11/10/2023

Turn to a neighbor and tell them three

Let’s Review things you know about this fund.

Announcements
❑Assignment #3 is now posted – must complete
Part 1 and Part 2 by November 21st
❑Questions- come to office hours! Dr. Tobe's are
Friday's from 11- Noon in Room 10 Human Ecology

1 2

Fees = Cost of Doing Business Typical Fees Associated with

OUTSIDE THE FUND –
INSIDE THE FUND
COMMISSION
Mutual Fund Investments
1. Money Manager Fee 1. Front End Load – A Shares Type of Fee or Charge Customary Amount
Load fund Up to 8.5 percent of the purchase.
2. 12b-1 Fee 2. Back End Load – B Shares No-load fund No sales charge.

◦ Marketing fee 3. Level Load – C Shares Contingent deferred sales load 1 to 5 percent fee for withdrawals, depending on how long you own
shares in the fund before making a withdrawal.
◦ Printing fee Management fee 0.25 to 1.5 percent per year of the fund’s assets.
4. No Load
◦ Advertising fee ◦ Index funds
12b-1 fee Cannot exceed 1 percent of the fund’s assets per year.
Expense ratio The amount investors pay for all fees and operating costs. Financial
These fees together are the ◦ Utilizing the internet experts recommend funds with an expense ratio of 1 percent or less.

expense ratio Class A shares Commission charge when shares are purchased.
Class B shares Commission charge when money is withdrawn during the first five
◦ 0.2 – 2.5% Good Resource to access: years. Generally, charges decline the longer you own the fund.
SEC – Mutual Fund Fees and Expenses Class C shares No commission to buy or sell shares. These shares may have a small fee
Annual fee http://www.sec.gov/answers/mffees.htm for withdrawals and often have higher ongoing 12b-1 fees.

3 4

Costs: Management Fees and How Important are Fees?

Other Charges
Companies that sponsor funds charge management fees, a fixed percentage of the EXAMPLE: Expense Ratios Make a Difference in Return.
fund’s net asset value on a predetermined date. Assume you invest in two different funds. Each fund returns 10 percent a year. One
• Annual management fees range between 0.25% and 1.5%, with the average being fund has an expense ratio of 1.5 percent; the other fund has an expense ratio of 0.5
0.5% to 1.0%. percent.

Fund Amount Annual Expense Ratio Value of the Investments

Investment firms may also levy a 12b-1 fee, a fee that defrays costs of advertising and Invested Return at the End of 20 Years
marketing a mutual fund.
Fund A $10,000 10% 0.5% $60,858
• These fees are taken out of the fund’s assets and cannot exceed 1% of a fund’s
assets per year. Fund B $10,000 10% 1.5% $49,725

• Typically, this is an ongoing fee that is charged annually. Difference in total return $11,133

Expense ratio is the amount investors pay for all of a mutual fund’s management fees Source: Securities and Exchange Commission, “Mutual Fund Fees and Expenses,”

and operating costs. https://www.sec.gov/fast-answers/answersmffeeshtm.html, accessed February 25, 2020.

5 6

1
 11/10/2023

Load funds are mutual funds in which investors pay a

Examples: Sales Charge and
commission every time they purchase shares.
• May be as high as 8.5% of the purchase price for
Contingent Deferred Sales Load
investments, but average is between 3% and 5%.
• Fees are often waived or lowered for shares purchased EXAMPLE: Sales Charge Calculation (J.P. Morgan Large Cap Growth
for retirement accounts. Fund).
Costs: Load • Fees are often lower for investors who make large The J.P. Morgan Large Cap Growth Fund charges a sales load of 5.25
percent. If you invest $10,000, you must pay a $525 commission to
Funds purchases.
• Advantage is that fund’s sales force will explain the
purchase shares.
Versus No- fund, help you determine which fund is appropriate,
Load charge = Dollar amount of investment  Load stated as a percentage
and offer advice.
Load Funds = $10,000  5.25 percent = $525
Amount available for investment = Investment amount − Load charge
No-load funds are mutual funds in which the individual
investor pays no sales charge. = $10,000 − $525 = $9, 475
Some funds charge a contingent deferred sales load, a fee
(ranging from 1% to 5%) that shareholders pay when they
sell shares in a mutual fund.

7 8

An Example… KEEP Your Money!

A SHARES C SHARES
Let your money work for you and keep as much of it as you can!
$10, 000 Investment (5 yrs) $10,000 Investment (5 yrs)
Inflation: 3 – 6%
5.75 % Commission (assume 10% return each year)
◦ $10,000 * 5.75% = $575 ◦ $10,000 * 1% = $100 Tax on Profits: 15%
◦ $10,000 - $575 = $9,425 ◦ $10,900 * 1% = $109 Money Manager Fee: 2%
◦ $11,881 * 1% = $118
-$575 12(b)1 Fee: 1%
◦ $12,950 * 1% = $129
$9,425 Total Investment ◦ $14,115 * 1% = $141 Load: 5.75%
Approximate Total return -$597
$15,179.06 $9,403 Total Investment
http://investor.gov/tools/calculators/compou Approximate Total Return $13,974
nd-interest-calculator

9 10

Turn to your neighbor…

Assessing Risk
Cheat Sheet posted on D2L – will
not need to know this for the
exam!
Your Turn: What fees are associated with this
fund?

Alpha - Did it outperform the benchmark index? By how

much percent? (goal is positive alpha)
Beta - How much more or less volatile is the fund than the
greater market?
R-squared - Assesses fund movement is due to manager or
market
Standard Deviation - How much the return on the fund is Fund Summary
deviating from the expected returns based on The fund invests primarily in common stocks and seeks to invest in companies that appear to offer
performance? So… Higher SD, Higher the risk superior opportunities for growth of capital. It may invest up to 25% of its assets in securities of
issuers domiciled outside the United States. The investment adviser uses a system of multiple
portfolio managers in managing the fund's assets. Under this approach, the portfolio of the fund is
Sharpe Ratio - Are returns due to smart decisions or too divided into segments managed by individual managers.
much risk? Front Load: 5.75%

11 12

2
 11/10/2023

How to search for mutual funds? The Mutual Fund Prospectus and
Annual Report
Information about mutual fund investments can be accessed:
• Obtain current market values for mutual funds by using a website The prospectus should provide the following:
such as Market watch, MSN Money, or Yahoo!. • Fund objective
• Access the web page of the mutual fund company • Risk associated with the fund
• Historical performance of fund
• Professional advisory services (ie: Morningstar, Inc. or Value Line) • Fund composition
provide detailed information; some may require you pay a fee
• Information about dividends, distributions, and taxes.
• FINRA Fund Analyzer • Fund Family and Fund Manager information
• Business- and investment-oriented magazines (i.e. Bloomberg • Information on limitations or requirements of fund
Businessweek, Forbes, Fortune, Kiplinger’s, and Money) • How to buy/sell shares of fund
• Description of services provided to investors and fees for services.
• Several mutual fund guidebooks and newspapers (like Wall Street
• Information about how often the fund’s portfolio changes.
Journal)

13 14

The Mutual Fund Prospectus

and Annual Report How to Buy Mutual Funds?
Annual report contains the following: For many investors, mutual funds have become the investment of choice.
• A letter from the president of the • May be part of a 401(k) or 403(b) retirement account, SEP IRA, Roth IRA, or
investment company, from the fund traditional IRA retirement account.
manager, or both;
• Can also be owned outright in a taxable account.
• Detailed financial information about the
fund’s assets and liabilities, performance, Most individuals invest in mutual funds to achieve long-term financial
statement of operations, and statement of objectives.
changes in net assets; For $2,000 or less, you can open an account and begin investing.
• Schedule of investments; and.
• A letter from the fund’s independent Do your research!!!
auditors that provides an opinion as to the
accuracy of the fund’s financial statements. Mutual Fund Investing: Look at More Than a Fund's Past Performance
http://www.sec.gov/investor/pubs/mfperform.htm

15 16

Steps to Buying a Mutual Fund

Purchase Options
1. Match your investment philosophy and financial goals with the goals You can buy shares of a closed-end fund or ETF through a stock
exchange or in the OTC market.
and objectives of the fund To purchase shares in an open-end mutual fund, you may use four
2. Open an account on your own or within your employer sponsored options:
retirement plan 1. Regular account transaction - most popular; least complicated
• You decide how much money you want to invest and when you
3. Keep your money-invest in no-load or low-load fund with low want to invest, and then you buy as many shares as possible.
expenses 2. Voluntary savings plans – allows you to make smaller purchases
than the minimum required by the regular account transaction way
4. Sign up for automatic reinvestment of any mutual fund dividends 3. Contractual savings plans - make regular purchases over a specified
period, usually 10 to 15 years.
4. Reinvestment plan allows income dividends and capital gain
distributions to be automatically reinvested to purchase additional
shares of the fund

17 18

3
 11/10/2023

Automatic “…Reinvest your dividends…that’s when the

compounding effect really kicks in” (The Wealthy Barber,
Reinvestment Chilton)

Dividend Reinvestment Program

(D.R.I.P.)
◦ Pay yourself first
Mutual funds allow investors to
reinvest interest, dividends, and
capital gains
An effect like compound interest

“Automatic reinvestment of dividends is one of the most overlooked ways Making Money with Mutual Funds:
of accumulating wealth. In addition to the benefits of compounding, it The net gain that a fund realizes when it sells
also provides a mechanism to dollar-cost average investments” (Dave Guarino,
Standard and Poor’s) securities that were held in the fund’s portfolio.
Occurs whenever a security is SOLD at a PROFIT.

19 20

Taxes on reinvested income dividends, capital gain

Example: Open-ended Fund
distributions, and profits can be deferred if fund
investments are held in retirement account.
& Taxes
• Taxes may be eliminated if investments are held in a Money manager buys and sells within the
Roth IRA and all qualifications are met.
fund at their discretion

Taxes and For mutual funds held in taxable accounts, income Buy at 10, sell at 50 = $40
dividends, capital gain distributions, and financial gains
Mutual and losses from the sale of funds are subject to taxation. Buy at 15, sell at 45 = $30
Funds Two problems develop with taxation of mutual funds: Buy at 25, sell at 15 = -$10
• Even if you choose to reinvest dividends/distributions,
they are still taxed in a taxable account and must be
reported on federal tax return as current income.
What this means: $60 profit to pay tax on
• You have no control over when the mutual fund sells (capital gains!)
securities and when you will be taxed on capital gain
distributions.

21 22

Investing a fixed amount of the same

investment at regular intervals,
regardless of what the market is doing
(FINRA). * Disciplined buying strategy Top 3 Mutual
Adhere consistently to two principles:
◦ 1. Consistently invest equal sum of $ Fund Mistakes
◦ 2. Consistently invest regular intervals
1. Invest in funds with high
◦ Do this regardless of price loads, fees, and expenses
During a falling market
2. Withdraw dividends
◦ Allows you to purchase more shares
when the price is down instead of reinvesting
Works in a fluctuating and rising
market – Allows you to regularly
Investing 3. Trying to chase trends,
performance, and the “hot”
As investment prices rise you purchase Strategy: funds
fewer shares
Dollar Cost
As investment prices fall you purchase
more shares Averaging

23 24

4
 11/10/2023

What do you think?

Mutual Fund Advantages &
Disadvantages Exchange Traded Funds
ADVANTAGES DISADVANTAGES
❑Diversification ❑Tax Consequences
❑Affordable ❑Fees
❑Professional Management
❑Low Costs
❑Flexibility of Risk
❑Reinvestment of Dividends Here is a quote for an ETF? What do
❑Dollar Cost Averaging you notice about it?

25 26

Exchange Traded Funds Exchange Traded

Funds
What are ETF’s? ◼Low Management Fees
◦ Baskets of securities that are traded, like stocks, on an exchange.
◦ Funds track and replicate index, similar to index MF i.e. S &P 500, DJIA ◼Cheaper alternative vs. Mutual Funds – no loads, lower expense ratios
Trade like individual stocks on the exchange Diversification (similar to MF’s)
◦ Purchase in real time like a stock; Pay transaction fee to broker to buy or sell shares Prices determined by supply and demand
Hybrid of stocks and mutual funds ◦ NAV - set daily based on the ending value of its portfolio and accrued expenses
◦ Over 900 listed on stock market ◦ Share Price - determined by the ETF's supply/demand in the market, like stock
Closed-end fund Tax Efficient:
◦ Companies are chosen and fund is locked ◦majority follow indexes, keep trading to a minimum
◦ No buying and selling ◦Usually only tax paid is from capital gains after selling ETF shares for a profit.
◦However – if ETF pays dividends or bond interest – will be taxed on this as well!
A group of passively managed securities
◦ Performance mirrors index performance

27 28

ETF Advantages & Disadvantages

In-Class Activity
ADVANTAGES DISADVANTAGES Visit: https://tools.finra.org/fund_analyzer/
Analyze three funds: AGTHX, AMRMX, ABCCX
Tax Efficient Pay a Broker
◦ Sold on the stock market Use the following:
Low Expense Ratio
◦ Supply & demand ❑$20,000 initial investment
No Minimum Purchases
Not Good for Dollar Cost ❑8% interest rate
Mix Between Stock & Mutual ❑hold for 20 years
Funds Not Good for Consistent
Investing
Examples of ETF’s
Not Good for Reinvesting Complete the D2L In-Class Activity online and answer the
Diamond (DIA) - Dow Jones Industrial questions based on what you find in the site.
SPDR (SPY) – S&P 500 Dividends
Cubed (QQQQ) – Nasdaq 100

29 30