In this web conference we will learn about mutual funds as a tool for long-term savings for families. We will discuss the elements of a fund and costs associated with funds. We will discuss ways in which mutual funds fit into a military families’ financial plan. We will also learn about performance measures and important characteristics of mutual funds highlighted in the prospectus. Finally we will learn about ways in which we can make decisions using fund screeners. We will use several case studies to illustrate.

1. Welcome to the
Military Families Learning Network Webinar
How to Read a Mutual Fund Prospectus
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This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture,
and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award Numbers 2010-48869-20685 and 2012-48755-20306.

2. Welcome to the
Military Families Learning Network
Research and evidenced-based
professional development
through engaged online communities.
eXtension.org/militaryfamilies
This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture,
and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award Numbers 2010-48869-20685 and 2012-48755-20306.

3. Connect with the Personal
Finance Team
Facebook: PersonalFinance4PFMs
Twitter: #MFLNPF

4. Additional Resources Available:
learn.extension.org/events/1674
• LEARN LINK / screen capture

5. Today’s Speaker
Dr. Michael Gutter is an Associate Professor,
Interim FCS Program Leader, and Financial
Management State Specialist for the
Department of Family, Youth, and Community
Sciences, in the Institute for Food and
Agricultural Sciences at the University of
Florida. He is also the Principal Investigator
for the Personal Finance Concentration Area
of the Military Families Learning Network. The
common theme that connects Gutter's
Research, Teaching and Outreach is helping
households achieve financial security. He
regularly tweets on personal finance topics
under @mikegutter on Twitter.

6. Mutual Funds: A Handy
Financial Tool for Building
Wealth
Dr. Michael S. Gutter
Interim FCS Program Leader
University of Florida IFAS Extension
msgutter@ufl.edu
@mikegutter

7. Workshop Objectives
• Learn about different types of mutual funds
• Learn about the different ways in which
military families may need or access funds or
similar investments
• Learn how to compare funds
• Activity involving matching funds to family’s
objectives

8. Mutual Funds
• May fit into your investment plan
• Provide diversification
• Understand your personal risk tolerance
• Know your objectives
• Research before purchasing any
investment vehicle

9. Open-end Investment
Companies - Mutual Funds
• Have a variable capital structure
• Shares are bought and sold from the
mutual fund
• Shares cannot sell for a discount from
NAV

10. Closed-end Investment
Companies
• Have a fixed capital structure
• Shares are bought and sold in the
secondary markets
• Shares may sell for a premium or
discount from NAV
• Tendency for shares to sell at a
discount from NAV

11. What is a Mutual Fund?
• An investment company pools the assets
of many investors to purchase securities
• Funds can be invested in stocks, bonds,
money market instruments, real estate,
precious metals
• Investors buy shares in the fund
• Provides diversification to reduce risk

12. Poll Question:
People Can Own Mutual Funds
1. Through employer sponsored
retirement plans
2. 529 plans
3. Individual Retirement Accounts
4. Annuities
5. All of the above
6. None of the above

13. Advantages of Mutual Funds
• Diversification
– Cost effective way to achieve diversification
• Affordability
– Can often get started with small amounts
– Allows for regular small deposits
• Liquidity
– Can sell shares back to the investment company
• Professional Management
– Professionals make decisions
– Advantages and disadvantages

14. Word on Diversification
• Time Value of Money
• Risk and Return
• Diversification
– Thus the goal of diversification can be
thought of as
– The reduction/elimination of idiosyncratic
risk within a portfolio

15. Disadvantages of Mutual Funds
• Funds held outside of a tax advantaged plan
– Taxes on capital gain & dividend distributions
• Even when you reinvest distributions
• Lack of control of exactly which securities are
purchased
– Decided by fund manager
– Index being tracked
• Risk
– No guaranteed return
– Market fluctuation

16. How Can You Profit?
• Dividend Distributions
• Capital Gain Distributions
• Net Asset Value increases and you
redeem (sell) the shares
• You can reinvest:
– Dividends
– Capital gains distributions

17. Prospectus
• Document that all companies offering
new securities for public sale must file
with the SEC.
• It spells out in detail the financial
position of the offering company, what
the new funds will be used for, the
qualifications of the corporate officers,
risk factors, nature of competition, and
any other material information.

18. Name of the Mutual Fund
• Prospectus must be updated at least
annually
• May be a “consolidated” prospectus for
several funds from the same fund family
– Example: Vanguard U.S. Stock Index Funds

19. Required Cover Statements
• Standardized “CYA” language
– Clearly states in bold print that there is no
government approval of the fund
– To state that there is approval is a crime
• Tells investor about the availability of
– Statement of Additional Information (SAI)
– Annual and semi-annual reports to
shareholders

20. Statement of Fund Investment
Objective
• Varies with the type of mutual fund
• Almost 30 different objectives (ICI)
• Three PRIMARY Objectives:
– Stability (preservation of principal)
• Example: Money market mutual funds
– Growth (increased value of principal over time)
• Examples: Stock mutual funds, stock index funds
– Income (generating a stream of payments)
• Example: Bond mutual funds

21. Example of a Mutual Fund
Objective
The fund invests with the objective of
capital growth. Although income is
considered in the selection of
securities, the Fund is not designed for
investors seeking primarily income
rather than capital appreciation.

22. Fees and Expenses
• Shareholder Fees
– Charged to an individual investor’s account
– Examples: sales load, redemption fee, account
maintenance fee, exchange fee
• Annual Fund Operating Expenses
– Paid by mutual fund as a % of assets
– Examples: management fee, 12b-1 fee, other
expenses
• Standardized hypothetical example
– 1, 3, 5, and 10 years of fees on $10,000

23. Financial Highlights Table
• NAV, beginning of period
• NAV, end of period
• Net assets, end of period
• Ratio: total expenses & average net assets
• Number of outstanding shares
• Total return for period
• Turnover rate

24. Net Asset Value
• A share in a fund is purchased at NAV
(plus sales charges & fees)
• Per share Net Asset Value=
Total Assets – Total Liabilities
Number of Shares Outstanding

25. Sources of Return to the
Investor
• Income distributed in the form of
dividends
• Capital gains distributions
• Appreciation in the NAV
• Change in the discount/premium

26. Investment Policies
The “personality” of a fund
– What it will do and won’t do
– Securities purchased to meet fund objective
– Investment quality of securities
– Use of speculative practices (e.g., selling on margin,
futures contracts, derivatives)
– Limits on % of fund assets in one industry

27. Investment Risks
• Describes principal risks associated with
investing in a particular fund
– Example: currency risk (global fund)
• Describes risks associated with a type of
investment
– Example: interest rate risk on bond funds
• Describes range of quality ratings allowed
– Example: low rated bonds in junk bond funds

28. Investment Advisor Information
• Name of advisor (e.g., The Vanguard Group)
• Beginning of operations (e.g., since 1975)
• Amount of assets under management (e.g., $592
billion in assets)
• Services provided by investment advisor
• compensation to investment advisor as a % of
assets
• Special arrangements such as bonuses

29. Fund Distributions and Taxes
• Frequency of fund distributions
– Dividends
– Capital gains
• Sale or exchange of shares is a “taxable
event”
• Procedure for reinvesting distributions

30. How to Purchase Shares
• Method(s) of Purchase
– Online, by check, by exchange, through a
broker/sales agent
• Price of Purchase
– NAV or NAV plus a sales load
– Price breaks for large purchases
• Minimum Purchase Amounts
– Minimum initial deposit and later deposits
– Minimums for IRAs and automatic
purchase plans

31. How to Redeem Shares
• Methods by which shares can be
redeemed (e.g., check-writing, telephone
request, written request, wire transfers)
• Description of redemption price
– Example: “You redeem shares at the fund’s
next-determined NAV after [company]
receives your redemption request.”
• Process to exchange fund shares

32. Profile Prospectuses
• Short and sweet
– One double-sided page
• Key pieces of information only
– Short paragraphs
– Sometimes in “Q&A” format
• Should still request full prospectus

33. Five Key Factors to Scrutinize
• Fund objective
• Fees and expenses (for type of fund)
• Historical performance
• Investment policies relative to personal
risk tolerance
• Minimum initial and subsequent deposits

34. The Load Fee
• Charged to investor when the shares
are purchased
• Compensates the sales person (i.e., is
analogous to brokerage commissions
for buying securities)
• Varies with dollar amount purchased
• Load expenses mean investors pay a
premium over the fund's NAV

35. The Load Fee
Front-End
• Charging the load
(commission) on a mutual
fund at the time of
purchase
Contingent-Deferred
• AKA Band-End Load:
fees assessed on a
mutual fund account at
redemption
• % percentage of net
asset value; generally
declines over time

36. Other Fees and Expenses
• Early withdrawal fees (or exit fees
• Management fees
• Operating expenses
• Exchange Fees
– a fee charged by many no-load fund
families when moving money from one
fund to another within the family
– Discourages investors from using the funds
as trading accounts.

37. Sales Charges vs. Management
Expenses
• The longer you hold an investment:
– Less effect of sales fee (load)
– Greater the effect of management
expenses
• Your timeline can affect your choice

38. Total Annual Fund Operating
Expenses
• Expense ratio
– Let’s you know how much of the funds
assets are going towards annual expenses
– Expressed as a percentage
• Expense Ratio = annual expenses ÷ fund
assets
• Does not include
– Loads (sales commissions)
– Transaction Fees

39. Expense Ratios
• Good way to compare the ongoing fees
of different mutual fund companies
• Example:
– Company A expense ratio= .75
– Company B = 1.5

40. Expense Ratios
• Compare ratios for similar types of fund
Example:
– Domestic to domestic
– International to international
– Index fund to index fund

41. Classes of Shares
• Class A (front end loads)
– Pay commission when you buy the fund
• Class B (back end loads)
– Pay commission if you sell before the
specified period ends. AKA Contingent
Deferred Sales Charges
• Class C
– Carry a level load, collected every year

42. No Load Funds
• No commission charged
• Purchase directly from the investment
company
• Can still charge other fees
– 12b-1
– Purchase fees
– Exchange fees

43. Tax Implications

44. Redeem Shares:
Will you have a capital gain?
• $$$ = (NAV x # shares) – fees, commission
– Capital Gain
– Capital Loss

45. Taxes
• Earnings in tax advantaged plans grow tax
free
– Retirement plans, 529 plans
• Outside of those plans, taxes paid on
distributions even if reinvested
– Long –term capital gains tax rate is less than
tax rate for ordinary income
– Capital losses can be used to offset capital
gains

46. Taxes
• When you sell you have a capital gain,
loss or break even
– Tax liability depends on amount gained or
lost
• Amount of Capital Gain/Loss
Sales Price – Cost Basis
• Cost basis is purchase price (includes
any fees, commissions, etc. )

47. • Turnover
– the relative frequency of trading securities
within a mutual fund or other portfolio
• Turnover ratio
– for mutual funds, annual sales divided by
the average monthly net assets (excluding
securities with less than one-year
maturities)

48. Family of funds:
group of mutual funds owned
and marketed by the same
company
So we know how they work, what they cost, how we measure it
HOW DO WE DECIDE AMONGST
THE THOUSANDS OF FUNDS?

49. Purchasing Mutual Funds
• Broker
– Full Service
– Online
• Directly from the investment fund
company
• Through employer sponsored plan

50. Fund Objectives
• Each fund will have a specific objective
• Some general examples
– Growth
– Income producing (dividend paying)
– Social responsibility
– Track an index

51. Basics
• Money market mutual fund
• Bond fund
• Common stock fund

52. Differences in Risk Orientation of
Common Stock Funds
• Growth funds: stress appreciation potential; accept
considerable risk
• Income funds: focus on stocks that pay high dividends;
provide low risk and modest growth
• Blend funds: place more emphasis on stability than growth
funds do but less than income funds do; seek growth as
well as stability

53. Specialized Funds
• Sector funds
• Bond funds
• Index funds
• Tax-exempt bond funds
• Single country or regional funds

54. Investment Styles
• Index Funds
• Large cap
• Mid-size cap
• Small cap
• Growth
• Value
• Market Capitalization - Total market value of a company’s stock

55. • Specialty fund: designed for investors who seek
special investment opportunities. One such fund
might invest in precious metals, a second might focus
on commodities or commodity trading, and a third
might engage in option trading.
• Hedge funds: typically invest in derivatives, sell
short, use leverage, and invest internationally. take
substantial risks, to try for large rewards. Allow only
“qualified investors” to participate.
• Blind pool: the precise purposes of the venture are
not revealed to the pool of investors until later

56. • International funds: specializes in investments
outside of the United States and helps the investor to
further diversify his or her portfolio. International
funds may specialize in specific countries or regions,
such as the Pacific Rim.
• Global fund: invests in the United States and in
foreign markets. The general philosophy is that we
live in a global economy and that capital should flow
toward those regions that offer optimal risk-return
combinations.

57. The Composite Performance
Measures: The Treynor Index
• Standardizes the return in excess of the risk-free return
by the portfolio's beta
• Useful for comparing two managers on a risk adjusted
basis but does not compare to market
– Can calculate for the market and then use for
comparison
• Uses the portfolio's volatility as the measure of risk
• Assumes that the portfolio is well diversified, so the beta
(which measures systematic risk only) is the appropriate
measure of risk

58. The Composite Performance
Measures: The Sharpe Index
• Standardizes the return in excess of the risk-free return by
the portfolio's standard deviation
• Uses the portfolio's variability as the measure of risk
• Does not assume that the portfolio is well diversified
• This is because it uses Standard deviation (which
measures total risk) is the appropriate measure of risk
• Useful for comparing two managers on a risk adjusted
basis but does not compare to market
– Can calculate for the market and then use for
comparison

59. Point of clarification
• Variability
– Compare one year’s return with average
for the portfolio or security
• Volatility
– Compares return relative to something else
• Like benchmark

60. The Benchmark Problem
• The comparisons use an aggregate
measure of the market
• The composition of many portfolios are
not comparable to the market
• Examples would be specialized funds or
global funds
• Treynor and Jensen use Beta but Beta
can be biased

61. Advantages of Mutual Funds
• Portfolio management
• Risk reduction
• Diversification
• Convenience

62. Disadvantages of Mutual
Funds
• Management fees, expenses, and loads for
load funds reduce their returns.
• Large investors, such as mutual funds,
usually adversely affect the market when
they trade.
• Institutions usually restrict their analysis to a
small percentage of traded stocks.

63. http://www.finra.org/Investors/ToolsCalculators

64. Okay let’s see what we
learned…
• We are going to consider a unique case
on the next slide. We will then go online
and access one of our fund screeners.
• What fund did you pick and why?

65. Selecting Your Own Funds
• Your financial goals
– Growth, income, combination
– Asset allocation
• Available options
– Employer sponsored plan
– Individual plans
• Risk: Safety of investment and Individual comfort level
• Minimum investment to get started
• Timeline
• Liquidity
– Can you access when needed (and what will be the cost)
• Tax consequences

66. Activity
• Meet Marco (28) and Sheila (27). Marco is
stationed at Eglin Air Force Base in Florida.
His wife is an Extension agent. They recently
decided to open a Roth IRA. They have no
plans for this money prior to retirement. They
are looking for growth in their investment over
the long run. They can afford to invest
between $2000 and $5000 per year. If you
were them, what fund might you choose?

67. http://www.msuextension.org/solidfinances/resources/mutualfunds.pdf

68. Follow “The Rule of Three”

69. Start a File For Every Fund That
You Own
• Most recent prospectus
• Copy of original application form
• Annual account statements
• Periodic statements
• Articles about the fund, manager, etc

70. Sources & Resources
• Montana State University
– http://www.msuextension.org/solidfinances/pastrecordi
ngs.html
• Securities and Exchange Commission
– http://www.sec.gov/investor/pubs/inwsmf.htm
• Investment Company Institute
– www.ici.org
• Financial Industry Regulatory Authority (FINRA)
– http://www.finra.org/Investors/SmartInvesting/Choosing
Investments/MutualFunds/
• Dr. Michael Gutter, 2011 webinar

71. Questions? Comments
Experiences?

72. Next Personal Finance Webinar
Current Personal Finance Topics for
Financial Practitioners
• Tuesday, November 25, 2014, 11 a.m. ET
• https://learn.extension.org/events/1714
• Speaker: Dr. Barbara O’Neill
• 1.5 CEUs for AFC-credentialed
participants

73. Military Families Learning Network
Find all upcoming and recorded webinars
covering:
Family Development
Military Caregiving
Personal Finance
Network Literacy
http://www.extension.org/62581
This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture,
and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award Numbers 2010-48869-20685 and 2012-48755-20306.