Unit
6
Mutual Fund Investing
1. Why is it important to learn about mutual funds? (See page 6-1)
2. What factors should always be considered prior to selecting a mutual fund, or other investment? (See page 6-1)
3. Describe a mutual fund. How does it make money for investors? (See pages 6-1, 6-2, and 6-5)
4. Compare and contrast open-end and closed-end mutual funds. Which are most widely available? Is a closed fund the same thing as a closed-end fund? (See page 6-2)
5. How does a mutual fund investment company calculate net asset value (NAV)? Why is this important investor information? (See page 6-2)
6. What disadvantages are associated with investing in individual stocks and bonds? (See pages 6-2 and 6-3).
7. When are mutual funds not a recommended investment choice? (See page 6-3)
8. Briefly summarize the 10 advantages associated with mutual fund investing. Identify three that are most important to you. (See pages 6-3 and 6-4)
9. How is an automatic investment plan used to build a portfolio? (See page 6-3)
10. Briefly summarize the four disadvantages associated with mutual fund investing. Identify one that is most important to you. (See pages 6-4 and 6-5)
11. Define the cost basis of a mutual fund. How might a mutual fund supermarket be helpful when determining your cost basis? (See pages 6-4 and 6-5)
12. Review Worksheets 1, 2, 3, and 4 to identify the mutual fund categories that match the descriptions listed below. (See pages 6-6 through 6-9)
a. Invest in companies that circle the globe?
b. Funds with typically the lowest expense ratios?
c. The high potential for capital appreciation coupled with volatility suggests that these funds are riskier than others with this objective.
d. Fund objective and name reflects the size of the companies whose stock makes up the mutual fund portfolio.
e. Utilities are commonly found in both of these fund categories, although the rest of the portfolios are made up of either stocks or bonds and the fund objectives are different.
f. These two fund categories invest in a portfolio of corporate bonds but one significant criteria, bond rating, differentiates the two.
g. Both fund categories combine stocks and bonds to meet their objectives, but only one matches the portfolio to a fixed ratio of the two securities.
h. Both of these funds use portfolios of municipal bonds, although their fund objectives and investment terms are different.
i. Although all funds maintain some cash in their portfolios, these fund portfolios are based on a combination of stocks, bonds, and cash.
j. Diversification is a hallmark of mutual funds, but these funds take that concept one step further.
13. Define no-load, load, and low-load funds. Explain the loads typically charged with Class A, B, and C shares. (See pages 6-4 and 6-10)
14. What are redemption fees? Are they unique to load or no-load funds? (See page 6-10)
15. Define expense ratio. What guidelines can you use to assess expense ratios? (See pages 6-4 and 6-10)
16. Summarize the seven-step mutual fund selection process. Is this approach unique to mutual funds or universally applicable to any investment? (See pages 6-11 and 6-12).
Because Internet sites change frequently, the uniform resource locator (URL) for the specific tool or page is not given below. Instead, the URL for the site, and instructions for navigating within the site are provided. It is our hope that this method will encourage you to explore and learn from the site, and more importantly, avoid the message: “Error: Site Not Found.”
Disclaimer: References to commercial sites are not an endorsement of the company or the financial products or services offered. These sites are included only because of their educational value; sites provided by competing companies may offer similar benefit. We encourage you to explore other sites of your choice.
1. To
learn more about index funds and their performance, try the following Internet
site: www.indexfunds.com.
2. The larger mutual fund companies offer general mutual fund education on their websites. Visit the following for some examples:
www.ici.org The Investment Company Institute
www.dreyfus.com Dreyfus
www.fidelity.com Fidelity Investments
www.vanguard.com The Vanguard Group
www.troweprice.com T. Rowe Price
www.strong-funds.com Strong Funds
If you run across an unfamiliar term, visit www.investorwords.com for a
definition.
3. Mutual fund supermarkets are mentioned in this unit for the convenience they offer in consolidating all fund activity into one account statement. When comparing mutual fund supermarkets, consider the number of no-transaction fee funds offered, the minimum balance required for opening an account, and the transaction fees charged for funds not available on a “no-transaction fee” basis. If accessibility to an office is important to you, consider this feature as well, although Internet and toll-free phone access is always available. To learn more about mutual fund supermarkets, you might start with these services:
Charles Schwab 800-435-4000 www.schwab.com
Fidelity Funds Network 800-544-5555 www.fidelity.com
CSFB Direct 800-825-5723 www.csfbdirect.com
The Vanguard Group 800-831-1105 www.vanguard.com
4. Internet tools can be useful to calculate and compare true costs associated with different funds. To help you analyze fund costs, visit the following websites:
www.sec.gov/investor/tools/mfcc/mfcc-int.htm
5. Find out if your bank, or financial institution, sells mutual funds or other investments. (Insurance companies are also getting into the act!) The mutual funds are typically load funds, but, like most products and services, you are “paying” for the expertise of the professional working with you. Inquire about the fund objective, historical performance, expense ratio, share type (A, B, or C), and other fees and expenses. Carefully analyze this information before making a purchase. The federal government does not insure mutual funds sold by a bank. But building an investment portfolio through your local bank may be a convenient way to foster another financial relationship with an institution you trust.
6. Step 4 of the Guidelines For Picking Mutual Funds states “Determine your selection criteria and eliminate funds.” Internet tools can help you with this step, often referred to as “screening.” Most sites let you choose a very basic search or to tailor the criteria to reflect your goal, whether searching for mutual funds or individual stocks. The following Internet sites will introduce you to these tools, which are widely available at other investment sites.
www.morningstar.com/ (Basic, Preset, or Advanced screening. The latter requires a subscription, or membership, to use the service.)
www.quicken.com/investments/mutualfunds/ (Easystep, Popular, or Full
screening)