What Is a Mutual Fund?

Mutual Funds Lesson

What is a mutual fund?

 An investment strategy that pools savers’ money (creates better buying power than you would have investing on your own) to invest in a variety of stocks & bonds

 Managed by a professional investment advisors who actively buy/sell stocks/bonds based on what they think is best for shareholders

 As a fund investor, you own shares of the fund

How do you make money w/a mutual fund? 2 ways

1. Income distributions: Earning dividends or interest on its investments

2. Capital gains distributions: Selling investments that have increased in price (the fund pays out/distributes these profits minus fees and expenses) to its investors

3 Main Categories of Mutual Funds:

1. Stock funds (AKA Equity Funds): Stock funds invest in stocks

 Some stock funds invest in well-established companies that pay regular dividends

 Some stock funds invest in younger, more growth-oriented firms/companies that have been operating below expectations for several years

 Typically concentrates in one area: blue chips or small-company stocks 2. Bond Funds: invest primarily in corporate (businesses) or government bonds

 Like bonds (a bond is a loan that pays interest over a fixed term (period of time), bond funds provide income

 Unlike bonds, these funds have no maturity date and NO-GUARANTEED repayment of the amount your invest

3. Money Market Funds: make short-term investments in an effort ot keep their share value fixed at $1

 Money market funds try to maintain their value at $1 a share, so they’re often described as cash equivalent investments

 Typically, you earn interest on the investments the fund makes

 Interest the funds pay is low when interest rates are low

Benefits of Mutual Funds:

 Makes buying a variety of stocks easier to purchase and mange, since a professional mutual fund manager actually decides when to buy and sell stocks within the mutual fund for shareholders of the fund

 Good strategy….they help individual investors diversify their portfolios

o reduces risk by spreading your investment dollars among different markets, industries

o diversification protects the value of your overall portfolio in case a single security/market sector takes a serious downturn and drops in price

Investing Styles: Approaches to investing in mutual funds

 Value Investing: buy securities that are selling for less than the manager believes they’re worth (w/the expectation that the price will rebound)

 Growth Investing: focus on stocks they think will increase substantially in price and have the potential to provide greater returns

 Blend Investing: combination of value and growth approaches

-fund manager tries to find the right balance of undervalued investments and those with strong growth potential

Stock Funds/Equity Funds and Company Sizes: Market Cap

Companies are generally divided into 3 sizes: large-cap, mid-cap, and small-cap

Large-Cap funds buy stock in established companies with capitalizations greater than $10 billion

Mid-cap funds purchase equity in companies valued between $2 billion and $10 billion

Small-cap funds buy stocks of companies with less than $2billion.

**Multi Cap funds invest in companies of all sizes Morningstar stylebox:

 visual shorthand for categorizing individual mutual funds by market cap and investment style

 designed to help investors pinpoint a fund’s risk/return profile

 Read Like Any Other Chart: Straight Down From The Top, Over From The Side.

Large, Mid, And Small: Company Or Fund’s Size. “Large,” “mid,” and “small” refer to something called market capitalization, which measures the size of a business. While there is no set rule, large-cap generally refers to a company that has over $5 billion, mid-cap to a company that has $1 to $5 billion, and small-cap to a company with under $1 billion. If you’re looking at a Morningstar page for a fund or index rather than for one specific company, the style box will indicate the sizes of the companies that the fund or index covers. Explaining “Value.” The other side of the box includes the words “value,” “blend,” and “growth.” A company is a “value company” when it’s trading at a price that is less than its true worth. These are often well-established companies that have temporarily fallen off the radar for many investors. Those who practice value investing are looking for a diamond in the rough—they see its potential, and they will buy shares cheaply now because they expect others to soon realize (or remember) how great it is. That would lead to more buyers and an increase in the stock price. Explaining “Growth.” A growth company is flashier—generating quite a bit of revenue and reinvesting in itself to continue the rapid growth. Growth companies tend to outpace the overall economy, and often include technology companies. Some tech companies (like Apple) have great track records of growth, but others implode. Because of this, growth companies are riskier than value companies. If a mutual or index fund incorporates both growth and value companies in its portfolio, you’ll probably see the “blend” label in the Morningstar box. The idea for these is that growth and value should average each other out. (http://www.learnvest.com/pages/article/How-To-Read-The-Morningstar-Style-Box)

Activity Sheet 3: Selecting and Evaluating a Mutual Fund

Group Members: ______

Task: You will select 2 mutual funds to evaluate. Read the information below to find a mutual fund. After selecting the mutual fund, record information in the section below.

How to use Morningstar:

1. Go to www.morningstar.com, and click on the “funds” tab on the homepage.

2. Scroll down to Mutual Fund Performance and Ratings. Under “performance”, click on “category returns”.

3. “Category returns” lists types of funds by industry (ie. real estate, technology, utilities, consumer staples, etc).

4. Click on an industry that you are interested in. This will bring up a list of related mutual funds (organized by name)

5. Click on one of the fund names listed….look at the NAV, YTD return, how the fund has done in the past 5 years, top 3 holdings of the fund (click on holdings tab)… record the answers on this sheet.

Mutual Fund 1.

Mutual fund Name: ______

NAV: ______

YTD Return: ______

Investment Style: (refer to Morningstar stylebox) ______

How has this fund done in the past 5 years? ______

What are the top 3 holdings of the fund? What industry (ie. technology, health care, , etc.) are they found?

 ______industry: ______

What type of risk is there when investing in this mutual fund? ______

______

Would you invest in this fund? Why/Why not? ______

______

______.

Mutual Fund 2.

Mutual fund Name: ______

NAV: ______

YTD Return: ______

Investment Style: (refer to Morningstar stylebox) ______

How has this fund done in the past 5 years? ______

What are the top 3 holdings of the fund? What industry (ie. technology, health care, , etc.) are they found?

 ______industry: ______

What type of risk is there when investing in this mutual fund? ______

______

Would you invest in this fund? Why/Why not? ______

______

______.

Conduct a SMG meeting. Record minutes in your SMG journal template. Discuss what you have learned today. Is your team ready to purchase mutual funds at this time? Why/Why not? If you are ready, which mutual fund(s) are you interested in investing in at this time? Why? SMG AGENDA: 11/4/2010

1. Read handout, “Mutual Funds Lesson”.

2. Complete the following SMG activity sheets:

1. Activity Sheet 1: What are mutual funds?

2. Activity Sheet 2: Reading and Interpreting Information on Mutual Funds

3. Activity Sheet 3: Selecting and Evaluating a Mutual Fund

3. Set aside the last 10 minutes of class to conduct a SMG Meeting (be sure to record team meeting minutes on your SGM journal template)

4. Put completed activity sheets in the red tabbed section of your portfolio. (1 copy of each activity sheet)

5. Put completed SGM meeting minutes in green tabbed section of portfolio.