Eileen Ponders Mutual Funds Eileen Mahurin is the director of a major charitable

Question

Eileen Ponders Mutual Funds

Eileen Mahurin is the director of a major charitable organization in Knoxville, Tennessee. A single mother of one young child, she earns what could best be described as a modest income. Because charitable organizations aren’t known for their generous retirement programs, Eileen has decided it would be best for her to do a little investing on her own. She’d like to set up a program to supplement her employer’s retirement program and, at the same time, provide some funds for her child’s college education (which is still 12 years away). Although her income is modest, Eileen believes that with careful planning, she could probably invest about $250 a quarter, and she hopes to increase this amount over time. Eileen now has about $15,000 in a bank savings account, which she’s willing to use to kick off this program. In view of her investment objectives, she isn’t interested in taking a lot of risk. Because her knowledge of investments extends no further than savings accounts, series EE bonds, and a little bit about mutual funds, she approaches you for some investment advice.

Critical Thinking Questions

In view of Eileen’s long-term investment goals, do you think mutual funds or ETFs are the more appropriate investment vehicle for her?

Do you think that she should use her $15,000 savings to start a mutual fund or an ETF investment program?

What type of mutual fund or ETF investment program would you set up for Eileen? In your answer, discuss the types of funds you’d consider, the investment objectives you’d set, and any investment services (such as withdrawal plans) you’d seek. Would taxes be an important consideration in your investment advice? Explain.

Do you think some type of real estate investment would make sense for Eileen? If so, what type would you suggest? Explain.

Explanation / Answer

1.      As far as I am concerned, Mutual funds are the more appropriate vehicle for Eileen. Since she is aiming for a long term investment plan, ETF (Exchanged Traded Funds) would be riskier for her because the profits and losses are abnormal in EFT and moreover it requires skillful knowledge to invest in EFT’s.

2.      This answers the first question. She should use her 15,000 $ to start up a mutual fund program to get a long term benefit.

4. I will not suggest an real estate plan for Eileen since the rate of risk is higher in case of real estate properties.

3.      I would suggest any type of below large cap value and growth fund since the requirement for Eileen is long term investment. With the investment objective of high return and low risk these below types of mutual funds will be effective one for a long term investment.

LARGE-CAP VALUE

Fund Name

Total Net Assets ($ mil.)

3-year return

5-year return

10-year return

Morningstar Risk Rating

Expense Ratio

The Yacktman Fund

2,005

8.9%

8.5%

13.6%

Above Average

0.93%

Van Kampen Growth and Income

6,883

-2.5%

3.4%

4.4%

Below Average

0.88%

California Investment Equity Income

22

-2.7%

3.1%

3.1%

Below Average

0.97%

Amana Trust Income

1,134

2.2%

7.7%

6.1%

Low

1.32%

Valley Forge

11

3.2%

5.2%

6.0%

Low

1.37%

Forester Value

101

4.5%

4.2%

5.6%

Low

1.35%

SunAmerica Focused Dividend Strategy

225

2.1%

5.3%

6.5%

Above Average

0.94%

Prudential Jennison Equity Income

222

-0.7%

4.8%

3.5%

Above Average

2.15%

Auxier Focus

108

1.1%

4.4%

6.2%

Low

1.35%

Homestead Value

524

-5.0%

2.9%

5.6%

Average

0.80%

Fund Name

Total Net Assets ($ mil.)

3-year return

5-year return

10-year return

Morningstar Risk Rating

Expense Ratio

The Yacktman Fund

2,005

8.9%

8.5%

13.6%

Above Average

0.93%

Van Kampen Growth and Income

6,883

-2.5%

3.4%

4.4%

Below Average

0.88%

California Investment Equity Income

22

-2.7%

3.1%

3.1%

Below Average

0.97%

Amana Trust Income

1,134

2.2%

7.7%

6.1%

Low

1.32%

Valley Forge

11

3.2%

5.2%

6.0%

Low

1.37%

Forester Value

101

4.5%

4.2%

5.6%

Low

1.35%

SunAmerica Focused Dividend Strategy

225

2.1%

5.3%

6.5%

Above Average

0.94%

Prudential Jennison Equity Income

222

-0.7%

4.8%

3.5%

Above Average

2.15%

Auxier Focus

108

1.1%

4.4%

6.2%

Low

1.35%

Homestead Value

524

-5.0%

2.9%

5.6%

Average

0.80%

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