Mutual Funds: Investing in Something Alongside Other People as a Group
To complete this assignment, refer to the scenario from Assignment 1: Investment Selection this is the scenario from assignment 1 (The highly marketable securities that I would be interested in researching is Fidelity investment mutual funds. Not all investments perform well at the same time. Holding a variety of investments may help offset the impact of poor performers, while taking advantage of the earning potential of the rest. Mutual funds are a theoretical, cost-efficient way to build a diversified portfolio of stocks, bonds, or short-term investments. Mutual funds are easy to buy and sell consequently, they meet a wide range of financial goals. Fidelity offers the tools and professional to guide an investor to build the investment strategy that matches their lifestyle and comfort level. The marketable securities at Fidelity Investments has grown over the past five years except in 2013 with a decline according to their financial statement and the S&P 500).
Note: Please include any financial statements or relevant financial information in an appendix.
Write a five (5) page paper in which you:
1. Provide a detailed overview of the selected U.S. investment indicating the rationale for your selection.
2. Select five (5) financial ratios, then analyze the past three (3) years of financial data for the investment (please obtain data from the financial statements or the equivalent).
3. Analyze the price of the investment to its market index for the past five (5) years.
4. Create a trend line that depicts the price movement for the investment against the market index movement using elements of Microsoft Office, such as Excel, Visio, MS Project, or one of their equivalents such as Open Project, Dia, and OpenOffice, as appropriate. Note: The graphically depicted solution is not included in the required page length.
5. Determine the type of person who would be the best candidate for the chosen investment (e.g., the risk adverse investor, an aggressive investor, etc.). Provide a rationale for why this investment is a solid one, and support the assertion that someone should invest in this stock.
6.Include a two paragraph abstract, introduction with a strong thesis statement and a conclusion.
Mutual Funds
Student name
Institution
According to Northcott (2009), Mutual funds are means of investing in something alongside other people as a group. Fidelity investment mutual funds, therefore, means investing in projects or investments that have a guarantee of returns. An example of such investment is investing in government bonds or stocks. The advantage of investing as a group rather than an individual is that there is a professional manager whose job is to look after the invested funds and make sure that all necessary adjustment are according to their experience and market changes
The main advantage of investing of mutual funds is that they aggregate larger investments more than an individual can invest alone. This may open up possibilities for investment by a manager who can yield higher returns. It is important to note that the larger the portfolio means that the manager can diversify the holdings more than one can do as an individual and therefore the diversification spreads the risks. There are a wide range of potential purchases for a manager, and therefore, it is not as simple as just buying of some stocks or bonds. There are many variations available for the manager to selection from and the choice of the fund and management will be according to both the risk level acceptable and the optimized returns. Therefore, you can invest in money markets funds, income funds, value funds, index funds, sector funds, international funds and others. Important to note is that successful investment takes time, and the results are that the price you pay for the professional management is relatively cheap as compared with the value that you will receive.
Since the capital and money markets have been in existence people have invested in groups by combining their monies and expertise with the same objective or goal to earn better returns. Hence, mutual funds are the logical extension of ideas where investors pay someone to manage their money and commit the time to research investment resulting in improved investment returns.
The rationale of researching on mutual funds is the need to understand the relationship between risk and return and diversification of investments and their benefits to the individuals. Mutual funds started in the United Kingdom where investment trusts sold shares to investors. Later, this idea was adopted in the United States but in this case, most of the funds were closed end meaning that there were a certain number of shares for sale that were subsequently traded by the owners who made the market. Open ended mutual funds were created by Edward Leffler, who previously sold securities. The timing of these funds was not favorable as they performed poorly following the stock market crash. These compounded the managers to leverage the assets of the investor. This is usually a common practice when the investor feels that the market will only hike and therefore goes ahead and borrows money to multiply his or her gains. The open end funds fared better in the stock market crash compared to closed-end funds. The managers of the closed end funds became very secretive and did not always disclose what shares were held. They even could value the shares at whatever price they chose. This led to dubious practices. In the contrast the open-end funds had a policy of declaring the net assets value as they also permitted redemption upon demand. This served to keep off the extremes of borrowing and other manipulations.
Due to the stock market crash, the regulations were introduced on securities. One of the regulations was that anyone who offered publicly traded securities be registered with the federal trade commission and produce a prospectus to describe the securities to potential investors. This helped to control funds operation and offered protections to investors.
Later a Revenue Act was passed, and this established a benefit for mutual funds. This allowed ordinary companies to have a pass through tax methodology. This means that the funds are not taxed on their profits in the way the normal company is taxed. Instead, the shareholders are taxed on the distributions therefore avoiding the problem of double taxation. Many more regulations were passed and the results of these regulations were that the shareholders in a mutual fund can be assured that his or her interests are legally protected. Nowadays, most of the financial scandals concern the type of funds that do not have restrictions imposed by these laws, especially the hedge funds.
Another rationale why the topic of research is of interest is because of the high growth rates of mutual funds. In addition to the regulations that have been passed regulating mutual funds also, laws have been passed over the years, and they have benefited and popularized mutual funds particularly in the realm of retirement and saving accounts. For instance, in 1974 the U.S the employee retirement income security act was passed creating the principle of an individual retirement account (IRA), and the 401(K) retirement plan came into being with the revenue act of the 1978. Both of these savings plan draw heavily on mutual funds for their investment vehicles. Public awareness increased and this lead to mutual funds offering a better rate than the saving accounts deposits. This has led to the fast growth of mutual funds within the United States. Pg. 1-69
The five financial ratios that are used in the analysis below are, the dividend payout ratio, earning per share ratio, gross profit margin ratio and the price/earnings ratio. The dividend payout ratio deals with financing .when the dividend yield are low it indicates that the investment is worth and has return. This means that profits are re-invested and hence the low dividend yield. Refer to the information below from the Fidelity National information services in the United States.
Fidelity National Information Services
Financials
2005-12
2006-12
2007-12
2008-12
2009-12
2010-12
2011-12
2012-12
2013-12
2014-12
TTM
Revenue USD Mil
1,117
4,133
4,758
3,446
3,770
5,270
5,746
5,808
6,071
6,414
6,410
Gross Margin %
29.1
29.1
28.5
23.5
25.7
31.0
30.4
32.0
32.7
32.4
33.2
Operating Income USD Mil
185
592
746
335
278
801
1,067
1,079
1,064
1,271
1,192
Operating Margin %
16.6
14.3
15.7
9.7
7.4
15.2
18.6
18.6
17.5
19.8
18.6
Net Income USD Mil
130
259
561
215
106
405
470
461
493
679
722
Earnings Per Share USD
1.53
1.37
2.86
1.11
0.44
1.15
1.53
1.55
1.68
2.35
2.53
Dividends USD
0.20
0.20
0.20
0.20
0.20
0.20
0.20
0.80
0.88
0.96
1.02
Payout Ratio %
—
25.0
7.7
32.8
47.6
15.8
12.5
44.0
45.4
48.4
39.6
Shares Mil
128
189
197
194
239
352
307
298
294
289
285
Profitability
2005-12
2006-12
2007-12
2008-12
2009-12
2010-12
2011-12
2012-12
2013-12
2014-12
TTM
Tax Rate %
39.49
37.20
37.00
32.14
33.40
34.93
32.11
32.59
37.48
31.81
35.45
Net Margin %
11.67
6.27
11.80
6.23
2.81
7.68
8.17
7.94
8.12
10.59
11.26
Asset Turnover (Average)
1.18
0.96
0.55
0.40
0.35
0.37
0.41
0.42
0.44
0.45
0.45
Return on Assets %
13.76
6.02
6.44
2.48
0.98
2.87
3.35
3.37
3.58
4.77
5.09
Financial Leverage (Average)
2.12
2.43
2.59
2.13
1.68
2.21
2.13
2.04
2.12
2.21
2.17
Return on Equity %
34.32
14.39
16.21
5.87
1.79
5.50
7.28
7.02
7.46
10.34
11.12
Return on Invested Capital %
21.90
10.93
9.88
4.56
2.19
4.47
5.63
5.47
5.53
6.94
6.29
...