FIN 331-Chapter 13

Balanced Funds

-hold a balanced portfolio of of both stocks and bonds to have a balanced return of current income and long-term capital gains -in many ways like equity-income funds, except balanced funds put more into fixed-income securities -30-40% in bonds --more income-oriented it will be -high-grade securities, so its a relatively safe form of investing - can earn you a competitive rate of return w/o a lot of price volatility

Types of Funds (13)

-growth -aggressive growth -value -equity-income -balanced -growth-and-income -bond -money market mutual funds -index -sector -socially-responsible -international -asset-allocation

Aggressive Growth Funds

-highly speculative investments that seek large profits from capital gains, pretty much extension of a growth fund -know as "capital appreciation funds" -buy stocks of small, unseasoned companies, stock with high P/E multiples, stock with high price volatility -buy stocks on margin by borrowing part of the purchase price -MOST VOLATILE OF ALL FUND TYPES -when the markets do well, they do well, if the market is at a loss, the fund is at a loss

Services Offered by Mutual Funds

-AUTOMATIC INVESTMENT PLANS: an automatic savings program that enables an investor to channel a set amount of money systematically in a mutual fund, can be a payroll deduction or transferred from a checking account -AUTOMATIC REINVESTMENT PLANS: a plan that gives share owners the option of electing to have dividends and capital gains distributions reinvested in additional fund shares, supports earning interest on interest -CONVERSION PRIVILEGE: (or exchange) allows investors to switch from one mutual fund to another within a family of funds -only restriction is it is confined to the same family of funds (ex. remain in fidelity) -attractive bc they are easier and less costly to shift money across sectors and industries -fallback: taxes are liable -Retirement Plans: mutual funds offer IRA's and other retirement accounts that are tax- deferred, the fund handles all administrative details

Choosing Between Mutual Fund of ETF

-ETF's have a narrow focus(a single sector, or index) -mutual funds invest in many different stocks -ETF's trade less than the average actively managed mutual fund -ETF's have lower costs than mutual funds -ETF's are often better for investors using discount brokers, for those investing a large sum of money and a long-term horizon

Types of Bond Funds (7)

-GOVT BOND FUNDS: invest in US treasury and agency securities -MORTGAGE-BACKED BOND FUNDS: put money into various types of mortgage securities, provide more diversification, more affordable way to get into these funds, allows investors to reinvest their principal portion of monthly cash flows to let them preserve their capital -HIGH-GRADE CORPORATE BOND FUNDS: invest in investment-grade securities rated BBB or better -HIGH-YIELD CORPORATE BOND FUNDS: risky investments that buy junk bonds for the yields that they offer which can be higher than standard bonds -CONVERTIBLE BOND FUNDS: invest primarily in domestic and possibly foreign securities that can be converted or exchanged into common stock -MUNICIPAL BOND FUNDS: invest in tax-exempt securities & are suitable for investors who are looking for tax-free income, can be in high-grade or high-yield funds -single state fund: invests in municipal issues of one state and produces income interest income thats fully exempt from federal taxes and state taxes

FEES

-Low-loads funds (front-end loaded fees): commission of 2 or 3 percent charged when purchases, charge up front -Back end loaded fee: also known as a redemption fee, aka at the end when you redeem it -per SEC, maximum total amount of fees is 8.5% -No-load funds do not charge a front-end transaction fee -12b-1 fees: annual fee to offset promotion and selling expenses . May be 1 percent of total assets under management -Management fees: cost to hire a professional manager to run the funds portfolio of investments. The annual fee ranges from less than 0.5-4% of assets under management. The fee is unrelated to the performance of the funds so good or bad, the manager gets paid regardless IMPACT OF FEES: reduces the return on your investment

2 categories of Mutual Funds

-Open-End Investment Companies: commonly called mutual funds, shares are purchased from and sold back to company --new shares issued as money flows in --net asset value (NAV) is quoted price --more than 10% of mutual funds are in open-end investment companies -Closed-End Investment Companies: --have fixed number of shares --trading between investors in market --shares are listed and trade at a discount or premium to NAV -as more $ goes in, it goes out again to invest again

Why invest in Mutual Funds?

-Pooled diversification: process whereby investors buy into a diversified portfolio of securities for the collective benefit of individual investors -Financial Returns: investors hope the mutual fund will achieve higher returns than they can generate on their own -Convenience: easy to purchase mutual funds and the fund handles all the tax reporting and record keeping -BUTTTT investor has no control over buying or selling of securities (passive investors) -"don't put eggs in one basket"

Mutual Fund

-a financial services organization that receives money from its shareholders (us) and invests those funds on their behalf in a diversified portfolio of securities -more ppl invest in this, investment vehicle of choice -good for ppl with little knowledge, beginning investors -limited investment capital -cannot buy during the day, can only by after hours after the market closes at 4pm -don't make any of the decisions, the investors who are more knowledgable do it for us, we give them the money and they do everything -not taxable entities

Socially Responsible Funds

-active, explicit consideration of moral, ethical and environmental issues -invests only in companies meeting certain moral, ethical, and environmental criteria -don't buy into stocks with alcohol, tobacco, or gambling

Exchange Traded Fund (ETF)

-an investment company whose shares trade on stock exchanges; unlike mutual funds, ETF shares can be bough or sold (or sold short) throughout the day. -ETF's are usually structured as an index fund thats set to match the performance of a certain market segment. Like a mutual fund, allows investor to achieve diversification with professional management of funds -shares are traded when the stock market is OPEN -they out perform MUTUAL FUNDS -traded on listed exchanges like closed end funds -number of shares change like open end funds -like stock may be traded throughout the day, the market sets the price

Index Funds

-buys and holds a portfolio of stocks (or bonds) equivalent to those in a market index of s&p 500 -rather than beat the market they simply try to match the market, do this through low-cost investment management -strictly buy and hold -modest amount of dividend income -produce little taxable income from year to year -produce HIGHLY COMPETITIVE RETURNS FOR INVESTORS

Asset Allocation Funds

-decides how you are going to divide your investment amongst different securities -since people have such a hard time allocating funds theres asset allocation funds -spread investors money across all different types of markets (bonds, stocks, and money market securities) -include gold and real estate -need a money manager, but doesn't mean he always makes all the right decisions, so it is risky -as market conditions change over time, the asset allocation mix also changes -

Equity-Income Funds

-emphasize current incomes -invest in high-yielding common stock -main goal: preserving capital & increasing capital gains -invest in high-grade common stocks, convertible securities, preferred stock and even junk or foreign bonds -hold higher-quality securities that are subject to less price volatility than seen in the market as a whole -low risk

Money Market Mutual Funds

-invest in a widely diversified portfolio of short-term money market instruments -popular with investors -several different kinds of money market mutual funds such as: --general purpose money funds: invest in any and all types of money markets - from treasury bills to corporate commercial paper and bank certificates of deposit, most $ funds are this type, any type of short-term investment vehicle --tax-exempt money fund: limits its investments to tax-exempt municipal securities with very short (30-90 day) maturities --govt securities money funds: investors need for safety, eliminate risk of default -highly liquid investments -low in risk bc immune to capital loss -interest income they produce to return to shareholders is dependent on interest rate conditions, so shareholders are subject to ups and downs of market interest rates

Value Funds

-invest in stocks considered to be undervalued in the market, that have the potential for growth -look for stocks that are yet to be discovered but are fundamentally sound -IN CONTRAST to growth funds, they look for stocks with low P/E ratios, high dividend yields, and moderate amounts of financial leverage, less risky than growth -involves looking at corporate financial statements

Bond Funds

-invest in various kinds of fixed income securities -invest mostly in income but they do not ignore capital gains -more liquid -offer a cost effective way of achieving a high degree of diversification in an expensive investment -automatically reinvest interest and other income therefore the investor can earn fully compounded rates of return -highly conservative form of investing -are risky because prices of the bonds fluctuate with changing interest rates -7 types of bond funds

International Funds

-mutual fund that does all or most investing in foreign securities -provide more diversity and go wherever the action is

Net Asset Value (NAV)

-price per share of the mutual fund -total market value of all securities held in funds portfolio less liabilities, divided by number of shares outstanding -will fluctuate in value as underlying shares of stock owned by the fund go up or down -only determined at the end of the trading day -this is the quoted price for the next day of trading

ETF's Performance

-primary reason is to invest in the INDEX -major performance criteria is how well the ETF matches the performance of the index it is tracking -primary statistic is R squared -closer to 100, the better the correlation b/s ETF and the index

Sector Funds

-restricts its investments to a particular sector of the market -concentrate investment holdings in the one of more industries that make up the targeted sector -INVESTMENT OBJECTIVE IS CAPITAL GAINS -similar to growth funds -rather than diversifying you can just put your money where the action is rn

Mutual Fund Performance

-return consists of: dividend income, capital gains distribution, and change in funds share price -past performance does not guarantee future returns, but recent past is a predictor of the future -change in value indicates realized and unrealized capital gains, includes gains on stock that has not been sold -tax efficiency of fund is indicated by the reported realized capital gains

Growth-and-Income Funds

-similar to balanced funds -seek a balanced return made up of current income and long-term capital gains -put more of an emphasis on GROWTH OF CAPITAL -put most money in equities: 80-90% in common stocks -lots of growth oriented blue-chip stocks in their portfolio -risky -suitable for investors who can tolerate their risk and price volatility

Growth Fund

-the objective is capital appreciation -long-term growth and capital gains are the primary goals -invest in common stocks wit above-average growth potential -involve a fair amount of risk -viewed as long-term investment vehicles for aggressive investors who want to build capital and have little interest in current income