Mutual Funds

• Book Title: Mutual Funds - an Introduction to the core concepts
• Author: Mark Mobius
• Year written/published: 2007
• Summary: Mutual Funds introduction
• My Comments: Really good one… my first book on mutual funds… it’s great
• Contents page:

1. An introduction to mutual funds
2. types of mutual funds
3. making sense of mutual funds documents
4. analysing preformance
5. mutual fund cost
6. buying and selling mutual fund shares
7. building mutual funds portfolios
8. the mutual fund industry: trends and growth drivers

Some extracts:

Mutual funds or unit trusts are called open-ended funds because they are repored to buy back shares or units from the shareholders at any time at a price based on the current value of the fund’s net assets Close end funds, or investment trusts are another typr of fund that issues a fixed number of shares, as in the case of open-ended funds.

Benefits of Mutual funds…

• professional management
• diversification
• lower cost
• convenience
• liquidity

Mutual fund structure…

• sponsor
• distributors
• custodian
• shareholders
• transfer agent
• management company
• fund manager
• board of directors
• shareholders

Equity makes money for investors un 3 different ways…

1. dividends 
2. capital gains distributions
3. share price appreciation

The most important document for a  mutual fund is the prospectus…which has…

• investment objectives
• strategy
• risks
• costs
• management
• performance history
• procedures for opening an account and buying and selling

some terminology…

Ratio of net investment income to average net assets

– shows the ratio of annual dividends that the fund is paid form companies, in which t is invested, to the net asset of the fund

Turnover rate – shows how often the fund trades its securities.

2 key questions to choose the right fund…

1. Performance: Which figures are key to evaluating a mutual fund’s past performance and forecasting future performance?
2.  Risk: Which characteristics of a fund help determine its degree of risk?

Evaluating return

• Dividends
• capital gains distributions
• share price, or NAV increase
• total return 0 annualised total return, load-adjusted total return

Evaluating fund performance…

• benchmark
• fund management company changes
• peer comparisons
• consistency

Measuring risk…

• Alpha is a measure of a fund’s excess return relative to a market index. A positive alpha means the fund manager produced a higher return than the benchmark
•  Beta measures the sensitivity of a fund’s returns to the returns of a market index
• Turnover rate
• Taxes
• Risk associated with specific fund categories – Foreign and Global Equity Funds (Currency risk and country risk), Bond Funds (Quality and Interest Rate Risk)

Buying strategies…

• Pay yourself first : Dollar –Cost Averaging
• Timing the market
• buy and hold
• reinvesting dividends and capital gains
• buying on margin

Selling mutual fund shares….deciding when to sell fund shares…

- rebalancing a portfolio - style changes - manager changes - changing investment goals - poor performance Selling mutual funds… deciding which fund to sell - specific shares - first-in-first-out - average cost Aggressive investor… - focused on equities - funds may include aggressive growth, small cap, emerging markets - younger or more experienced investors - longer time horizons to goals – more than 10 years before needing the money invested - can tolerate higher market volatility - have higher expectations for returns - desire returns that outpace inflation Conservative investor… - needs current income from investments - willing tolerate only low amounts of risks or volatility - older or less-experienced investor - has 5 or fewer years before money needed for financial goal - investments may be concentrated in money market funds, bonds, large-cap equities

How many funds??

Still, after 4 funds, the effect of adding another fund on standard deviation declined. After 7 funds, changes were slight, and after 10 funds the portfolio’s standard deviation stayed the same no matter how many more funds were added. Therefore, after owning 7 to 10 funds, it may be unnecessary to add more to a portfolio.