Mutual Funds Part 1 PDF

INVESTING IN MUTUAL FUNDS Objectives: 1. To know the definition and objectives of mutual funds. 2. To understand the basic concepts of mutual funds. 3. To learn and calculate investments in the mutual funds. DEFINITION OF MUTUAL FUNDS Ø are an aggregate of stocks, bonds, and assets purchased with mo...

INVESTING IN MUTUAL FUNDS Objectives: 1. To know the definition and objectives of mutual funds. 2. To understand the basic concepts of mutual funds. 3. To learn and calculate investments in the mutual funds. DEFINITION OF MUTUAL FUNDS Ø are an aggregate of stocks, bonds, and assets purchased with money from many investors and typically managed by a portfolio manager and investment experts who research the market and recommend which investments to add to the fund. The pooled money is placed into stocks, bonds, and other holdings. Ø are the most common investment vehicle for individuals because they do not require a lot of money to get started. Ø when putting the money into a mutual fund, it is being thrown into a pot with another couple hundred million of pesos that can go as high as a billion pesos or more. Ø Detailed information about the mutual fund is called prospectus. FEES ASSOCIATED WITH MUTUAL FUNDS Ø Portfolio managers or money managers are paid from a fee within the fund, usually a percentage of the value of the fund. Ø In addition to the portfolio manager’s fee or money manager’s fees, there are several other fees being charged. Ø No-load mutual funds let you avoid paying a sales commission on the transactions. Ø Load funds pay sales commissions to a broker, financial adviser, and insurance consultant. 1. Load funds have front-end loads, deferred sales charges, or back-end loads. Ø Front-end loads are fees paid up front. Example: A 6% front load means you pay 6% of every peso invested as a fee, you invest in the remaining fund. An investment of PHP 100,000 means that PHP 94,000 goes to the fund and PHP 6,000 goes to the salesperson. Ø Deferred sales charge permits the load to be postponed, and it gradually declines over a period of years until the sales charge is 0. Example: If you invest PHP 100,000 in February in a mutual fund with a 5% deferred sales charge, you would pay 5% if you sell the fund the first year, 4% the second year, and so forth until the sixth year, when you could withdraw all the funds without a fee. Ø Back-end loads means you pay a set fee upon the sale of the mutual fund. Example: If you purchase and then sell a fund within too short a time, certain funds will charge a back-end fee, often 1 or 2 % HOW TO BUY MUTUAL FUNDS 1. Call a stockbroker, a professional buyer and seller of investments, and ask about the fund. 2. Go directly to the mutual fund on line. ADVANTAGES OF MUTUAL FUNDS 1. Money can be taken directly from the bank account each month and transferred into a mutual fund. 2. It offers diversification. If you diversified and one or more of your investments hits a slump, you can rely on your other investments to boost your total portfolios. 3. It does not cost much out of pocket to buy mutual fund shares. 4. It carries almost no risk of going bankrupt. This is due to diversification within a fund, a mutual fund is very unlikely to lose its entire value. QUIZ 1. Explain the fees associated with the mutual funds. ANSWERS: 1. Front-end loads - fees paid up front. 2. Deferred sales charge - permits the load to be postponed, and it gradually declines over a period of years until the sales charge is 0. 3. Back-end loads - means you pay a set fee upon the sale of the mutual fund.