load %).
Investing Rs.1,000 in a load MF with 7% and expected return of 10%,
Rs.value=1000(1-.07)(1.10)=1023 (2.3% growth)
Investing Rs.1,000 no load MF with 8% return and 2% redemption fee,
Rs.value=1000(1-0)(1.08)(1-.02)= 1058.4 (5.84% growth)
]]> Mutual Fund Expenses and Considerations: <![CDATA[ Mutual Fund Expenses and Considerations Deferred Sales Loads
Redemption charges when fund shares are sold (rather than when purchased)
Often high (5-7%) if shares are sold within the first year, but then fall over time, perhaps even disappearing eventually
Many funds offer several different classes of shares (A-B-C) with different fee structures
Best choice usually depends of investment horizon]]> Mutual Fund Expenses and Considerations: <![CDATA[ Mutual Fund Expenses and Considerations Management Fees
Fees deducted from the fund’s asset value to compensate the fund managers
Some adjust fees according to the fund’s performance
Adding all fees and calculating expenses as a percentage of the fund’s asset]]> *Mutual Fund Expenses and Considerations: <![CDATA[ *Mutual Fund Expenses and Considerations Portfolio Turnover
Not an explicit cost, but very important determinant of shareholder returns
Trading costs rise with turnover
In order for high turnover to pay off, fund managers must be successful in their active trading strategies
Sources of Information
Wall Street Journal, Business Week
Fund history, tax efficiency, risk analysis]]> Holding Period for a Portfolio: <![CDATA[ Holding Period for a Portfolio Portfolio Turnover
Holding Period = 12 months/(Portfolio Turnover%)
Ex Turnover 125%=>12/1.25=9.6 month
]]> Mutual Fund Return and Risk Performance: <![CDATA[ Mutual Fund Return and Risk Performance Return Performance
On a risk-adjusted basis, the average stock fund under-performs market averages
While portfolio managers seem to out-perform the market before expenses, net returns are below the market index
Some above-average performers over short time horizons, but such performance is not generally sustained (just luck?)
These results help to explain the growing popularity of index funds]]> Mutual Fund Return and Risk Performance: <![CDATA[ Mutual Fund Return and Risk Performance Risk Performance
While returns are not consistent, risk is
Objectives lead to strategies that lead to varying degrees of investment risks
Return is positively related to the level of risk
Risk is therefore an important consideration]]> Mutual Fund Return and Risk Performance: <![CDATA[ Mutual Fund Return and Risk Performance Fees and expenses: Do higher fees pay off?
Investment performance is no better (and perhaps worse) for load funds vs. no-load
Expenses lower returns in predictable ways – lower expense funds give better returns
Turnover affects returns in several ways, including taxes – high turnover means more short-term realized gains
Tax efficiency is an important consideration – after-tax returns may be 30-40% less than pre-tax]]> Mutual Fund Investment Strategies: <![CDATA[ Mutual Fund Investment Strategies Choose in funds consistent with your objectives, constraints, and tax situation.
Consider index funds for a large portion of your fund portfolio.
When possible, invest in no-load funds with below-average expense and turnover ratios.
Invest at least 10-20% in international or global funds.
Own funds in different asset classes and consider life-cycle investing.]]> Mutual Fund Investment Strategies: <![CDATA[ Mutual Fund Investment Strategies If you actively manage your portfolio, consider the past year’s “hot funds.”
Do not attempt to time the market; timing strategies add little except costs and risk.
Use dollar cost averaging by investing a set dollar amount each month.
Avoid investing money shortly before the capital gain distribution dates (prospectus).
Do not own too many funds. You will get average returns with high expenses.]]> When should you sell a mutual fund?: <![CDATA[ When should you sell a mutual fund? Personal considerations
Portfolio rebalancing points due to life cycle considerations
Be aware of the quick trigger, selling on the first dip in NAV; think long-term
Be aware of capital gains with selling fund shares
Change in portfolio manager
Change in investment style
Fund is growing “too large” or “too fast”
Persistent bad performance.]]>