Mutual Fund Lesson #1 PDF

LESSON # 1: BASICS OF MUTUAL FUND By: CHERRY B. LANTICAN, MBA  “AN INVESTMENT IN KNOWLEDGE PAYS THE BEST INTEREST” BENJAMIN FRANKLIN LEARNING OUTCOMES: 1. Describe what an investment company is 2. Compare and contrast open-end and closed end companies 3. Define mutual funds a...

LESSON # 1: BASICS OF MUTUAL FUND By: CHERRY B. LANTICAN, MBA  “AN INVESTMENT IN KNOWLEDGE PAYS THE BEST INTEREST” BENJAMIN FRANKLIN LEARNING OUTCOMES: 1. Describe what an investment company is 2. Compare and contrast open-end and closed end companies 3. Define mutual funds and explain how they work 4. Describe a professional fund manager and explain his role in mutual fund investment 5. Determine where and how the funds are invested 6. Analyze the factors that affect mutual fund share prices 7. Explain how mutual funds are regulated Example: Let us say investors Jay-Ar and Airene were both convinced to invest in mutual funds. Jay-Ar started by investing Php.50,000.00 while Anna invested Php.100, 000.00. They both invested in the same fund at the same time. They money will be added to the pool and invested by the fund manager. A year later, the mutual fund performed well. The return equals 8% after taxes and fees are deducted. At this point, Jay-Ar’s investment should be equal to Php.54,000.00 if he decided to withdraw his funds. Airene’s investment on the other hand, should be equal to Php.108, 000.00 Both investment funds grew by 8%. However, just because Airene invested double the amount of money, she gets double the returns. When a person invests in mutual funds, he or she buys shares of the mutual fund company. The mutual fund company invests the pooled funds to various securities of top companies. In the Philippines, these companies may include country’s biggest corporations such as SM, PLDT, BDO, Ayala, Jollibee, and others. The number of shares he gets depends on the amount he invests and the price of the mutual fund shares or the so called “NAVPS” or Net Asset Value per Share. In the given example, Jay-Ar invests Php.50,000.00. Let us say that the Net Asset Value per Share is Php.1.00. At this price, Jay-Ar will get Php.50,000.00 shares. For Jay-Ar’s investment to go up by 8% at the end of the year, then the NAVPS should go up to Php.1.08. For it to go up by 15%, then the NAVPS should go up to Php.1.15. You would earn from the increase of the price of each share. Such increase is caused by the gains derived from all dividends, rise in the value of its stock portfolio, and/or interests. The NAVPS varies per Mutual Fund Company For RESEARCH: Look for the TOP 30 companies listed in the index. Name Ticker Category Where is the Funds Invested? Each mutual fund has a specific underlying asset. Basically, an equity fund for example is solely invested in the Philippine Stock Market. A bond fund is invested in the Philippine Bond Market. Mutual funds are commonly classified according to their underlying assets and the criteria for choosing where the assets should be invested. Performance Task: 1. How might investing in mutual funds compare to keeping money in a savings account in terms of potential financial security and growth? Explain your thoughts. 2. In what ways do you think the role of a professional fund manager impacts the performance and appeal of mutual funds for investors? 3. How could the factors affecting mutual fund share prices influence an investor's decision-making process when choosing a fund? 4. Discuss some potential advantages and disadvantages of mutual funds being actively managed versus passively invested. 5. How might the regulation of mutual funds by the Securities and Exchange Commission (SEC) affect investor confidence? Elaborate on your perspective.