CH 16 Investing in Mutual Funds
Wednesday, May 13, 2026 10:12 AM
Why Investors Purchase Mutual Funds
- A mutual Fund
○ Pool the money of investors (its shareholders) to invest in a variety of securities
○ Mutual Funds can also be used for retirement accounts like IRA, 401k & 403B
○ After the Great Depression in 1927, the following stats show how mutual funds helped
individuals from experiencing financial ruin
§ In the US over 100 million people own mutual funds
§ Over 59 millions households are in the US - almost half own mutual funds
§ There are 4 types of common mutual funds
- The Psychology of Investing in Funds
○ Professional Management & Diversification
§ Companies look for someone who has a lot of experience & dedicate a lot of time to
their financial & work portfolio
§ Diversification in an investors portfolio is a safety strategy; occasional loss can occur,
investments can be contained in a mutual fund that offset from the gains of the
portfolio
§ This is considered practical because diversification offers a purchases in individual
stocks in high number from corporations
- Characteristics of Mutual Funds
○ Closed-End Funds
§ A fund issued by an investment company when the fund is organized
§ Are managed by professional fund managers
□ These must be invested in stocks, bonds & other securities, these also determine
the need for supply & demand
○ Exchange-Traded Funds (ETF’s)
§ A fund that invests in stock or other securities contained to a specified stock or
security index, there are various EFT’s that attempt to track the stock market:
□ Midcap stock
□ smallcap stocks
□ fixed income securities
□ stocks issued by other companies in specific industries
□ Stocks issued by corporations in diff countries
□ Commodities (raw & agricultural products that can be bought, sold & traded)
§ The price of an EFT is determined on the stock exchange and/or the over the counter
market
□ Buying the same EFT at different times of the day can result in diff prices &
returns
□ Shares for EFTs are dependent on supply & demand, the value of the stock, other
investments in the portfolio & investor expectations
□ Other advantages to lower fee’s when investing in EFT’s include:
® No minimum investment amount, because shares are traded on exchange &
not purchased from a company other wise a minimum of $250-$3000 would
be required to open an account
○ Open-End Funds
§ A mutual fund whose shares are issued & redeemed by the investment company at
the investors request
○ Net Asset Value (NAV)
§ The current market value of securities contained in a mutual funds portfolio minus
the liabilities, divided by the number of shares outstanding
§ Net assets are calculated at the end of each trading day
○ Load Funds
§ AKA A fund, is a mutual fund where investors pay a commission every time they
purchase a share
○ No Load Fund
§ A no load fund is a mutual fund where the individual investor pays no sales charge
□ They don’t charge commissions when you buy a share bc they don’t have a sales
person
□ You deal directly w/ the investment company
® Via internet, phone and/or mail
□ This can also be done through a brokerage firm
® Schwab, Fidelity, & E*Trade
○ Contingent Deferred Sales Load
§ Aka a “B Fund” or Back-end load fund
□ Has a 1 to 5 charge that shareholders pay when they withdrawal their
investments from a mutual fund
- Management Fee’s & Other Charges
○ Management fee’s
§ A fixed percentage of the funds asset values
○ Investment companies will also charge a 12b-1 fee
§ A 12b-1 fee aka a distribution fee, is used to delay the costs of marketing & selling
fund shares
§ Used to pay brokers & others who sell fund shares
§ Pays for advertising, printing new info form investors & shareholders service fees
§ Can calculate the value of a funds assets & cant exceed 1% of funds per year
○ Expense Ratio
§ Different types of management fee’s, if any fund operating costs for specific mutual
funds
Classification of Mutual Funds
- Stock Funds
○ Aggressive Growth Funds
§ Look for rapid growth by purchasing stocks whose prices are expected to increase
quickly in a short period of time
§ Quick turnover because managers are buying individual stocks in the portfolio & more
risk instead of other stocks
○ Equity income Funds
§ Invest in stocks issued by the company w/ a long history of paying dividends
§ The objective of these funds is to provide income to shareholders & they are an
attractive choice for those who are conservative or retired investors
○ Global Stock Funds
§ Invest in stock of companies in the world including the US
○ Growth Funds
§ Invest in companies expecting higher than average & earnings
§ Tend to invest in larger well established companies
§ Prices for shares in a growth fund are are less likely to change compared to aggressive
growth funds
○ Index Fund
§ Invest in companies like Standard & Poor’s 500 stock or NASDAQ
§ An index fund should show approx the same performance as the stocks chosen
before hand
○ International Funds (AKA Foreign Funds)
§ Invest in foreign stocks sold in securities markets globally; if the economy is better in
one region compared to another, profits can still be earned
§ Unlike Global funds, foreign funds are a true international investment outside the US
○ Large Cap Funds
§ Invest in the stocks of a company w/ a total capital of 10 billion or more
§ Are generally investment stable, well established companies that have minimal to no
fluctuation on their value
○ Midcap Funds
§ Invest w/ a total capitalization of $2 - $10 billion in stocks that offer more security
than a small cap & more potential growth that invest in large corporations
○ Regional Funds
§ Invest in stocks traded within a specific region of the world
○ Sector Funds
§ Invest in companies in the same industries
§ Invest in the health sector in biotech, science & natural resources
○ Small Cap Funds
§ Invest in smaller known companies w/ a capitalization of less than 2 billion
§ Because these companies are smaller & innovative funds offer a higher growth
potential
○ Socially Responsible Funds
§ Avoid investing in companies that cause harm to people, animals & the environment
§ They don’t invest in other companies that produce tobacco, nuclear energy, weapons
and/or w/ companies who have a history of discrimination
§ They choose companies who follow ethics, policies to reduce pollution & are socially
responsible
- Bond Funds
○ High yield bond funds
§ Invest in high yield & high risk corporate bonds
○ Intermediate corporate bond funds
§ Invest in investment grade corporate debt w/ maturities between 3-10yrs
○ Intermediate US Govt Bond Funds
§ Invest in US Treasury securities w/ maturities between 2-10 yrs
○ Long term corporate Bond Funds
§ Invest in bonds w/ maturities in excess of 10 yrs
○ Long term US govt bond funds
§ US treasury securities w/ maturities in excess of 10 yrs
○ Municipal Bond Funds
§ Investments in municipal bonds might provide investors tax free interest income
○ Short Term Corporate Bonds
§ Invest in corporate bonds w/ maturities less than 3 yrs
○ World Bond Funds
§ Invest in bonds & other debt securities offered by foreign companies & govts
- Other Funds
○ Asset Allocation funds
§ Invest in stocks, bonds & money market securities w/ objs to preserve income & long
term growth
○ Funds of Funds
§ Invest in shares of mutual funds, mainly funds are increased in diversification & assets
are allocated because this type of purchase in shares has various funds
○ Money Market Funds
§ Invest in Certificate of Deposits (CD’s), govt securities & other liquid investments
○ Target Date Funds
§ (Refers to as a life-style and/or life-cycle fund) These are popular w/ investors
planning for retirement at a specific date
§ Usually involve stocks at high risk and eventually become low risk becoming a CD or a
income at a certain date or near retirement
○ A Family Fund
§ A group of mutual funds managed by one investment company
§ Each fund in the family has a different financial objective
○ The Benefits of Portfolio Construction
§ The process of choosing different types of stocks, bonds, funds & other investment
alternatives to obtain larger returns while reducing risk
§ The choice of investment is determined by your goals, tolerance for risk, age, amount
of money you have to invest & how long before you retire
§ Most investors highly suggest your portfolio be a 401k or 401b for these three
reasons:
1. Do you want to participate in a retirement account?
a) Yes here’s why:
i) Employee sponsored retirement provide a way to reduce the amount of
the current income tax that is withheld from your paycheck
ii) Most employers will match what you decide to contribute from your
check to your retirement, although some do place a limit on how much
they will match
2. Which Mutual Fund do you want to invest in?
a) You have many options
i) You can go to a personal life insurer who can give you a policy
ii) The best option is to stay w/ the one your employer offers and do your
best to stay their the longest
3. What is your stage in Life?
a) This is determined on age, how long before you retire & your risk for
tolerance
i) Those older/closer to retirement tend to choose more conservative
funds w/ less risk
How to decide to buy or Sell Mutual Funds
- Managed Funds vs Indexed Funds
○ Mutual Funds
§ Has a manager/team of managers that choose securities contained in a fund
§ These managers decide when to buy/sell
§ How long has the present manager been handling the fund?
○ Index Funds
§ Index funds tend to out perform mutual funds by 50-80%
§ Tend to have lower ratios than mutual funds
- Things to consider when choosing a type of fund
○ Managed funds can out perform index funds, this does become harder overtime
- The Internet
○ You can obtain a vast majority of information about mutual funds on the internet:
§ Finance Mutual Funds Screener - Yahoo!
□ Here, or other sites you can also find:
® Current Market Values, price history/holdings, performance data,
comparative data, ratings & risks
® Black Rock Stock Prices Google Finance search engine - Vanguard
® Statements describing various types of investments in a funds portfolio
® Info about dividends & capital gain distributions
® Info about the funds management
® Info on limitations or requirements
® The process investors used to open an account and self shares
® A description of services provide provided to investors and fees
® How often fund investment for portfolio changes
- Newspapers & Financial Publications
○ Various publications still provide information on mutual funds
The Mechanics of a Mutual Fund Transaction
- Return on Investment (ROI)
○ Income Dividends
§ Earnings a fund pays to shareholders that result from dividends & interest income
○ Capitol Gain Distributions
§ The payments made to a funds shareholders that result from the sale of securities in
the funds portfolio
- Taxes & Mutual Funds
○ Income dividend are reported on your federal tax return & taxed as income
○ Capitol gain distributions result from the fund selling securities it held for more than a
year
- Two Problems to keep a look out for that come from taxation of a mutual fund
○ When you purchase shares of stocks, corporate bonds and/or other investments in your
taxable account you then decide whether you want to hold or sell them
○ Mutual Funds buy & sell securities within the funds portfolio’s on a regular basis during
any 12 month period
- Purchase Options
○ Through a brokerage firm you can purchase shares of an open-end loan fund through an
account executive or sales person authorized to do so
○ Investors purchase & sell mutual funds via an investment company by:
§ Regular account transactions (The more popular/least complicated choice)
§ Voluntary Savings plans
§ Contractual Savings plans
§ Reinvestment Plans
○ This allows for smaller purchases for the minimum required by method mentioned above
○ For most voluntary savings plans, the minimum purchase ranges from $25-100 for each
purchase
○ Most investors can choose mutual funds as a tool to invest money to be contributed to a
401k, 403b or Roth IRA (Individual Retirement Account)
○ An older plan known as Contractual Savings plans (formerly periodic payment plans)
require you to make regular purchases over a specified period of time, usually 10-20yrs
○ Front ended load plans
§ almost all the commission are paid in the first few years of the contract
○ A reinvestment plan
§ A service provided by an investment company where income dividends & capitol gain
distributions are reinvested to purchase additional shares of funds
- Withdrawal Options
○ Closed-ends funds & EFTS can be sold on the stock market or over the counter markets to
another investor
○ Open-End Fund Shares are sold to back to the investment company at their Net Asset
Value (NAV)
§ Investors can receive money by:
□ Check, electronic transfer, written physical check
- Systematic Withdrawal Plans
○ Many open end funds allow scheduled withdrawals if the account has a minimum balance
& have various methods to withdrawal:
§ Fixed Dollar Withdrawal
□ When you take out the same amount of money on a regular basis
§ Sell-off Method
□ When you sell a certain number of shares in a certain amount of time
□ The amount received changes due to price fluctuations
§ Fixed Percentage Withdrawals
□ A fixed percentage of the funds growth
□ When your original principal stays invested as long as withdrawals stay below
growth
Wednesday, May 13, 2026 10:12 AM
Why Investors Purchase Mutual Funds
- A mutual Fund
○ Pool the money of investors (its shareholders) to invest in a variety of securities
○ Mutual Funds can also be used for retirement accounts like IRA, 401k & 403B
○ After the Great Depression in 1927, the following stats show how mutual funds helped
individuals from experiencing financial ruin
§ In the US over 100 million people own mutual funds
§ Over 59 millions households are in the US - almost half own mutual funds
§ There are 4 types of common mutual funds
- The Psychology of Investing in Funds
○ Professional Management & Diversification
§ Companies look for someone who has a lot of experience & dedicate a lot of time to
their financial & work portfolio
§ Diversification in an investors portfolio is a safety strategy; occasional loss can occur,
investments can be contained in a mutual fund that offset from the gains of the
portfolio
§ This is considered practical because diversification offers a purchases in individual
stocks in high number from corporations
- Characteristics of Mutual Funds
○ Closed-End Funds
§ A fund issued by an investment company when the fund is organized
§ Are managed by professional fund managers
□ These must be invested in stocks, bonds & other securities, these also determine
the need for supply & demand
○ Exchange-Traded Funds (ETF’s)
§ A fund that invests in stock or other securities contained to a specified stock or
security index, there are various EFT’s that attempt to track the stock market:
□ Midcap stock
□ smallcap stocks
□ fixed income securities
□ stocks issued by other companies in specific industries
□ Stocks issued by corporations in diff countries
□ Commodities (raw & agricultural products that can be bought, sold & traded)
§ The price of an EFT is determined on the stock exchange and/or the over the counter
market
□ Buying the same EFT at different times of the day can result in diff prices &
returns
□ Shares for EFTs are dependent on supply & demand, the value of the stock, other
investments in the portfolio & investor expectations
□ Other advantages to lower fee’s when investing in EFT’s include:
® No minimum investment amount, because shares are traded on exchange &
not purchased from a company other wise a minimum of $250-$3000 would
be required to open an account
○ Open-End Funds
§ A mutual fund whose shares are issued & redeemed by the investment company at
the investors request
○ Net Asset Value (NAV)
§ The current market value of securities contained in a mutual funds portfolio minus
the liabilities, divided by the number of shares outstanding
§ Net assets are calculated at the end of each trading day
○ Load Funds
§ AKA A fund, is a mutual fund where investors pay a commission every time they
purchase a share
○ No Load Fund
§ A no load fund is a mutual fund where the individual investor pays no sales charge
□ They don’t charge commissions when you buy a share bc they don’t have a sales
person
□ You deal directly w/ the investment company
® Via internet, phone and/or mail
□ This can also be done through a brokerage firm
® Schwab, Fidelity, & E*Trade
○ Contingent Deferred Sales Load
§ Aka a “B Fund” or Back-end load fund
□ Has a 1 to 5 charge that shareholders pay when they withdrawal their
investments from a mutual fund
- Management Fee’s & Other Charges
○ Management fee’s
§ A fixed percentage of the funds asset values
○ Investment companies will also charge a 12b-1 fee
§ A 12b-1 fee aka a distribution fee, is used to delay the costs of marketing & selling
fund shares
§ Used to pay brokers & others who sell fund shares
§ Pays for advertising, printing new info form investors & shareholders service fees
§ Can calculate the value of a funds assets & cant exceed 1% of funds per year
○ Expense Ratio
§ Different types of management fee’s, if any fund operating costs for specific mutual
funds
Classification of Mutual Funds
- Stock Funds
○ Aggressive Growth Funds
§ Look for rapid growth by purchasing stocks whose prices are expected to increase
quickly in a short period of time
§ Quick turnover because managers are buying individual stocks in the portfolio & more
risk instead of other stocks
○ Equity income Funds
§ Invest in stocks issued by the company w/ a long history of paying dividends
§ The objective of these funds is to provide income to shareholders & they are an
attractive choice for those who are conservative or retired investors
○ Global Stock Funds
§ Invest in stock of companies in the world including the US
○ Growth Funds
§ Invest in companies expecting higher than average & earnings
§ Tend to invest in larger well established companies
§ Prices for shares in a growth fund are are less likely to change compared to aggressive
growth funds
○ Index Fund
§ Invest in companies like Standard & Poor’s 500 stock or NASDAQ
§ An index fund should show approx the same performance as the stocks chosen
before hand
○ International Funds (AKA Foreign Funds)
§ Invest in foreign stocks sold in securities markets globally; if the economy is better in
one region compared to another, profits can still be earned
§ Unlike Global funds, foreign funds are a true international investment outside the US
○ Large Cap Funds
§ Invest in the stocks of a company w/ a total capital of 10 billion or more
§ Are generally investment stable, well established companies that have minimal to no
fluctuation on their value
○ Midcap Funds
§ Invest w/ a total capitalization of $2 - $10 billion in stocks that offer more security
than a small cap & more potential growth that invest in large corporations
○ Regional Funds
§ Invest in stocks traded within a specific region of the world
○ Sector Funds
§ Invest in companies in the same industries
§ Invest in the health sector in biotech, science & natural resources
○ Small Cap Funds
§ Invest in smaller known companies w/ a capitalization of less than 2 billion
§ Because these companies are smaller & innovative funds offer a higher growth
potential
○ Socially Responsible Funds
§ Avoid investing in companies that cause harm to people, animals & the environment
§ They don’t invest in other companies that produce tobacco, nuclear energy, weapons
and/or w/ companies who have a history of discrimination
§ They choose companies who follow ethics, policies to reduce pollution & are socially
responsible
- Bond Funds
○ High yield bond funds
§ Invest in high yield & high risk corporate bonds
○ Intermediate corporate bond funds
§ Invest in investment grade corporate debt w/ maturities between 3-10yrs
○ Intermediate US Govt Bond Funds
§ Invest in US Treasury securities w/ maturities between 2-10 yrs
○ Long term corporate Bond Funds
§ Invest in bonds w/ maturities in excess of 10 yrs
○ Long term US govt bond funds
§ US treasury securities w/ maturities in excess of 10 yrs
○ Municipal Bond Funds
§ Investments in municipal bonds might provide investors tax free interest income
○ Short Term Corporate Bonds
§ Invest in corporate bonds w/ maturities less than 3 yrs
○ World Bond Funds
§ Invest in bonds & other debt securities offered by foreign companies & govts
- Other Funds
○ Asset Allocation funds
§ Invest in stocks, bonds & money market securities w/ objs to preserve income & long
term growth
○ Funds of Funds
§ Invest in shares of mutual funds, mainly funds are increased in diversification & assets
are allocated because this type of purchase in shares has various funds
○ Money Market Funds
§ Invest in Certificate of Deposits (CD’s), govt securities & other liquid investments
○ Target Date Funds
§ (Refers to as a life-style and/or life-cycle fund) These are popular w/ investors
planning for retirement at a specific date
§ Usually involve stocks at high risk and eventually become low risk becoming a CD or a
income at a certain date or near retirement
○ A Family Fund
§ A group of mutual funds managed by one investment company
§ Each fund in the family has a different financial objective
○ The Benefits of Portfolio Construction
§ The process of choosing different types of stocks, bonds, funds & other investment
alternatives to obtain larger returns while reducing risk
§ The choice of investment is determined by your goals, tolerance for risk, age, amount
of money you have to invest & how long before you retire
§ Most investors highly suggest your portfolio be a 401k or 401b for these three
reasons:
1. Do you want to participate in a retirement account?
a) Yes here’s why:
i) Employee sponsored retirement provide a way to reduce the amount of
the current income tax that is withheld from your paycheck
ii) Most employers will match what you decide to contribute from your
check to your retirement, although some do place a limit on how much
they will match
2. Which Mutual Fund do you want to invest in?
a) You have many options
i) You can go to a personal life insurer who can give you a policy
ii) The best option is to stay w/ the one your employer offers and do your
best to stay their the longest
3. What is your stage in Life?
a) This is determined on age, how long before you retire & your risk for
tolerance
i) Those older/closer to retirement tend to choose more conservative
funds w/ less risk
How to decide to buy or Sell Mutual Funds
- Managed Funds vs Indexed Funds
○ Mutual Funds
§ Has a manager/team of managers that choose securities contained in a fund
§ These managers decide when to buy/sell
§ How long has the present manager been handling the fund?
○ Index Funds
§ Index funds tend to out perform mutual funds by 50-80%
§ Tend to have lower ratios than mutual funds
- Things to consider when choosing a type of fund
○ Managed funds can out perform index funds, this does become harder overtime
- The Internet
○ You can obtain a vast majority of information about mutual funds on the internet:
§ Finance Mutual Funds Screener - Yahoo!
□ Here, or other sites you can also find:
® Current Market Values, price history/holdings, performance data,
comparative data, ratings & risks
® Black Rock Stock Prices Google Finance search engine - Vanguard
® Statements describing various types of investments in a funds portfolio
® Info about dividends & capital gain distributions
® Info about the funds management
® Info on limitations or requirements
® The process investors used to open an account and self shares
® A description of services provide provided to investors and fees
® How often fund investment for portfolio changes
- Newspapers & Financial Publications
○ Various publications still provide information on mutual funds
The Mechanics of a Mutual Fund Transaction
- Return on Investment (ROI)
○ Income Dividends
§ Earnings a fund pays to shareholders that result from dividends & interest income
○ Capitol Gain Distributions
§ The payments made to a funds shareholders that result from the sale of securities in
the funds portfolio
- Taxes & Mutual Funds
○ Income dividend are reported on your federal tax return & taxed as income
○ Capitol gain distributions result from the fund selling securities it held for more than a
year
- Two Problems to keep a look out for that come from taxation of a mutual fund
○ When you purchase shares of stocks, corporate bonds and/or other investments in your
taxable account you then decide whether you want to hold or sell them
○ Mutual Funds buy & sell securities within the funds portfolio’s on a regular basis during
any 12 month period
- Purchase Options
○ Through a brokerage firm you can purchase shares of an open-end loan fund through an
account executive or sales person authorized to do so
○ Investors purchase & sell mutual funds via an investment company by:
§ Regular account transactions (The more popular/least complicated choice)
§ Voluntary Savings plans
§ Contractual Savings plans
§ Reinvestment Plans
○ This allows for smaller purchases for the minimum required by method mentioned above
○ For most voluntary savings plans, the minimum purchase ranges from $25-100 for each
purchase
○ Most investors can choose mutual funds as a tool to invest money to be contributed to a
401k, 403b or Roth IRA (Individual Retirement Account)
○ An older plan known as Contractual Savings plans (formerly periodic payment plans)
require you to make regular purchases over a specified period of time, usually 10-20yrs
○ Front ended load plans
§ almost all the commission are paid in the first few years of the contract
○ A reinvestment plan
§ A service provided by an investment company where income dividends & capitol gain
distributions are reinvested to purchase additional shares of funds
- Withdrawal Options
○ Closed-ends funds & EFTS can be sold on the stock market or over the counter markets to
another investor
○ Open-End Fund Shares are sold to back to the investment company at their Net Asset
Value (NAV)
§ Investors can receive money by:
□ Check, electronic transfer, written physical check
- Systematic Withdrawal Plans
○ Many open end funds allow scheduled withdrawals if the account has a minimum balance
& have various methods to withdrawal:
§ Fixed Dollar Withdrawal
□ When you take out the same amount of money on a regular basis
§ Sell-off Method
□ When you sell a certain number of shares in a certain amount of time
□ The amount received changes due to price fluctuations
§ Fixed Percentage Withdrawals
□ A fixed percentage of the funds growth
□ When your original principal stays invested as long as withdrawals stay below
growth
