The Growth of the Mutual Fund Industry

1

The Growth of the Mutual Fund Industry

Mutual Fund Statistics

• Almost 1 in 2 U.S. households invest in the stock market directly or through mutual funds

• Over 8,000 mutual funds

• Over $7 trillion of assets

2

Why Learn About Mutual Funds?

To choose investments in a retirement plan

To invest an insurance or divorce settlement

To get started as a new investor

To build a portfolio

To invest a year-end bonus or tax refund

To put what you read & hear in perspective

3

What is a Mutual Fund?

A mutual fund is: a portfolio of stocks, bonds, or other

securities collectively owned by many investors managed by a professional

investment company

4

Mutual Funds Make Money in Two Ways

Current income (dividends or interest earned on the portfolio investments)

Capital gains (selling securities that have gone up in value)

5

How the Investor Makes Money

Income distribution (dividends and interest that are passed on to investors)

Capital gains (an increase in a fund’s value)

Combination = total return

6

Forms of Mutual Fund Companies

Open-end: issues and redeems shares at any time

Closed-end: trades like a stock andissues a fixed number of shares

7

What Is Net Asset Value (NAV)?

The NAV is the price your fund pays you per share when you sell.

Value of fundNumber of shares = NAV

Example: $52,500,000 3,500,000 = $15 per share

8

Why Mutual Funds vs. Individual Securities? Individual securities:

– Require time and expertise to analyze

– Usually have higher transaction costs

– Offer less probability of adequate diversification

– OK if:

• you have stock-picking expertise

• you have $20-30K to buy 10-20 stocks

• you are buying Treasuries

9

Advantages of Mutual Funds

1) Full-time, professional management

2) Reduced risk through diversification

3) Earn competitive returns

4) Small $ amount needed to start

5) Retain ready access to your money

10

More Advantages of Funds

6) Inexpensive way to invest

7) Convenience

8) Automatic withdrawal plans available

9) Lower incidence of bankruptcy and

fraud

10) Monitoring fund investments is easy

11

Disadvantages of Mutual Funds

Funds follow market declines

No guaranteed rate of return

Unwanted taxable distributions

Record-keeping for tax purposes can be difficult

12

The Mutual Fund Marketplace

Stock funds

Bond funds

Money market funds

13

Types of Funds by Investment Objective

Growth

Income

Growth & income

Capital preservation

14

Match Your Goal to the Right Fund Categories with a growth objective

Growth

Aggressive growth

Small cap

Specialty (Sector)

International

Global

Index

15

Match Your GoalCategories with an Income Objective

Income

Corporate bond

Municipal bond

High-yield (junk)

bond

Government bond

GNMA

Global bond

16

Match Your GoalFunds with Growth & Income

Objective

Equity-income

Growth & income

Balanced

17

Match Your Goal Funds with a Preservation

of Capital Objective

Taxable money market

Tax-free money market

18

Match Your GoalFunds with All Four Objectives

Lifestyle

Asset allocation

Fund of funds

19

Risk and Return Relationship The higher the level of risk, the higher the

expected return» Sector » Aggressive Growth» International» Growth» Stock Index» Lifestyle» Growth & Income» Equity-Income» Balanced» Income» Bond» Money Market

20

Mutual Fund Costs

Sales charges/loads• Sales commissions

Operating expenses• Management fees

• Marketing costs

• Overhead expenses

21

Types of Funds by Sales Charge

No-load -- No sales commission

Load -- 4%-8.5% commission

Back-end load -- Declining 6%-1%

Low-load -- 1%- 3%

22

Mutual Fund Operating Expenses

Management and administrative fees

12b-1 fee for marketing and distribution

Redemption fee

CHECK OVERALL EXPENSE RATIO

23

Mutual Fund Economics

Costs and Fees A Shrs B Shrs C Shrs

Sales Load 5.5% None None

Redemption Fee None 0.5% None

Marketing Fee .25% .75% 1.00%

Management 1.30% 1.15% 1.20%

Annual Expense 1.55% 1.90% 2.20%

24

Avoid Above-AverageExpense Ratios

Stock funds > 1.4%

Bond funds > 1.00%

Money market funds > 0.5%

25

Seven Steps to Finding the Right Fund

1) Identify type of fund that matches goal

2) Do more reading

3) Research specific funds

4) Determine selection criteria

5) Get and read the prospectus

6) Make your purchase

7) Establish a schedule to buy more

26

Step 1 -- Identify Types of Funds That Will Help You Reach Your Goals

Focus your search

Begin building your portfolio

Establish an asset allocation strategy

27

Step 2 -- Do More Reading

Mutual Funds For Dummies - Eric Tyson

Guide To Successful No-Load Investing - Sheldon Jacobs

The Right Way To Invest In Mutual Funds - Walter Updegrave

Bogle on Mutual Funds and Common Sense on Mutual Funds - John Bogle

28

Step 3 -- Research Specific Funds

Personal finance publications

Business newspapers

Mutual fund trade associations

Library references

Fund-provided information

Professional advisors

29

Personal Finance Publications

Money

Kiplinger’s Personal Finance

Forbes

Business Week

Smart Money

30

Newspapers & Trade Associations

The Wall Street Journal

Barron’s

The New York Times

USA Today

Investment Company Institute

Mutual Fund Education Alliance

31

Library & Fund-Provided Info

Morningstar

Value Line

Lipper Analytical

Annual reports

SAI

Prospectus

32

Internet Sites

<www.morningstar.com>

<www. networth.galt.com>

<www. brill.com>

<www. ici.org>

<www. mfea.com>

<www.sec.gov/mfcc/mfcc-int.htm>

33

Step 4 -- Determine Your Selection Criteria

Fund objective (relative to your goal)

Cost to purchase (no-load vs. load)

Fund fees/expense ratio

Investment minimum

Manager tenure

Performance (1, 3, 5 years)

Longevity

34

Step 5 -- Get a Prospectus for Each Fund from:

Mutual fund families

Mutual fund supermarkets/networks

Full-service & discount brokers Financial planners

Banks Internet

35

Step 6 -- Make Your Purchase

By mail

Local investment center

Toll-free 800 number for assistance

Through a broker or financial planner

On-line

36

Step 7 -- Continually Buy More

Use a dollar-cost-averaging system--

Investing a fixed number of dollars, e.g.,

$50 or $100, at periodic intervals,

usually monthly or quarterly

37

Dollar-Cost-Averaging

Month Amount Invested Share Price Shares Purchased Cumulative Value

January $150 $30 5 $150.00

February $150 $30 5 $300.00

March $150 $25 6 $400.00

April $150 $25 6 $550.00

May $150 $20 7.5 $590.00

June $150 $15 10 $592.50

July $150 $15 10 $742.50

August $150 $15 10 $892.50

September $150 $20 7.5 $1,340.00

October $150 $25 6 $1,825.00

November $150 $30 5 $2,340.00

December $150 $30 5 $2,490.00

TOTAL $1,800 $280 83 $2,490.00

Average Cost $21.69 per share Average Price $23.33

38

Final Hints:

Invest for your goals

Research funds carefully with a questioning attitude

Review progress quarterly, comparing “apples with apples”

Read your mail

Keep excellent records

39

Take These Action Steps

Make a list of long- and short-term financial

goals and match them with an appropriate

mutual fund Learn about mutual fund choices available

through your employer’s retirement plan

Decide on your selection criteria

Identify specific mutual funds that match your

investment goals

40

Take These Action Steps

Call at least three mutual fund organizations for a prospectus.

Do follow-up research and compare at least three mutual funds using Morningstar or Value Line.

Complete a mutual fund application and make an investment.