What is a Mutual Fund? Suggested Grade & Mastery Level Suggested Time

What is a Mutual Fund? Suggested Grade & Mastery Level Suggested Time

What is a Mutual Fund?
Suggested Grade & Mastery Level
High School
Suggested Time
45- 50 minutes
Teacher Background
A mutual fund is a collection of stocks, bonds and other securities owned by a group of investors and
managed by a professional investment advisory firm. The investment firm collects money from investors,
pools it and invests it. The mutual fund manager, working with a team of analysts, decides which stocks
and securities to include in the fund, often investing in 100 or more securities. Some mutual funds are
index funds, which closely follow a particular index of stocks such as the S&P 500 or the Dow.
Mutual funds fit the needs of people with a variety of risk tolerances—from the very conservative to the
more speculative. Every day the fund's managers and analysts evaluate the performance of each
security and how current economic, social and political events might affect their holdings. Based on
these factors, the fund manager decides which securities in the fund to keep or sell.
All mutual funds have investment objectives, for example, value funds only invest in stocks the fund’s
managers believe are undervalued. Some funds take the fund’s objectives even further by only investing
in companies the managers believe are “socially responsible”. Socially responsible can mean different
things to different people. For more on socially responsible funds, visit http://www.socialfunds.com,
where you can find funds that address everything from the environment to religious standards.
Investing in mutual funds helps individual investors “diversify their portfolios.” Investors cannot buy a
mutual fund’s shares on margin (using money borrowed from a broker to buy stock) or sell them short
(sale of a stock borrowed from a broker. Short sellers believe a stock’s price will drop enabling them to
repay the borrowed shares with lower-priced ones).
Vocabulary
Bonds: An IOU that a company or government sells when it borrows money. Bonds are called fixedincome investments because they pay a fixed amount of interest to the bondholder for the use of his/her
money.
Closed-end funds: Like open-end mutual funds, these are collections of securities managed by a
professional investment advisor. Unlike open-end mutual funds, their shares are traded on a stock
exchange like ordinary stock.
Diversification: Reducing risk by combining different investments whose prices aren’t likely to move in
step with one another.
Exchange-Traded Funds: Funds whose shares, like closed-end funds, are traded on a stock exchange.
These invest in stocks or bonds that closely follow an index.
Index: A statistical measure of change in an economy or a securities market. In the case of financial
markets, an index is essentially an imaginary portfolio of securities representing a particular market or a
portion of it. For example, the Standard & Poor's 500 is one of the world's best known indexes and is the
most commonly used benchmark for the stock market.
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Mutual funds: An investment instrument developed and managed by a company that pools members’
money—often millions of dollars—to invest in a variety of stocks and bonds. Investment professionals
who research companies and buy or sell stocks actively manage the funds based on what they think is
best for the fund’s shareholders.
Open-end funds: Funds that usually sell as many shares as investors want to buy. Sometimes open-end
funds stop selling shares to new investors when they grow too large to be managed effectively. Investors,
who want to sell shares of their open-end funds, sell them back to the mutual fund.
Performance Objectives
Students will be able to:
Define and identify the characteristics of a mutual fund
Use the newspaper and Internet to research mutual funds.
Use their research on mutual funds to help determine team investments for The Stock Market Game.
Create and deliver a presentation on mutual funds, their risk and performance
Subject Areas
Economics, Technology/ Research, English Language Arts (Writing), Mathematics, Business, Social
Studies
Materials
Activity Sheet 1: What are Mutual Funds, Part I and Part II (for Master and Grand Master)
Activity Sheet 2: Reading and Interpreting Information on Mutual Funds
Activity Sheet 3: Selecting and Evaluating a Mutual Fund
Chart Paper & markers
Computers/Internet
Springboard Activity
Have students, working in their SMG teams, brainstorm different products and services people buy and
use. Have students name a range of products in these three categories:
Information (software, media, telecommunications, hardware)
Services (healthcare, consumer, business, and financial services)
Manufacturing (consumer goods, industrial materials, energy, utilities)
Explain to the students that when you are making investments, you want to diversify your portfolio.
Ask
As an investor, why might you want to invest in companies under all three categories?
How many of you would invest in products in more than one of the category?
What if you could only buy in one category?
Would that put your money in greater risk?
Procedure
A mutual fund company does exactly what we have just discussed. They take investors’ money, pool it
with other investors’ money and invest in various stocks, bonds and other securities. Some mutual funds
are more risky than others depending on the types of investments they make.
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Organize students in their SMG teams and distribute Activity Sheet 1: What Are Mutual Funds? Part I.
Have students complete the activity sheet in their teams. Discuss as a class.
NOTE: For more information on mutual funds, The Stock Market Game supplies information on funds and
how to invest in them. When the students sign into their SMG accounts, they can click on the green tab at
the top right that says “Mutual Funds.”
Novice and Apprentice Levels:
Distribute Activity Sheet 2: Reading and Interpreting Information on Mutual Funds and review with
the students how to read the table. Using information the teams developed on Activity Sheet 1: What
Are Mutual Funds, have the teams go to www.morningstar.com and research the three funds they
selected. Use Activity Sheet 3: Selecting and Evaluating a Mutual Fund to help guide the research.
Master and Grand Master Levels:
Complete Activity Sheet 1: What Are Mutual Funds, Part 2 and discuss which mutual fund families the
students would like to research further. Distribute Activity Sheet 2: Reading and Interpreting Information
on Mutual Funds and review with the students how to read the table.
Assessment
Novice and Apprentice Levels
Ask
Based on what you now know about mutual funds, will your team consider investing in mutual funds?
Why or why not?
Master and Grand Master Levels:
Ask
Based on your research, if your team was going to invest in a mutual fund, which fund would be your
primary investment?
Why did you choose this fund?
Application
Novice and Apprentice Levels:
Using the information the teams developed in Activity Sheet 1: What Are Mutual Funds? Have the
student team go to www.morningstar.com and research the three funds they selected. Use Activity
Sheet 3: Selling and Evaluating a Mutual Fund for Novice and Apprentice Levels to guide the research.
Ask
How will the information you found through Internet research help you when you decide where to put your
mutual fund investment dollars?
Based on your new understanding of mutual funds, what will your investment strategy be—mutual funds
or individual stocks or perhaps both?
Have students each write a paragraph describing their team’s investment approach.
Master and Grand Master Levels:
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Use Activity Sheet 3: Selling and Evaluating a Mutual Fund for Master and Grand Master Levels guide the
research.
Ask
What information does the Morningstar style box provide to help investors make their decisions?
Could you use the same system for individual stocks? Why or why not?
Hold a classroom debate, assigning some teams to support mutual fund only investing, some to support
stock only investing and some to advocate a mix of stocks and mutual funds. Have each team make a
three-minute presentation before the debate begins outlining their point of view.
Enrichment Activities
Have each team select several mutual funds for possible investment. Assign each team member to
research one fund under consideration and report back to the group on or before the next time the team
must evaluate their portfolio. At that time, have each team make a brief presentation on one of the funds
researched (they do not have to reveal their investment strategy: they can select a fund that they
rejected or accepted as a potential investment).
Math: Have students create a bar graph or pie chart showing a breakdown of investments the mutual
fund contains (bonds, information, services, manufacturing, gold, etc…) Encourage students to use their
IT skills in creating this graph. Students may also do a comparative study of the performance of various
kinds of funds—stock funds, bond funds, mixed funds, etc.
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Activity Sheet 1: Answer Key
Part 1: Novice and Apprentice Levels
Answers may vary Note: The SMG website is also an information source on mutual funds. When you sign into your
account, click on “Mutual Funds” at the top right.
1. Look at the stocks your team has purchased or plan to purchase. Do the stocks represent a broad
range of industries? What industries do they represent?
We mainly have stocks in communications and oil & gas.
2.Use the Internet to research different mutual fund companies. You can use a search engine and type in
mutual fund, use the newspaper and/or use morningstar.com. List three mutual fund companies.
Fidelity Advisor Cyclical Indst Instl
Hancock Horizon Value A
Merrill Lynch Large Cap Value I
Types of Mutual Funds
There are more than 17,000 mutual funds for investors to choose from, including balanced funds, stock
funds, bond funds, sector funds, money market funds, etc.
Most are open-end funds, that is, they sell as many shares as investors want to buy. (Sometimes, openend funds will stop selling new shares when they grow too large to be managed effectively.) If you want to
sell shares of your open-end fund, you sell them back to the fund.
Closed-end funds are collections of securities managed by a professional investment advisor but unlike
open-end mutual funds, they offer a fixed number of shares that are traded on a stock exchange like
ordinary stock.
Exchange-Traded Funds are funds whose shares, like closed-end funds, are traded on a stock
exchange. These invest in stocks or bonds that closely follow an index.
3. Using the Internet, find three funds that hold shares in industries that interest your team.
U.S. Global Investors Global Res, BlackRock Global Resources Inv A, and Jennison Natural Resources
A-these all invest in natural resources.
4. A number of funds that have been created to support particular ideas or causes such as support
for women’s issues, to encourage investment in companies with socially responsible business
practices, or support family-friendly companies. Locate two funds that fall into this category.
Calvert Funds Inc. and Green Century Balanced Fund
Part 2: Master and Grand Master Levels
Mutual Fund Families
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There are many funds with the same name, i.e., Putnam funds, Schwab funds, Vanguard funds, etc. A
family of mutual funds is a group of funds offered by the same investment company. A fund family can
use different distributors for different funds. The family of funds will often include many different types of
stock funds, bond funds, international funds, etc.
Mutual fund ticker symbols are five letters long and end in an “X” (e.g., FBGRX, SNXFX, etc.) Many
commercial web sites provide a fund index and list mutual funds in family indices. The Investor
Research link of your SMG portfolio also allows you to research mutual funds.
Name three mutual fund families that you would like to research further:
Wasatch Micro Cap Value
Royce Value Plus Service
Royce Select III Inv
WAMVX
RYVPX
RSFTX
31.29%
30.00%
29.40%
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Activity Sheet 2: Answer Key
Answers may vary
Most daily newspapers include mutual fund quotes in the financial section, but not all mutual funds are listed
every day. Listings for open-end mutual funds are usually organized by family fund names. Listings for closedend funds are contained in the stock quotation section, because they are valued like stocks.
Here is an example of information for two Fidelity Family Funds:
Name
Fidelity
EmrgMkt
LgGrowth
NAV
Net Chg
YTD % Ret
16.59
24.66
+0.07
-0.14
+16.0
+4.92
NAV stands for Net Asset Value. This represents the value of one share in this fund. NAV is calculated by
taking the total value of the fund's investments, subtracting its expenses and dividing by the number of shares
outstanding. In this example, one share of the Fidelity Emerging Markets Fund was valued at $16.59.
Net Chg (Net Change) is the change in the value of one share from the previous day’s market closing. Here the
value of one share increased seven cents from the previous day, so a share in this fund closed trading the
previous day at $16.52.
YTD % Ret (Year-To-Date Percent Return) shows the percentage increase or decrease in value for one share
since the beginning of the current calendar year. This number assumes reinvestment of any dividends. Here a
share of Fidelity Emerging Markets Fund increased in value by 16% during the current year.
Based upon what you have read so far, what is the main reason why you would choose to invest in a mutual
fund?
It can give you a variety of stocks, which can increase in value over time.
Find the NAV, NetChg and YTD % Ret for the three mutual funds you named on Activity Sheet I.
Ticker Symbol
RYVPX
BRUSX
FBRVX
NAV
12.62
40.46
44.90
NetChg
1%
.08%
1.38%
© 2012 SIFMA Foundation for Investor Education. All rights reserved.
YTD% Ret
22.75%
25.83%
17.92?
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Activity Sheet 3: Answer Key
Answers for Morningstar Box
Morningstar Style Box
Large
Medium
Small
Value Blend Growth
A growth-oriented portfolio will hold stocks of companies that the portfolio manager believes will increase factors
such as sales and earnings faster than the rest of the market. A value-oriented portfolio contains mostly stocks
the manager thinks are currently undervalued in price and will eventually see their worth recognized by the
market. A blend portfolio might be a mix of growth stocks and value stocks, or it may contain stocks that exhibit
both characteristics. Large, medium and small refer to the size of the mutual fund.
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Activity Sheet 3: Answer Key
Group Members:
How to use NASDAQ:
1. Go to yahoo.finance.com and click on the “top funds” link in the left hand navigation.
2. Click on “overall top performances”.
3. Choose three mutual funds and answer the questions below.
1. Fund Name: Janus Adviser Large Cap Growth JGROX
NAV: 23.0
YTD Return: 9.53%
How has the fund performed in past five years? It has not been around for that long!
What is the percent breakdown among Information, Service and Manufacturing holdings if the
company invests in stocks? Health 19.89%, Industrial Materials 14.53%, and Financials 12.87%
What are the three largest holdings of this fund? In what industry are they found?
BOEING CO
BA
3.51
17.50
PROCTER GAMBLE CO
PG
3.12
-2.95
YAHOO INC
YHOO
2.86
What level of risk is there in investing in this fund? Why? Moderate because it invests in growth
companies like Yahoo but also has other companies like P & G.
Would you invest in this fund? Why/ Why not? Would invest in this company because in June and
July it has beaten out the record of the S&P as Dow Jones.
2. Fund Name: answers may vary depending on fund chosen
NAV:___________________________________________________________________
YTD Return:_____________________________________________________________
How has the fund performed in past five years?_____________________________________
What is the percent breakdown among Information, Service and Manufacturing holdings if the
company invests in stocks?
_____________________________________________________________________________
_____________________________________________________________________________
____________________________________________________________________
What are the three largest holdings of this fund? In what industry are they found?
_____________________________________________________________________________
_______________________________________________________________________
What level of risk is there in investing in this fund? Why?
_____________________________________________________________________________
_____________________________________________________________________________
____________________________________________________________________
Would you invest in this fund? Why/ Why
not?______________________________________________________________________
_____________________________________________________________________________
_______________________________________________________________________
3. Fund Name: answers my vary depending on fund chosen
NAV:___________________________________________________________________
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YTD Return:_____________________________________________________________
How has the fund performed in past five years?_____________________________________
What is the percent breakdown among Information, Service and Manufacturing holdings if the
company invests in stocks?
_____________________________________________________________________________
_____________________________________________________________________________
____________________________________________________________________
What are the three largest holdings of this fund? In what industry are they found?
_____________________________________________________________________________
_______________________________________________________________________
What level of risk is there in investing in this fund? Why?
_____________________________________________________________________________
_____________________________________________________________________________
____________________________________________________________________
Would you invest in this fund? Why/ Why
not?______________________________________________________________________
_____________________________________________________________________________
_______________________________________________________________________
© 2012 SIFMA Foundation for Investor Education. All rights
reserved.
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