296 Chapter 6 Investments
When funds are withdrawn, the investor receives the value of the withdrawn shares,
calculated at the then-current NAV.Example 6.4.4 Six months later, Matt decides to sell his shares of the fund. When
he sells, the fund’s total assets are $16,509,362 and the total number of shares is
903,444. How much does Matt receive?The value of a share is $16,509,362/903,444 $18.27. Multiplying this NAV by 96.722
shares works out to $1,767.11.Mutual funds are required to distribute the dividends they receive and capital gains they
earn (less any capital losses) to their shareholders each year. The shareholders may choose
to receive these payouts in cash, but in most cases they choose to reinvest these payments
in more shares of the mutual fund. In that case, the number of shares owned may grow over
time, even if no new money is invested in the fund.
Mutual funds charge their shareholders a number of fees, to pay for the expenses of run-
ning the fund and to allow the fund company to make a profit. These expenses are normally
deducted from the fund’s overall assets, and so the fund’s shareholders do not pay these
directly, though they do pay them in the form of a lower NAV than if there were no such
fees. A fund’s expense ratio indicates the amount of fees charged as a percent of overall
fund assets. Obviously, funds with low expense ratios have an advantage over funds with
higher ratios. It may be worth paying a high expense ratio, though, if the mutual fund is an
exceptionally strong performer.
Some mutual funds charge loads. A load is a fee paid when the fund is purchased. Loads
are expressed as a percent of the total invested in the fund. Loads are most commonly
charged on funds sold through stockbrokers. A no-load fund is a fund that does not charge
a load.Example 6.4.5 The NAV of the Macedon Mutual Global Fund is $43.79. The fund
charges a 5% load. How many shares will I own if I invest $3,000 in this fund.The 5% load works out to (5%)($3,000) $150. This leaves $3,000 $150 $2,850.
Then $2,850/$43.79 per share 65.083 shares.Some funds also charge fees when you sell shares, or if you sell your shares within a certain
period of time of buying them.
There are literally thousands of mutual funds available in the United States today.
Some are very general in nature: equity funds invest in stocks, bond (or fixed income)
funds invest in bonds, and money market funds invest in the cash asset class. Within
each of these categories there are special types of funds that invest in certain speci-
fied ways. You can find equity funds that invest only in stocks of companies in certain
industries, or in foreign stocks, or in stocks that pay high dividends. If you want to invest
your money specifically in renewable energy companies, or in Japanese companies, or
in companies considered “socially responsible,”^9 you can find mutual funds to meet your
interests. You can find bond funds that invest only in U.S. federal government bonds, or
only in municipal bonds or junk bonds, or only in the bonds of foreign companies, and
so on.
Two particular types of mutual funds deserve particular mention. Index funds are mutual
funds that are managed to match the investment performance of some market index, such
as the S&P 500. Index funds are quite popular. Even though it might seem that buying an
index fund is aiming for a mediocre return, in fact very few mutual funds that are managed
to do better than the index consistently succeed at this goal. Balanced funds (or asset
allocation funds) invest in a mix of different asset classes. They are intended to provide
“one-stop shopping” for investors seeking an investment portfolio diversified across dif-
ferent asset classes.(^9) There is also at least one mutual fund which caters to “socially irresponsible” investors. Really.