Teaching Mutual Funds

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1. Welcome
2. Topic of the Week
3. Definitions
4. Teaching Mutual Funds
5. Learning Activity

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We are looking forward to another great year
of providing training materials to help you teach
your young people.

If you would like to suggest topics, or have
any questions that we could help with, please
send us an email: topics@101financiallessons.com

Again, welcome to a new year of financial lessons
and thank you for being a subscriber.

Tim Liptrap,
Vice President, Education and Development

Email: tliptrap@101financiallessons.com


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II. Topic of the Week

The Nuts and Bolts of Mutual Funds

A Mutual fund is essentially a large pool of
money that is used to purchase stocks, bonds and
other investments, such as real estate or commodities.

Individuals will invest in a mutual fund by
purchasing "shares" of the fund, in anticipation that
the value of the fund will rise over time.

Investors purchase into mutual funds because they
offer diversification into many companies, thus
reducing risk and potential for financial loss.

A mutual fund is a great choice for those investors
who do not have the time, knowledge or desire to
manage their own money. By investing in a mutual
fund, an investor allows a professional money or
fund manager to make investment decisions on
their behalf.

A fund manager is responsible for the day-to-day
investing that is conducted by a mutual fund. The
fund manger works with a team of researchers and
analysts who provide the manager with the necessary
information to make wise investment decisions.

Investors will judge the fund manager on his or her
ability to manage the fund by the annual percentage
return on their investment.

According to the Monday, January 6, 2003, Wall
Street Journal, the best performing stock fund in 2002,
rose 106.97% (First Eagle SoGen:Gold) and the worst
performing fund dropped 80.37% (ProFunds:Wireless).

It may be unfair to judge a fund manager on a straight
percentage alone. Funds are compared against an index,
such as the NASDAQ 100, Dow 30, S+P 500, Russell 2000
or the Wilshire 5000. By comparing the fund against indexes
or other funds in the same category, offers a fair comparison
when evaluating performance.

In today's market, there are more than 12,000 mutual
funds available for purchase.

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An index is a measuring device used by investors to monitor
a specific area of the stock market. An index is comprised of
a group of different companies that share similar traits. An
index can either represent the entire stock market, a small
segment or industry (i.e. medical, software) or a type or size
(i.e. small, medium, large) company.

Types and Loads

Mutual funds are generally sold as either A, B or C Shares.
Shares of mutual funds are available directly from a mutual
fund company, through a retail broker or in your 401(k)
retirement plan.

It is important to know the differences between A, B and
C shares because it can affect the amount of money you
spend, save and earn. Generally, A, B and C shares are sold
on the same mutual fund, but have different cost structures
depending upon your investment needs.

"A" shares have a front-end load or a cost up-front. For example,
if you were to purchase a $1,000 worth of AIM Opportunities III,
it would cost you $55.00 to buy in. AIM Opportunities III charges
a 5.5% front-end load ($1,000 x .055 = $55.00).

A front-end load is a one-time expense to you, the investor to
buy into the fund. After purchasing an "A" share, an investor can
sell the mutual fund shares and will not incur any additional sales
charges.

A "B" share carries a back end load. A back-end load, is an expense to
the shareholder when the mutual fund shares are sold. A back-end
load is generally based on a sliding scale (i.e. 7% - 0%), depending
upon how long the shares are held. Each year, the amount that is
owed is reduced by a percentage point, until the investor has held
the shares for a full 5 - 7 years and the back-end load is 0.0%.

A back-end load encourages an investor to hold the funds longer
in their portfolio.

There is an argument for which shares are better to purchase,
an "A" share with a front-end load or a "B" share with a back-end
load. The argument states that in the end, it will work out to be the
same amount of money. Depending upon your current financial
situation, one type of mutual fund might be more advantageous
than the other.

"C" Shares do not have a front-end or back-end load. "C" shares are
in the same mutual funds, but are sold in large retirement programs
such as a 401(k) or 403(b) plan. "C" shares may also carry a higher
management fee.

Mutual funds also carry a management fee and 12b-1 fees
(marketing expenses). The fees are needed to pay the managers,
their staff and the marketing and administration of the fund.

Fees are shown to the investor as an annual percentage, but are
withdrawn quarterly from the fund's pool of money. Fees can
range from 0.2% to 14.0% depending upon the fund.

The US Global Investors Eastern Europe mutual fund charges
a fee of 6.43% annually. If you were to have $10,000 invested in
this fund, you would be charged $643.00 to cover management
expenses.

In contrast, the Alliance Premier Growth fund charges 1.25% for
annual fees. On the same $10,000, the expense to you to manage
the fund would be $125.00.

A listing of fees and expenses may be found in each mutual fund's
prospectus. Morningstar and Value Line offer detailed information
pertaining to mutual funds to their paid subscribers.

Shares are sold on the open market. Mutual funds have a 5-letter
symbol such as EUROX or APGYX. While stocks have a
1 to 4-letter symbol depending upon which exchange that they are
sold on (NYSE, NASDAQ or American).

The NAV or the net asset value determines the price for one share
of a mutual fund. The NAV is the entire value of the portfolio
divided by the number of shares outstanding. If a mutual fund
 had 1 million shares outstanding and the total value was $10 million
 the  NAV would be $10.00 or $10,000,000 /1,000,000 shares = $10.00
 per share (NAV).

The NAV is determined once a day, at the close of the market. If an
investor where to purchase shares in a mutual fund on Tuesday, they
would be charged the NAV (or cost) determined at Monday's close.
Mutual funds are sold at the previous days' close.

Recommend Links:

IV. Teaching Mutual Funds

A discussion with your children on mutual funds and investments
is recommended.

This subject is complicated, and we do not believe that it is necessary
to confuse the student with the different type of funds (i.e. Index,
Large Cap, Mid-Cap) in the first discussion.

We believe that the most important part of this lesson is to expose
a child to the types of common investment vehicles available.

• Past results do not indicate future performance.
• There are more than 12,000 mutual funds on the market
  today.
• An investment advisor can help you choose which funds
  are right for your portfolio.
• It is not uncommon to have a mutual fund outperform a
  savings account or Certificate of Deposit.
• According to the Wall Street Journal, the average U.S.
  diversified stock fund has had an average return of 7.65%
  for the last 10 years.
• The difference between front-end and back-end loaded
  funds.
  
  

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Goal:


To start children on the process of understanding
mutual fund expenses, fees and return on investment.

Word Problems.

Solve the following problems. Assume that all percentage
rates are not compounded.

1. Captain Ben, an Airline Pilot invested $10,000 in
XYZ mutual fund last year. It has been a full 12 months
and an annual return of 4.5%. How much does he have
it the account?

2. At the end of the year, Captain Ben chose to move his
entire account from a "B" share, with a back-end sales
fee of 3.0 % to a "C" Share with no front-end load. How much
did he move over in total?

3. Mr. A., a local CPA wants to invest $25,000 of a client's
money into ABC Mutual Fund. The fund has a front-end load
of 5.0% and an annual return of 7.0%. Assume that the fund
will return 7.0% again this year and there are no management
fees.How much money will Mr. A's client have at the end of
next year?

Answer Key

1. $450.00

$10,000 (total) x .045 = $450

2. $ 10, 136.50

$10,450 x .03 = $ 313.50 (expense)
$10,450 - $313.50 = $10,136.50

3. $25,412.50

$25,000 (investment) x .05 (front-end) = $1,250
$25,000 - $1,250 = $23,750 (actual investment)
$23,750 x .07 (annual return) = $1,662.50
$23,750 + $1,662.50 = $25,412.50

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