SUMMER TRAINING REPORT ON

A Comparative Study of Investment in Mutual

Funds as Compared to Bank Deposits
With reference to

Reliance Mutual Fund

Submitted in partial fulfillment of the requirements

For the award of the degree of
MASTER OF BUSINESS ADMINISTRATION

To
FMT HARISHCHANDRA PG COLLEGE BAWAN BIGHA
VARANASI
Submitted by:-
Alok Kumar Singh
MBA-III Sem
Roll No.
1615470004
 CONTENTS

S No Topic Page No.

1 Certificate
2 Summer Training Appraisal
3 Acknowledgement 2

4 About Reliance Mutual Fund 3

5 The main objectives of RMF 4

6 Why Reliance Mutual Fund 5

7 Types of Funds 6
8 Learn and Investment 10

9 RMF Philosophy 11
10 Vision & Mission Statement 12
11 Why to Invest in RMF 13
12 Mutual Fund 17
13 Difference between Saving &Investment 18
14 Advantages of Fixed deposits 21
15 Mutual Funds vs. Fixed Deposits 22
16 Review of Literature 27
17 References/ Bibliography 76

1
Acknowledgement

The internship opportunity I had with Reliance Mutual Fund was a great chance for learning
and professional development. Therefore, I consider myself as a very lucky individual as I
was provided with an opportunity to be a part of it. I am also grateful for having a chance to
meet so many wonderful people and professionals who led me though this internship period.

Bearing in mind previous I am using this opportunity to express my deepest gratitude and
special thanks to the MD of Reliance Mutual fund who in spite of being extraordinarily busy
with her/his duties, took time out to hear, guide and keep me on the correct path and allowing
me to carry out my project at their esteemed organization and extending during the training.

I express my deepest thanks to GauravSrivastava, Relationship Manager for taking part in

useful decision & giving necessary advices and guidance and arranged all facilities to make
life easier. I choose this moment to acknowledge his/her contribution gratefully.

I perceive as this opportunity as a big milestone in my career development. I will strive to use
gained skills and knowledge in the best possible way, and I will continue to work on their
improvement, in order to attain desired career objectives. Hope to continue cooperation with
all of you in the future,

Sincerely,
Alok Kumar Singh
Place: Varanasi
Date

2
RELIANCE MUTUAL FUND

Reliance Mutual Fund (RMF) is one of India's leading mutual funds, with Average Assets
Under Management (AAUM) of ` 2,22,964 Crores(April 2017 - June 2017 Quarter Q1) and
70.05 lakhs folios (as on 30th June,2017). To know more details about the AUM.

Reliance Mutual Fund, a part of the Reliance Anil DhirubhaiAmbani (ADA) Group, is one of
the fastest growing mutual funds in India. RMF offers investors a well-rounded portfolio of
products to meet varying investor requirements and has presence in 160 cities across the
country. RMF constantly endeavours to launch innovative products and customer service
initiatives to increase value to investors.
Reliance Mutual Fund (RMF) is one of India’s leading Mutual Funds, with Average Assets
Under Management (AAUM) of Rs. 1,07,749 Crores and an investor count of over 72
Lakh folios. (AAUM and investor count as of September 2010) AAUM Source :
http://www.amfiindia.com/

Reliance Mutual Fund, a part of the Reliance - Anil DhirubhaiAmbani Group, is one of the
fastest growing mutual funds in the country. RMF offers investors a well-rounded
portfolio of products to meet varying investor requirements and has presence in 159 cities
across the country. Reliance Mutual Fund constantly endeavors to launch innovative
products and customer service initiatives to increase value to investors. Reliance Mutual
Fund schemes are managed by Reliance Capital Asset Management Limited., a subsidiary
of Reliance Capital Limited, which holds 93.37% of the paid-up capital of RCAM, the
balance paid up capital being held by minority shareholders.

Reliance Capital Ltd. is one of India’s leading and fastest growing private sector financial
services companies, and ranks among the top 3 private sector financial services and
banking companies, in terms of net worth. Reliance Capital Ltd. has interests in asset
management, life and general insurance, private equity and proprietary investments, stock
broking and other financial services.

3
Sponsor: Reliance Capital Limited
Trustee: Reliance Capital Trustee Co. Limited
Investment Manager: Reliance Capital Asset Management Limited Statutory Details: The
Sponsor, the Trustee and the Investment Manager are incorporated under the Companies
Act 1956. Reliance Mutual Fund (formerly known as Reliance Capital Mutual Fund), a
Trust under Indian Trust Act, 1882 and registered with SEBI vide registration number
MF/022/95/1 dated June 30, 1995.

Reliance Mutual Fund (RMF) has been established as a trust under the Indian Trusts Act,
1882 with Reliance Capital Limited (RCL), as the Settler/Sponsor and Reliance Capital
Trustee Co. Limited (RCTC), as the Trustee.

Reliance Mutual Fund has been registered with the Securities & Exchange Board of India
(SEBI) vide registration number MF/022/95/1 dated June 30, 1995. The name of Reliance
Capital Mutual Fund was changed to Reliance Mutual Fund effective March 11,2004 vide
SEBI's letter no. IMD/PSP/4958/2004 dated March 11,2004. RMF was formed to launch
various schemes under which units are issued to the public with a view to contribute to the
capital market and to provide investors the opportunities to make investments in diversified
securities.

4
THE MAIN OBJECTIVES OF RMF ARE :-

These are the main objectives of the Reliance Mutual Fund in which it has three parts and it is
divided into three categories which are as follows :-

5
 Why Reliance Mutual Fund

TOP 5 REASONS
WHY INVESTING WITH US IS A SMART DECISION

6
 Types of Funds

1- EQUITY FUNDS

Equities potentially can offer one of the high returns among comparable investment options
and are ideal for investors with commensurate risk appetite & long term time investment
horizon. From an Indian context, Equities have been one of the best performing asset class
over the last few years.At Reliance Nippon Life Asset Management Limited (formerly
Reliance Capital Asset Management Limited), we have been managing Equity funds since
1995 and currently manage one of the highest equity assets managers in the mutual fund
industry. We have one of the largest and highly experienced Equity fund management &
research team to manage your funds. We believe performance is an outcome of 3Ps – People,
Philosophy & Process and this coupled with robust risk management practices is key to our
goal of delivering Superior Risk Adjusted returns.We offer a wide range of equity oriented
products to suit your investment needs and risk appetite. These include:

7
2- DEBT FUNDS

What are debt funds?

Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as Treasury
Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt
securities of different time horizons.The returns of a debt mutual fund comprises of –

• Interest income
• Capital appreciation / depreciation in the value of the security due to changes in market
dynamics

There is a wide range of fixed income or Debt Mutual Funds available to suit the needs of
different investors, based on their:

• Investment horizon
• Risk return profile

We at Reliance Mutual Funds offer various kinds of debt funds such as Ultra Short term
funds, Short term funds, Long Term debt funds and also close ended debt funds in the form
of FMPs. Each of them has their own share of advantages.

8
3- LIQUID FUNDS

When should you invest in Liquid Funds?

Ideally one should invest in liquid funds, when there is surplus money lying idle and needs to
be deployed for a short period of time. These funds would be invested in very short term debt
& money market instruments ( upto 91 days), which are highly rated, providing easy liquidity
and returns in line with that prevailing at the market conditions at the shorter end of the yield
curveBenefits:

• Minimal capital Risk: liquid funds are highly rated, signifying minimum loss from credit
defaults. The scheme invests in instruments with a maturity profile of 91 days or below. The
very short maturity of the investments helps minimize the MTM volatility in the portfolio
thus minimizing capital risk.

• Return Efficiency: Investors start earning returns from the date of investment itself thus
minimizing any return leakage.

• Optimizing cash management: Investors could even invest for as less as one day, in order to
optimally use the fund for their cash management purposes.

• Real Time Redemption: In addition to traditional modes of redemption, the fund also allows
access to your investments through Reliance Any Time Money Card.

• No entry and exit loads

9
4- GOLD FUNDS

Invest in Gold through Mutual Fund and diversify your investment portfolio!
Gold has unique properties as an asset class. Modest allocations can diversify and enhance
the performance of an investment portfolio. Investors of all levels of experience are attracted
to gold as a solid, tangible and long-term store of value that historically has moved
independently of other assets. Gold Funds can be used in portfolios to shield global
purchasing power, reduce portfolio volatility and may minimise losses during periods of
market shock. It can serve as a high-quality, liquid asset to be used when selling other assets
would cause losses. Investment in Gold Fund.Via mutual fund route investment in gold funds
can be done through two options:

• Gold Exchange Traded Fund-Gold ETFs are passively managed funds which endeavors to
track and provide similar returns to its benchmark- the domestic prices of gold, through
investment in physical gold and money market instruments. Gold ETF is a smart and easy
way to invest in Gold in a dematform.The fund Invests exclusively in physical gold which
shall be of fineness (or purity) of 995 parts per 1000 (99.5 %) or higher.

• Gold Savings Funds- Gold Saving Funds are Fund of Fund of Gold ETFs.

•Benefits of Investing in Gold Via Mutual Funds.

• Low cost : When you buy Gold funds you have to pay brokerage or other charges, which is
usually much lower than paying for markup charges while buying physical gold.

• Transparency: In Gold Funds the rates are transparent and therefore it provides the ability to
buy and sell at correct prevailing prices. There is no consistency when you buy and sell
physical gold across jewelers or banks.

• Security:Unlike physical gold no concerns about security against theft. Safeguard in the
form of electronic mode in the case of unforeseen circumstances.

10
LEARN & INVEST

It is easy to invest once you know the background and rationale behind various investment
options. Read on to learn how to make well-informed investments. This section is designed to
answer all your investment related questions. You can use the video tutorial and the FAQ
section to learn more about investing. The glossary simplifies complicated financial jargon
into simple everyday language. You will find most of your questions answered here. Use the
Jab we invest section to learn about the benefits of investing and why it is important to do it
in a systematic and planned way.

11
THE PHILOSOPHY

RNLAM’s philosophy with respect to Corporate Governance envisages the attainment of the
highest levels of transparency, accountability and equity, in all facets of its operations and in
all its interactions with its stakeholders, including shareholders, employees, the government,
lenders and the society. The Company believes that all its operations and actions must serve
the underlying goal of enhancing long-term shareholder value.RNLAM’s philosophy of
Corporate Governance is guided by the following core principles-

Transparency - To maintain highest standards of transparency in all aspects of interactions

& dealings;

Disclosures - To ensure timely dissemination of correct information to the relevant

stakeholders & regulatory authorities;

Empowerment and Accountability - To demonstrate highest levels of personal

accountability in order to ensure that employees consistently pursue excellence in everything
they do;

Compliances - To timely comply with all the applicable laws and regulations, in letter &
spirit;

Ethical Conduct - To conduct the affairs of the company in an ethical & just manner; and

Stakeholders’ Interests - To promote the interests of all stakeholders including that of the
unit holders, shareholders, employees, vendors and the community at large.

12
VISION AND MISSION STATEMENT

 VISION STATEMENT

To be a globally respected wealth creator with an emphasis on customer care and a

culture of good corporate governance.

 MISSION STATEMENT

To create and nurture a world-class, high performance environment aimed at

delighting our customers.

13
WHY TO INVEST IN RELIANCE MUTUAL FUND?

CREATE WEALTH

High inflation often impacts the savings of individuals. In view of the same, generating
"market-linked" returns over a longer period of time is critical for meeting our goals. Mutual
Fund schemes in this category are positioned with an objective to produce "market-linked"
returns over a period of time. Invest into Equity Funds, Gold Funds and Hybrid / Balanced
Funds which are positioned to help you create wealth and generate returns.The following
funds may be suitable for investors who seek to create wealth by earning "market-linked"
returns:
• Equity funds
• Gold funds
• Hybrid / Balanced funds

14
STABLE INCOME

In today’s competitive and rapidly changing world, we face a lot of financial uncertainties.
The employment and business opportunities that are available are constantly evolving, and
may result in fluctuations in our income. In such a scenario, sensible investment in Mutual
Funds can open up other sources of income, which would reduce our dependence on purely
our salary or business profits and help us manage the financial uncertainty in our lives. Invest
in Short Term Funds and Long Term Funds with an objective to generate less volatile returns.
The following funds may be suitable for investors who seek stable income through smart
investing:
• Reliance Retirement Fund – Income Generation Scheme
• Ultra Short funds
• Short term funds
• Long term debt funds

LIQUID FUND

All of us need cash to take care of our daily expenses (groceries, provisions etc.) as well as to
deal with any medical emergencies. But at the same time, we don’t want the cash to be lying
idle or blocked. If you keep your cash idle, you are depriving your cash to earn for you. It
would be smart to invest this cash in Mutual Funds, so that it earns you returns and is still
available as and when you need it. And if you park it for a long term investment, you might
end up blocking it. Hence, invest in Liquid Funds as it is the best way to invest your cash and
manage it smartly.The following fund may be suitable for investors who seek to manage their
cash smartly:
• Liquid funds

15
TAX SAVING INVESTMENT

Income and expenditure are the two sides of the same coin. However, when the time comes to
pay income tax, you cannot act blind towards it and at the same time you would not want it to
have an impact on your wallet. While you cannot dodge taxes, you can still lessen its affect
on your income.

Make tax saving investments to minimize the affect of income tax on your income!
Tax savings investments allow you to save on tax as well as increase your savings. Tax
saving mutual fund schemes is one of the tax saving investments. Want to save tax and try to
grow your savings at the same time? Enjoy the dual benefit of saving tax as well as the
potential to earn long-term growth by investing into the below-mentioned Mutual Funds.
While offering the potential of growth through investments into equity markets, these Mutual
Funds also offer tax benefits.

The following funds may be suitable for investors who seek to save tax:
• Equity Linked Savings Scheme (ELSS) – tax benefits under Section 80C
 Rajiv Gandhi Equity Savings Scheme (RGESS) – tax benefits under Section 80CCG
 RM Shares Nifty ETF
 RM Shares CNX 100 ETF
 RM Shares Sensex ETF
 RM Shares NV20 ETF
 RM Shares Nifty BeES
 CPSE ETF
 RM Shares Bank BeES
 RM Shares Junior BeES
 RM Shares ShariahBeES

16
PLAN YOUR RETIREMENT WITH OUR PENSION PLANS

Retirement happens to be one of the most important life-stage goals, if not the most
important! Yet, most of us do not plan prudently to ensure we have a happy and hassle-free
post-retirement life.

Retirement is a fairly long-term goal, which requires careful considerations and planning.
A 30-30 rule of thumb says an individual earns for 30 years, to provide for 30 years of post-
retirement life where the individual’s income would have stopped, yet the need to maintain
similar life style exists. For this, you need some sound pension plans.
Have you planned for your retirement yet?

The following funds may be suitable for investors who seek to plan their retirement:

• Reliance Retirement Fund – Wealth Creation Scheme

• Reliance Retirement Fund – Income Generation Scheme

For More Information:

• Scheme Information Document

• Product Update

17
MUTUAL FUND

A mutual fund is a professionally managed investment fund that pools money from many
investors to purchase securities. Mutual funds have advantages and disadvantages compared
to direct investing in individual securities. The primary advantages of mutual funds are that
they provide a higher level of diversification, they provide liquidity, and they are managed by
professional investors. On the negative side, investors in a mutual fund must pay various fees
and expenses.

Primary structures of mutual funds include open-end funds, unit investment trusts,
and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment
trusts that trade on an exchange. Mutual funds are also classified by their principal
investments as money market funds, bond or fixed income funds, stock or equity funds,
hybrid funds or other. Funds may also be categorized as index funds, which are passively
managed funds that match the performance of an index, or actively managed funds. Hedge
funds are not mutual funds; hedge funds cannot be sold to the general public and are subject
to different government regulations.

18
DIFFERENCE BETWEEN SAVING & INVESTMENT

 Savings refers to that part of disposable income, which is not used in consumption,
i.e. whatever is remained in the hands of a person, after paying all the expenses. On
the other end.

 Investment is the act of investing the saved money into financial products, with a
view of earning profits. It alludes to the increase in capital stock.

19
Comparison Chart

It shows the comparison between Saving and Investment

20
Definition of Savings

Savings are defined as the part of consumer’s disposable income which is not used for current
consumption, rather kept aside for future use. It is made to meet the unexpected situations or
emergency requirements. It makes a person financially strong and secure. There are several
ways through which a person can save money like, accumulating it in the form of cash
holdings, or depositing it into the savings account, pension account or in any investment
fund.The stepping stone of wealth formation is savings, which is decided by a person’s level
of income. The higher the income of a person, the higher is his capacity to save, because the
rise in income increases the propensity to save and decreases the propensity to consume. It
can also be said that it is not a person’s ability to save that encourages him to save money, but
the willingness to save forces him to do so. The willingness depends on some factors like his
concern or financial background, etc.

Definition of Investment

The process of investing something is known as an Investment. It could be anything, i.e.

money, time, efforts or other resources that you exchange to earn returns in future. When you
purchase an asset with the hope that it will grow and give good returns in the coming years, it
is an investment. Present consumption should be foregone to obtain higher returns later.
The ultimate purpose that works behind the investment is the creation of wealth which can be
in the form of appreciation in capital, interest earnings, dividend income, rental income.
Investment can be made in different investment vehicles like stocks, bonds, mutual funds,
commodities, options, currency, deposit account or any other securities or assets.
As investment always comes with a risk of losing money, but it is also true that you can reap
more money with the same investment vehicle. It has a productive nature; that helps in the
economic growth of the country.

21
THE ADVANTAGE OF FIXED DEPOSITE

Guaranteed returns:

Unlike investment in the stock market or commodity market, fixed deposits are not a risky
investment as they do not depend on fluctuating market rates. Investors can rest assured that
his investments are safe and he will be getting back a guaranteed amount at the end of the
tenure.

Easily withdrawal:

The amount that is invested in fixed deposit can be withdrawn at any time for a small penalty.
The investor may have a financial emergency to meet financial needs during marriage,
sickness or when his business is in loss. The penalty is less than that of selling stocks or real
estate as the asset cannot be sold easily because of its high value and if you are in a distressed
situation, you will sell it for a much lower rate. Whereas, fixed deposits can be withdrawn at
any time and all you lose is a certain interest income.

22
MUTUAL FUND vs. FIXED DEPOSITES

Many of you may be quite familiar with this traditional investment instrument that is
considered safe and caters to the needs of a large category of investors in India, even today.
Being a financial instrument provided by banks in India, it offers returns better than the
regular savings account and hence enjoys an edge when it comes to earning better returns on
one's savings. Yes, we are talking about 'Fixed Deposits'.

It usually ends up in a long debate when it comes to comparing fixed deposits with other
investment avenues like mutual funds. In our learning session today, we'll try to present a
clear and unbiased comparison which may help you choose a suitable investment avenue (i.e.
Mutual Funds or Fixed Deposits) to meet your financial goals.

So, let us see which of these are more advantageous - mutual funds or fixed deposits. But
first, let us take a look at what are...(But there is a restriction on withdrawal of the money
before maturity...)

Banks may Charge a Penalty for Premature Withdrawal

(...Say, you invested in a FD offering interest @ 9% p.a. for 5 years; but due to some
emergency you need to withdraw the money after 3 years. In this case, the bank will pay you
interest applicable for 3 years of your investment tenure, leaving you with a lower interest
rate of, say, 7%. So you would lose 2% on returns and maybe an additional 1% in the form of
penalty for premature withdrawal)

Fixed Deposits are considered to be Safe Investments

(...as they are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
However, DICGC guarantees an amount of up to Rs 1,00,000 per depositor per bank - for
both principal and interest. It is noteworthy that deposits kept in different branches of a bank
are aggregated for the purpose of insurance cover and a maximum amount of up to rupees
one lakh is paid to the depositor.) (Apart from Fixed Deposits...) Banks (...in India...) also
offer Recurring Deposits and Flexi Fixed Deposits (...to investors) While in our past sessions
we told you all about investing in mutual funds and how it is beneficial for you. Here we
have compared mutual funds and fixed deposits on various parameters.

23
In terms of Rate of Returns: while the interest rate offered on fixed deposits are pre-specified
and fixed for the entire tenure, the returns on mutual funds may vary based on the market
movement. While mutual funds offer you the benefit of market-linked returns, they have the
potential to earn high returns in the form of capital appreciation during positive market
conditions. On the other hand, fixed deposits would continue to offer you the same interest
rates even if markets turned negative or positive. So usually mutual funds outscore fixed
deposits during positive market conditions, and underscore fixed deposits during negative
market conditions.

We all know that inflation eats a major chunk of our savings in terms of loss in the value of
money. So you need to keep pace with inflation. Your investments would be worthy only if
they are able to offer you decent Inflation-adjusted returns. Assume you have invested in a
Fixed Deposit offering interest @ 9% p.a. while the rate of inflation is 8%; your inflation-
adjusted return would be only 1%. It is quite obvious that you would like to look beyond this
rate. Mutual funds have the ability to offer you better inflation-adjusted returns. But do not
forget, they come with a relatively higher risk.

So what is the risk associated with these instruments? While bank fixed deposits are known
for low risk, mutual funds carry market risk which is higher than fixed deposits. So you
should consider your risk appetite while opting between bank's fixed deposits and mutual
24
funds. Also, recognise that High Return comes with High Risk. In terms of liquidity: Fixed
deposits come with a fixed tenure and offer medium to low liquidity option until you
complete the entire tenure of the deposit. On the other hand most mutual funds do offer
liquidity to its investors but with certain conditions.

As we mentioned earlier, you may need to pay a penalty for premature withdrawal of your
fixed deposits, where you would lose out a portion of your expected return. On the other
hand, most mutual funds offer you high liquidity, once the minimum holding period is
complete. In case you happen to withdraw immediately after your investment (usually within
a period of 1 year), then you may have to pay an exit load which is usually around 1%. Exit
load conditions may vary from one fund to another. So you should be aware about the exit
clause of the mutual funds you are investing in.

Tax Status is an important aspect which should be considered while choosing between mutual
funds and fixed deposits. You would agree that you will like to make high post-tax returns
from your investment. In our previous session we told you about the tax implications on your
mutual fund investment. The tax status of mutual funds is based on their category. While you
need not pay any long term capital gain tax on your investment in equity mutual funds, the
short term gain is taxable @ 15%. On the other hand your gains from long term investment in
debt mutual funds (i.e. over a period of 1 year) is taxable @ 20% with indexation and 10%
without indexation (whichever is lower); while your short term capital gain from debt and
liquid mutual funds is taxable as per your tax slab. As far as fixed deposits are concerned,
irrespective of the tenure, the interest which you earn thereon is taxable as per your income
tax slab. So, as per the current tax laws mutual funds are quite tax friendly, provided you
have held on for more than a year and you are in the highest tax slab.

25
The illustration here can help you understand the comparison better...

...Here are 3 scenarios which show an investment of Rs 1 Lakh each, in a bank fixed deposit,
debt mutual fund and equity mutual fund. We've assumed in a given year, all 3 investments
deliver a return of 9%. Further the assumption is that inflation will grow at 7.5% in the given
year.

So you see... Rs 1 Lakh invested is now Rs 1.09 Lakh in each of the investment avenues. But
in case of fixed deposits, with the interest income being taxable as per tax slab of an investor,
the gain of Rs 9,000/- which the investor earns would further reduce to Rs 6,300/- assuming
one happens to be placed in the highest tax slab of 30% (where he would have to pay a tax
amounting to Rs 2,700/-). So the post-tax returns would be 6.3% in the given year in case of
FD.

26
However, in the case of the debt mutual fund, with an indexation benefit available on account
of long term capital gain (since having invested for over 1 year), the cost of investment is
raised to Rs 1,07,500/- (due to inflation factor) instead of Rs 1 Lakh. Thus considering the
indexed cost, the taxable gain would be Rs 1,500/- instead of the original gain of Rs 9,000/-.
Here the investor pays long term capital gain tax @ 20% (as he has claimed indexation
benefit) and hence the post-tax returns (over a period of 1 year) would be 8.7%, which is
higher than the bank fixed deposit.

27
Review of Literature

Top 5 Mutual Fund Holders of General Motors (GM) By David Dierking | Updated
August 14, 2017

In 2016, General Motors Company (NYSE: GM General Motors CoGM36.69+2.43%) was

the third-largest automaker in the world, behind Volkswagen AG (OTC: VLKAY) and
Toyota Motor Corp. (NYSE: Toyota Motor She Sponsored American Deposit Receipt Rear 2
ShsTM112.65+0.32%). GM famously held the top spot in global auto sales for 77
consecutive years from 1931 to 2007. However, the company fell on tough times during the
2007-2008 financial crises and ultimately filed for bankruptcy protection in 2009. It re-
emerged following a $50 billion federal bailout and recaptured the title of top automaker in
2011. It produced a total of 10 million vehicles in 2016. GM returned to the Standard &
Poor's (S&P) 500 on June 7, 2013. As a component of the index, its stock attracts significant
investment interest among individual shareholders and mutual funds. Several large mutual
funds own significant stakes in the company.

Vanguard Total Stock Market Index Fund (VTSMX, VTSAX)

The Vanguard Total Stock Market Index Fund ("VTSMX," "VTSAX") is one of the
company's and the industry's flagship mutual funds. While its S&P 500 Index fund remains
popular among many investors, its Total Stock Market Index Fund provides the additional
benefits of diversification across mid-cap and small-cap stocks, as well as large caps. The
Vanguard Total Stock Market Index Fund had 27,494,722 shares of GM, as of December 30,
2016.

Vanguard 500 Index Fund (VFINX)

The Vanguard 500 Index Fund ("VFINX") is one of the most well-known mutual funds in the
world, as well as one of the first to popularize index fund investing. It tracks the performance
of the S&P 500 Index after expenses, and charges an ultra-low 0.05% expense ratio. The fund
had 20,277,393 shares of GM, as of December 30, 2016.

Frankling Custodian Funds - Income Fund (FKINX)

28
Launched in 1948, Franklin Custodian Income Fund seeks to provide current income and
capital appreciation over the long term. The fund had $82.2 billion under management, as of
June 30, 2017, which invested in a blend of stocks and bonds. The fund owned exactly 17
million shares of GM — which represented 1.13% of the company — on the last reported
date, December 30, 2016.

The Income Fund of America (AMECX)

The Income Fund of America seeks to provide current income, and has secondary objective
of capital growth. The fund launched in 1973, and has $106.7 billion under management
which is invested both in stock and bond markets. It's the fourth-largest mutual fund holder of
GM with its 16,877,712 shares, as of March 30, 2017. Top holdings include Microsoft
(MSFT), Merck (MRK) and Lockheed Martin (LMT).

Vanguard Institutional Index Fund (VINIX)

The Vanguard Institutional Index Fund ("VINIX") also seeks to benchmark the S&P 500
Index, but is limited to corporate clients, as opposed to retail ones. The fund is also passively
managed, but carries a $5 million minimum initial investment. It had 15,156,579 shares of
GM, as of December 30, 2016. Its total assets under management was $228.4 billion, as of
May 31, 2017.

29
 Top 4 Technology Mutual Funds for 2017

By Sheila Olson | Updated August 22, 2017

The technology sector is up more than 17 percent year to date (YTD) as of July 14, 2017,
outperforming the market so far this year. And if President Donald Trump carries through
with some of his campaign promises (think repatriation of overseas cash, decreased corporate
taxes), the tech sector stands to benefit greatly. (See also: Top 5 Technology Penny Stocks to
Watch for 2017.)
Although there is always inherent volatility in technology, the sector has consistently
performed well – the Nasdaq is up 94 percent over the past five years compared with 71
percent gains for the S&P 500. If you're looking for exposure to technology to diversify
your portfolio, here are the top technology mutual fund picks for 2017. (See also: Top 4 ETFs
to Track the Nasdaq.)
Note: Funds were selected on the basis of year-to-date (YTD) performance and assets under
management. All figures were current as of Aug. 18, 2017.
Fidelity Select IT Services Portfolio (FBSOX)
 Issuer: Fidelity
 Assets Under Management: $1.81 billion
 Expense Ratio: 0.79 percent
 YTD Performance: 18.55 percent
FBSOX is one of the largest and oldest of the technology mutual funds. Over the life of the
fund (inception date February 1998), it has delivered average annualized returns exceeding
12 percent. The fund's objective is capital appreciation, and it invests at least 80 percent of
its assets in companies providing IT services. The mutual fund is relatively concentrated –
although there are 53 equities in the fund's portfolio, the top 10 holdings account for 68
percent of the assets. About 95 percent of the equities are domestic, with the remainder in
international emerging markets.
The turnover rate is low at just 27 percent. FBSOX requires a $2,500 minimum
investment and $25 minimum recurring investments. (See also: 3 Mutual Funds That Invest
in U.S. Companies With Indian CEOs.)
Red Oak Technology Select Fund (ROGSX)
 Issuer: Oak Associates Funds

30
 Assets Under Management: $457 million
 Expense Ratio: 1.23 percent
 YTD Performance: 14.78 percent
ROGSX is a long-term growth fund that bases stock picks on fundamentals without regard
to market cap. There are just 43 holdings in the fund's portfolio, with the top 10 equities
accounting for just 39 percent of its assets. You'll see household names like Amazon.com,
Inc. (AMZN

Amazon.com Inc
AMZN
978.19
+1.10%
) and Apple Inc. (AAPL

Apple Inc
AAPL
163.72
+0.23%
) as well as lesser known equities like Arrow Electronics (ARW

Arrow Electronics Inc

ARW
78.64
+0.47%
) powering the fund's solid returns. (See also: Arrow Q2 Earnings and Revenues Top
Estimates, Guides Well.)
Since its inception in 1998, the fund has delivered returns of nearly 5 percent, with one-,
three- and five-year annualized returns at 33.79 percent, 15.37 percent and 19.85 percent,
respectively.
T. Rowe Price Global Technology Fund (PRGTX)
 Issuer: T. Rowe Price
 Assets Under Management: $5.3 billion
 Expense Ratio: 0.90 percent
 YTD Performance: 32.75 percent
31
 This is an aggressive growth fund for investors seeking long-term capital growth. Turnover is
brisk at 101 percent, as you'd expect from an aggressively managed fund. Since its inception
in 2000, the fund has consistently outperformed the MCSI All Country World Index IT and
the Lipper average for global technology funds.
One-, three- and five- average annual returns are 35.23 percent, 23.27 percent and 25.87
percent, respectively. There is a $2,000 minimum investment required ($1,000 for an IRA)
and a charge of $100 to add to an account. (See also: Top Mutual Funds for Aggressive
Investors.)
Columbia Seligman Global Technology Fund (SHGTX)
 Issuer: Columbia Threadneedle Investments
 Assets Under Management: $1.1 billion
 Expense Ratio: 1.37 percent
 YTD Performance: 23.52 percent
SHGTX is another aggressive growth fund, and compared with the MCSI World Index IT
Index Net, its portfolio is heavily concentrated in semiconductors (48.5 percent vs. 15
percent) and short on IT (6 percent vs. 17 percent). However, SHGTX has consistently
outperformed the index by between 5 percent and 10 percent over the past three years. (See
also: Semiconductor Names Tied at the Hip to Apple.)
One-, three- and five-year annualized returns are 34.16 percent, 20.80 percent and 20.62
percent, respectively. The fund requires a $2,000 minimum investment.

32
A Closer Look at Passive Vs. Active Management
By Sean Ross | Updated August 1, 2017

Which is best: passive management or active management? It's a seemingly simple question
that should be analytically testable. However, when you dig a little deeper, the many layers to
this debate quickly become apparent. The honest statistical answer is that there have been
oscillating periods when active management has outperformed and under-performed against
average market indexes. In fact, the only consistent trend when researching this topic is that
passive funds charge investors less for the trouble.

Framing the Active Vs. Passive Debate

The active versus passive debate boils down to one factor: Does the fund manager believe he
can outperform the fund's underlying index?

Managers of active funds utilize high stock turnover – frequently buying and selling stocks –
to jump out of falling assets and into gaining ones. It's a form of highly diversified arbitrage.
Passive managers simply track major market indexes and keep stock turnover – and the fees
that come with it – low. The passive approach assumes that markets are efficient and that
fund expenses only get in the way of compoundable returns.

All mutual funds and exchange-traded funds (ETFs) are managed and advised to some
degree. Even indexed funds cannot always fully replicate the portfolio of their underlying
indexes, so managers have to determine how to fill in the gaps.

The 21st Century: A Passive Era

Passive fund management started out as an academic concept in the 1970s and didn't really
gain traction until Vanguard burst onto the scenes with its low-cost indexed fund products.
By 2000, however, passive funds had become all the rage with investors who had seen almost
a decade of market underperformance by active managers.

Ever since, the entrenched position of many is that active funds are never going to
consistently beat the market and, more importantly, their high fees are only going to dilute
investor returns. There is some evidence of this belief: On a 10-year basis ending in 2013,
fewer than half of active managers outperformed the index. Those who did outperform did so
only barely – most by less than 1% – and charged higher-than-average fees for the luxury.

33
Distribution of Returns and Volatility
In separate studies between 2009 and 2014, Vanguard research shows that the distribution of
returns among active managers was much more pronounced. Some managers are very good at
what they do, while others are very poor. For example, between 2004 and 2014, 50% of
active mid-cap growth funds outperformed the style benchmark; only 7% of active mid-cap
value funds outperformed their respective style benchmark.

This kind of volatility is an underappreciated menace for long-term investors. Passive funds
gain an edge by virtue of simply being more consistent on the aggregate.

U.C. Berkeley Study on Emerging Markets Fund Management

In 2012, advisors and research analysts from the University of California, Berkeley used
econometric techniques to test the influence of active management for U.S. equity investors.
The team used data from TD Ameritrade Research and the Standard and Poor's Net
Advantage database on "all existing U.S. mutual funds and ETFs dedicated to emerging
markets."

Results from the study demonstrated that, before taxes and net of fees, actively managed
mutual funds yielded 2.87% higher than passively managed funds over a three-year period.
The research team described this as "a striking result."

Taxes don't improve the situation much for the passive crowd. Passive funds still trailed by
2.75% after the regression analysis was adjusted to account for the impact of taxes on net
returns.

This study highlights an important debate that doesn't get enough attention: Is active
management suitable for some sectors or segments, but not others? There isn't an obvious
answer yet, but it seems to be a reasonable question.

Do Most Active Funds Actually Underperform?

The Berkeley study points out results from several other studies, indicating that nearly all
mutual funds underperform the S&P 500, net of fees. These largely refer to dual 10-year
studies that concluded in 1999 and again in 2003, each of which found that active managers,
net excess returns, under-performed the market 71% of the time.

34
Lesser known are two 10-year studies that concluded in 2008 and in 2013 that showed
drastically different results. These studies, produced by Vanguard and Morningstar, showed
that the annualized excess returns of active funds beat the U.S. stock market 63% of the time
(2008) and 45% of the time (2013). These studies suggest that active funds were worse than
the market 71% of the time from 1989 to 1999 but better than the market 63% of the time
from 1998 to 2008.

The Vanguard study pointed out that performance leadership among equity groups shifted
"from growth stocks to value stocks and from larger stocks to small" between 1999 and 2008
– two items that should benefit active portfolio construction. In fact, value stocks beat out
growth stocks by 35% in this period; small-caps beat large-caps by an astounding 43%. These
patterns mostly continued from 2008 to 2013.

Conclusion
Someone who says that passive managers often perform better than active managers would
be correct. However, someone who responds that active managers often perform better than
passive managers would also be also correct.

Just look at the data: In the 25 years between 1990 and 2014, more than 50% of active large-
cap managers bested the returns of passive large-cap managers in 1991, 1992, 1993, 2000,
2001, 2002, 2003, 2004, 2005, 2007, 2008, 2009 and 2013.

Over the same period, more than 50% of passive large-cap managers performed better in
1990, 1994, 1995, 1996, 1997, 1998, 1999, 2006, 2011, 2012, 2013 and 2014. (2003 was
about even.)

There have been dramatic swings in both directions. In 2011, passive managers showed better
returns 88% of the time. By 2013, active managers performed best 81% of the time. In the
past three years, things have shifted back into the favor of passive managers. However, these
studies use extreme aggregates that deal with thousands of funds; it's likely that some active
managers might almost always outperform indexes, and it's likely that some almost always
underperform.

35
Top Mutual Fund Holders of Exxon Mobil (XOM, VTSMX)
By Jea Yu | Updated July 28, 2017

Vanguard Total Stock Market Index Fund (VTSMX)

The largest mutual fund holder of Exxon, Vanguard Total Stock Market Index Fund
(VTSMX), owns 87,889,990 shares of Exxon Mobil, according to iys latest filing. This
mutual fund was created in 1992 and designed to give broad exposure to the total U.S. stock
market by including small-cap, mid-cap and large-cap growth and value stocks. As of July
20, 2017, the fund has $581 billion in net assets invested in 3,588 stocks. Exxon Mobil shares
represent the sixth-largest holding and 1.34% of total assets. The minimum investment for
this fund is $3,000.

Vanguard 500 Index Fund Investor Shares (VFINX)

The Vanguard 500 Index Fund (VFINX) is the second-largest mutual fund holder of Exxon
Mobil with 60,615,771 shares, according to its latest filing. The fund is the industry's
first index fund for individual investors and is invested in 506 stocks, covering a diversified
spectrum of the largest U.S. companies and mirroring the Standard and Poor's 500 Index
(S&P 500). The total net assets are $329.3 billion, with a 6.05% allocation to the energy
sector. Exxon Mobil shares represent the sixth-largest position and 1.64% of total assets. The
minimum investment is $3,000.

Vanguard Institutional Index Fund (VINIX)

The Vanguard Institutional Index Fund (VINIX) tracks the perfomance of the Standard &
Poor's 500 Index. It is the third-largest mutualfund holder of Exxon Mobil with its
45,309,927 shares, according to its latest filing. The fund is passively managed and invested
in 505 stocks, with a 6.05% allocation in the energy sector. Not surprisingly, Exxon Mobil
represents the sixth-largest position and 1.64% of total assets. Total assets are $228.9 billion,
and the minimum investment is $5 million.

36
Top Mutual Fund Holders of Bank of America
By Jea Yu | Updated July 18, 2017

Vanguard Total Stock MktIdxInv (VTSMX)

The largest mutual fund holder, the Vanguard Total Stock MktIdxInv (VTSMX), owns
214,199,154 shares of Bank of America, according to its December 30, 2016 filing. This
mutual fund was created in 1992 and intends to give broad exposure to the total US. stock
market by including small-, mid-and large-cap growth and value stocks. The fund has $581
billion under management, with a benchmark of 15.5% allocation to the financial services
sector.

Vanguard 500 Index Inv (VFINX)

The Vanguard 500 Index Inv (VFINX) is the second-largest mutual fund holder of Bank of
America with 147,714,160 shares, according to its December 30, 2016 filing. VFINX was the
industry's first index fund for individual investors and is invested in a diversified spectrum of
the largest US. companies mirroring the Standard and Poor's 500 Index (S&P 500). The total
net assets are $329.3 billion with a benchmark of 15.5% allocation in the financial services
sector.

Dodge and Cox Stock (DODGX)

This $65.3 billion value fund owns the third-largest stake in Bank of America with
111,294,300 shares, according to its December 30, 2016 filing. The Dodge and Cox Stock
(DODGX) seeks long-term growthand income. The fund is invested in 65 companies with a
benchmark of 25.10% allocation in financial services. Bank of America shares represent
3.76% of the portfolio.

Vanguard Institutional Index I (VINIX)

This $228.9 billion institutional fund tracks the S&P 500 Index following a passively
managed, full-replication approach. The Vanguard Institutional Index I (VINIX) is the
fourth-largest mutual fundholder of Bank of America with 110,415,152 shares, according to
its December 30, 2016 filing. The fund has a benchmark of 16.09% allocation in the financial
services sector. This is the institutional version of the Vanguard 500 Index Fund, which is
available only to institutional investors.

37
How Vanguard Dominates the Mutual Fund Industry By Caleb Silver | Updated
July 14, 2017

One billion dollars per day. That’s the amount of money that has been flowing into Vanguard
Funds since the election. The index fund giant says from 2013 through 2016 investors
dropped $823 billion into its funds, more than 8.5 times the rest of the mutual fund industry,
according to Morningstar, as reported by the New York Times.

With $4.2 trillion in assets under management, the mutual fund giant has surpassed its peers
and done so in its quiet and fastidious manner. Just seven years ago, Vanguard had but $1
trillion under management and questions arose as to whether index investing, central to
Vanguard’s investment philosophy, along with a low cost fund structure, was built to last.
Those questions have been summarily dismissed as Vanguard’s competitors continue to look
for ways to lower fees while delivering consistent returns.

"Every year in January there is a headline that says it's a stock pickers market, and that has
just not been the case," says Bill McNabb, Vanguard's CEO since 2008. "High cost active
management is effectively dead as a practice." McNabb cites the performance of index funds
over the past decade in addition to the muted expectations for equity returns for the next few
years. Vanguard says investors should expect 5-7% from equities in 2017, lower than the 6-
8% trend of the past decade. Vanguard announced that McNabb will be stepping down as
CEO at the end of 2017, but will remain as the company's chairman.

38
Top Mutual Fund Holders of YUM! Brands
By Jea Yu | Updated July 5, 2017
Following are the top four largest mutual fund holders of Yum! Brands.

Vanguard Total Stock MktIdxInv (VTSMX)

The largest mutual fund holder, Vanguard Total Stock MktIdxInv (VTSMX), owns 7,377,173
shares of Yum! Brands as of December 30, 2016. This mutual fund was created in 1992 and
was designed to give broad exposure to the total U.S. stock market by including small-, mid-
and large-cap growth and value stocks. The fund has $574.7 billion in net assets invested in
3,572 stocks, with a 9.80% allocation in the consumer goods sector. The minimum required
investment is $3,000.

Vanguard 500 Index Inv (VFINX)

The Vanguard 500 Index Inv (VFINX) is the second-largest mutual fund holder of YUM!
Brands, with 5,096,724 shares as of December 30, 2016. The fund is the industry's first index
fund for individual investors and is invested in 510 stocks covering a diversified spectrum of
the largest U.S. companies, mirroring the Standard and Poor's 500 index (S&P 500). The
fund has total net assets of $324.6 billion, with a 12.5% allocation in the consumer staples
sector. The minimum required investment is $3,000.

T. Rowe Price Capital Appreciation Fund (PRWCX)

In third is T. Rowe Capital Appreciation Fund (PRWCX) with its 4,307,715 shares of Yum!
Brands. The fund seeks long-term capital appreciation by investing primarily in common
stocks it believes to have above-average potential for capital growth. It's assets under
management is worth $28 billion, and is invested in 286 holdings, of which 9.8% is allocated
in the consumer goods sector. This is a closed fund.

T. Rowe Price Growth Stock Fund

Incepted in 1950, the T. Rowe Price Growth Stock Fund (PRGFW) is the fourth largest
mutual fund holder of Yum! Brands with its 4,016,600 shares. The fund primarily seeks to
invest in companies that have the ability to pay increasing dividends through strong cash flow
— thus provide long term capital appreciation. Its net assets are worth $50.7 billion invested
in 100 different holdings. Slightly more than 23% is allocated in the consumer goods sector.

39
The Advantages and Disadvantages of Mutual Funds
Thomas Mingone, CHFC, CLU, AIF, AEP, CFS June 21, 2017

Almost, if not all, investments will have both pros and cons associated with them. A mutual
fund by definition is a company that pools money from many investors that can then be
invested in many vehicles, including stocks, bonds, short-term debt and alternative
investments. Investors buy shares in mutual funds and each share represents their ownership
in the fund and any income it generates.

The Advantages of Mutual Funds

Diversification: A single mutual fund can hold a wide range of securities from different
issuing companies. Focus funds are on the lower end of the spectrum and can hold little as 20
investments that the manager has high conviction in. On the other hand, there are mutual
funds that hold thousands upon thousands of different investments. Generally a mutual fund
will have somewhere between 75-125 holdings. This diversification may considerably reduce
the risk of a serious monetary loss due a particular company or industry having bad or
negative returns.

Affordability: Many mutual funds set a relatively low dollar amount for initial investments
and subsequent purchases. For example, many fund families allow you to begin buying units
or shares with a small dollar amount (e.g. $500) for the initial purchase. Some mutual funds
also permit you to buy more units on a regular basis with even smaller installments (e.g. $50
per month) allowing you to invest small dollar amounts in many companies. This allows an
individual to own all of the underlying investments of the fund that may not have been
affordable to purchase individually. (For related reading, see: The Advantages of Mutual
Funds.)

Professional Management: Many investors do not have the time or expertise to manage
their personal investments every day, to efficiently reinvest interest or dividend income, or to
filter through the thousands of securities available in the financial markets. Mutual funds are
managed by professionals who are experienced in investing money and who have the
education, skills and resources to research diverse investment opportunities. Not only do they

40
do the security selection, but many will also monitor performance and make adjustments with
the changing economic and market cycles.

Liquidity: Units or shares in a mutual fund can be bought and sold on any business day (that
the market is open), providing investors with easy access to their money for the current net
asset value (NAV), minus any redemption fees, usually within three business days of the
transaction. (For related reading, see: What Items Are Considered Liquid?)

Flexibility: Many mutual fund companies manage several different funds (e.g., money
market, fixed-income, growth, balanced, sector, index, international, global, alternative,
allocation, target date, etc.) and allow you to switch between these funds at little to no charge.
This enables you to change your portfolio balance as personal needs, financial goals or
market conditions change.

The Disadvantages of Mutual Funds

When you invest in a mutual fund you place your money in the hands of a professional
manager. The return on your investment depends heavily on that manager’s skill and
judgment and the way they decide to invest your money. Not every manager has the same
resources, depth of research/analyst teams or experience backing their decisions. There are
also multiple investment philosophies widely accepted in the financial industry and it’s up to
the manager to decide which one they think is best.

Research has shown that few portfolio managers are able to consistently out-perform the
market over long periods of time (according to a 2016 study done by Kent Smetters,
professor of business economics at Wharton). It’s a good idea to look at the fund manager’s
track record for one, three, five and 10 years and/or since the mutual fund’s inception. It is
also important to try and uncover the “why” behind that fund’s performance and decide if the
performance is both sustainable and replicable through different market cycles. This can be
found near the front of the prospectus, right after the narrative, description, investment
objective, goals, strategies and risks. There will be a bar chart showing the fund’s annual total
returns for each of the last 10 years or since its inception. Fees for fund management services
and various administrative and sales costs can reduce the return on your investment. These
are charged, in almost all cases, whether the mutual fund has a positive or negative return on
investment. (For related reading, see: Digging Deeper: The Mutual Fund Prospectus.)

41
Redeeming your mutual fund investment in the short-term could significantly impact your
overall rate of return due to sales commissions and redemption fees that may be applicable.

A variety of share classes available can make it harder to interpret which would be the best
investment for one person’s situation to the next.

Understand the Terms Before Investing

In summary, choosing the right mutual fund to fit into your portfolio can be very complex.
Every mutual fund is different and you should consult each mutual fund’s prospectus for the
exact terms of the offering. I would also urge you to seek input from your financial and tax
professional to make sure the final decision is suitable and tailored for your individual
financial goals.

Please consider the investment objectives, charges, risks and expenses carefully before
purchasing a variable annuity. For a prospectus containing this and other information, please
contact a financial professional. Read it carefully before you invest or send money.

42
How a Portfolio Benefits From Market Neutral Funds
Marguerita M. Cheng, CFP®, CRPC®, RICP, CDFA May 22, 2017

During the global financial crisis, the majority of investors lost a significant amount of their
portfolio value as traditional asset classes, such as stocks and bonds plunged,and they went to
their financial advisors seeking ways to combat these downturns. We are all aware that
having stocks and bonds in our portfolio provide a diversification benefit, primarily due to
lower correlation between these asset classes. However, the correlation increases between
this pair of asset classes during the recession. (For more from this author, see: An
Introduction to Asset Allocation.)

The above discussion manifests an important question: How can investors further diversify to
mitigate market risk during a recession? One solution is to allocate some amount of their
portfolio to alternative strategies. The two funds that could fulfill this strategy and have
become popular in the last few years for retail investors are market neutral funds and absolute
return funds. Both funds exhibit lower correlation to the traditional asset classes and hence,
provide diversification benefit.

In this article, I will focus on the market neutral funds, followed by the explanation of
absolute return funds in the next article.

What Are Market Neutral Funds?

Market neutral funds employ a strategy that has been quite common among hedge funds and
separately managed accounts. The investment objective is to outperform the market, i.e.
generate alpha, by investing in high-quality bullish stocks, while shorting equivalent amounts
of bearish stocks. By doing this, a market neutral fund attempts to have no exposure to
market movements. In other words, it reduces the beta of the portfolio to “zero”. This is the
reason why this strategy is sometimes called a “zero beta” strategy. The strategy pays off
when one side of the strategy outperforms the other (e.g. long stocks outperform short or
vice-versa). (For related reading, see: Beta: Know the Risk.)

Let us look at an example to understand how the strategy is beneficial. Suppose the fund
manager invested $1 million in 10 different bullish stocks and simultaneously shorted the
same amount in the stocks that are expected to poorly perform. If the market rises by 20%
and the bought stocks increase by 30% and the poor stocks increase by 15%, the investor

43
makes 15% return. On the other hand, if the market falls by 20% and the bought stocks fell
by 15% and poor stocks fell by 25%, the investor ends up making a positive return of 10%.

These funds also generate additional interest income by investing the cash received
from short sales in a money market account. The primary benefit of investing in these funds
is they are totally unrelated to the stock and bond market returns, thereby, lowering the risk of
the portfolio.

It is important to note that the market neutral strategies are not exclusive to the stock market,
but can be used in the bond, currency and commodities markets. (For related reading,
see: Getting Positive Results With Market Neutral Funds.)

Why Invest in Market Neutral Funds?

As highlighted above, the primary reason for investing in these funds is to achieve long-
term capital appreciation while maintaining a low correlation to other asset classes.
Incorporating them in a portfolio with traditional asset classes can increase the portfolio’s
return and decrease risk. As an example, the table below shows the correlation matrix of
Fiera Capital’s market neutral fund against other asset classes.

Source: Fiera Capital

The objective of these funds is to generate returns which are 3% to 6% above the three-month
treasury bill yield or LIBOR. To implement the strategy, the funds primarily use pairs
trading, which includes taking long and short positions at the same time to offset the market
exposures.

Risk and Costs of investing

Though market neutral funds can reduce exposure to market risk in an investment portfolio,
they have exposure to other risks. The predominant ones are risks related to short sales,
proprietary software and frequent trading. Proprietary software risks refers to the risks
associated with the statistical software used to make stock selection. Frequent trading risks
affect the portfolio’s turnover rate. Because a market neutral strategy involves frequent
trading to manage the market risk, significant portfolio turnover could lead to high

44
transaction costs and high capital gains tax for the investors who utilize these funds in taxable
accounts. (For related reading, see: Offset Risk With Options, Futures and Hedge Funds.)

The performance of these funds has been lackluster in the recent past. According to U.S.
News, which assigns rankings to 50 market neutral funds, only 36% of the funds have beaten
the S&P 500 Index in the last year.

The expense ratio of market neutral funds is significantly higher compared to other mutual
funds with traditional strategies. This is primarily due to higher management fees to
compensate for their efforts in stock selection and higher transaction costs.

The Bottom Line

I believe all investors should allocate some portion of their portfolio in alternative strategies,
which lower the overall risk in a portfolio with lower correlations to traditional asset classes.
As indicated above, these funds are typically associated with high turnover and the investors
may not only bear higher transaction costs, but also higher capital gains taxes. For this
reason, investors who want to incorporate market neutral funds should use their tax-deferred
accounts, such as 401(k), IRA or Roth IRA.

45
Vanguard Mutual Funds Take Another Hit From Brokers
By Michelle Zhou | May 6, 2017

Too much success can sometimes draw the ire of colleagues, as demonstrated by Morgan
Stanley’s announcement on Wednesday that it will no longer offer Vanguard mutual funds to
clients starting next week.

According to the brokerage firm, which has close to 16,000 brokers and $2.2 trillion in assets
under management, the move is part of a broader overhaul of its fund offerings. Since April,
Morgan Stanley has been reducing its mutual fund menu by about 25% to eliminate those it
deems to be unpopular, underperforming or a conflict of interest. The purge is part of the
firm’s commitment to complying with the Department of Labor’s fiduciary rule on retirement
advice.

A spokesman of Morgan Stanley told The Wall Street Journal that Vanguard mutual funds
are not popular with its clients, and represent less than 5% of its total mutual fund assets.

Industry insiders however believe Morgan Stanley is retaliating against Vanguard for its
longstanding policy of not paying brokerage firms to sell its funds, otherwise known as “shelf
space,” which is part of the reason why the asset manager can offer record-low expense ratios
to investors. Most of Vanguard’s competitors pay Morgan Stanley $250,000 to $850,000 a
year, reported Advisor Hub.

Morgan Stanley is not the first to adopt this strategy. A year ago, Merrill Lynch began
restricting new sales of Vanguard mutual funds to clients who do not have an existing
position.

A similar policy applies to Morgan Stanley accounts, the WSJ article shows. Clients who are
currently invested in Vanguard mutual funds will not be forced to sell, but only have until the
first quarter-end of 2018 to add to their positions. Both Morgan Stanley and Merrill Lynch
continue to offer Vanguard exchange-traded funds.

Since launching the first index mutual fund in 1976, Vanguard has become the industry
leader in index investing and low-cost funds. It is currently the second-largest asset manager
in the world, after Black Rock, and boasts $4 trillion in AUM. An estimated $1 billion a day

46
has flown into Vanguard funds since the 2016 U.S. election, more than 8.5 times the rest of
the mutual fund industry, according to Morningstar data.

Vanguard’s near-monopoly position is part of the reason behind Morgan Stanley and Merrill
Lynch’s efforts to stymie some of the firm’s incredible growth and protect their own revenue
models. The brokerage arms of Wells Fargo and UBS, the other two of the “big four”
brokerage firms, or so-called warehouses , have not followed suit and continue to offer
Vanguard mutual funds.

47
The Best Mutual Funds with 'Clean Shares'
By Amy Bell | May 4, 2017

If you want to get the biggest bang for your buck, you might consider mutual funds with
'clean shares,' a relatively new class of mutual fund shares developed in response to the U.S.
Department of Labor’s fiduciaryrule. According to a Morningstar report, clean shares could
save investors at least 0.50% in returns as compared to other mutual fund offerings. Even
better, investors could enjoy an extra 0.20% in savings, as their advisors will now be tasked
with recommending funds that are in investors' best interests, according to the report.

Mutual Funds with Clean Shares Avoid Conflicts of Interest

Clean shares were designed, along with T shares and a handful of other new share classes, to
meet fiduciary-rule goals by addressing problems of conflicts of interest and questionable
behavior among financial advisors that were the reason the rule was created. For instance, in
the past some financial advisors have been tempted to recommend more expensive fund
options to clients to bring in higher commissions. Because clean-share classes provide one
uniform price across the board, these shares could put an end to this unethical practice. (For
more, see Understanding the New ‘T’ Shares.)

Currently, most individual investors purchase mutual funds with A shares through a broker.
This purchase includes a front-end load of up to 5% or more, plus management fees and
ongoing fees for distributions, also known as 12b-1 fees. To top it off, loads on A shares vary
quite a bit, which can create a conflict of interest. In other words, advisors selling these
products may encourage clients to buy the higher-load offerings.

“As the Conflict-of-Interest Rule goes into effect, most advisors will likely offer T shares of
traditional mutual funds to retirement investors looking to put retirement savings in an IRA,
in place of the A shares they would have offered before,” write report co-authors
AronSzapiro, Morningstar director of policy research, and Paul Ellenbogen, head of global
regulatory solutions. “This will likely save some investors money immediately, and it helps
align advisors’ interests with those of their clients.”

For example, an investor who rolls $10,000 into an individual retirement account (IRA) using
a T share could earn nearly $1,800 more over a 30-year period as compared to an average A-

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share fund, according to the analysis. The report also states that T shares and clean shares
compare favorably with “level load” C shares, which generally don’t have a front-end load
but carry a 1% 12b-1 annual distribution fee.

Crystal Clear
According to the Morningstar report, clean shares are the best way to
enhance transparency for mutual fund investors. The authors point out that firms distributing
funds to investors currently use “indirect” payments. This money goes from the investor to
the fund company and then back to a third party for services other than managing
the portfolio.

On the other hand, clean-share classes remove all of these indirect payments, and it’s up to
distributors to charge investors directly for any services. Brokers set their own commissions
for selling clean shares, which adds even more transparency for investors.

Unlike T shares, clean shares do not have sales loads or annual 12b-1 fees for fund services.
Morningstar says this will lead to even greater clarity for investors choosing mutual funds
with clean shares.

The Bottom Line

As more fund companies roll out mutual funds with clean shares, investors will not only
enjoy greater transparency; they’ll also save a bundle on fees. Morningstar predicts mutual
fund companies will create 3,500 new T shares in the coming months for IRA investors.
Funds you can invest in right now that offer clean shares include American Funds, Janus and
MFS. Morningstar expects others will soon follow. They're worth looking for and asking
about. (For more, see Mutual Fund Benefits and Types.)

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Socially (Ir)responsible Mutual Funds
By Shauna Carther | Updated April 26, 2017

For many investors, social responsibility is an important factor in their choices of mutual
finds. There is, however, a whole other side to the equation: socially irresponsible investing.
Let's take a closer look at what irresponsible investing is and how this investment strategy
emerged. In Socially Responsible Mutual Funds, we discuss what socially responsible mutual
funds are, how they came to be and why investors may want to choose them. Here, we look at
the opposite.

What are Socially Irresponsible Mutual Funds?

As the name suggests, socially irresponsible mutual funds hold baskets of stock from
companies with business or activities that are considered bad for society. These activities
might include things such as the distribution or production of alcohol, tobacco and weapons.
Sometimes referred to as sin stocks, these companies might also engage in unethical business
practices such as child labor or environmental negligence.

No Lack of Beliefs
Unlike socially responsible investors who hold strong convictions about sinful stock, socially
irresponsible investors are focused on making significant returns, and are indifferent to social
issues and the unethical actions of corporations. This isn't to say that people investing in sin
stocks support the use of questionable business practices; these investors simply believe that
certain companies will always have opportunity to profit from people's consumption of so-
called immoral products.

Different Faces
Within the classification of socially irresponsible mutual funds, there are different names for
funds with different strategies. For example, "leisure funds" invest a large portion of their
assets in casinos and alcohol and tobacco companies but also maintain a measure
of diversification. Like many socially responsible mutual funds, leisure funds prevent over-
specification of many sector funds. The Fidelity Select Leisure Portfolio, for example, invests
in restaurants such as McDonald's in addition to casino hotels such as MGM Mirage. Another
example of a socially irresponsible mutual fund is the Vice Fund. Unlike leisure funds, the

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vice fund invests solely in the casino, defense, tobacco and alcohol industries, which may not
provide adequate diversification for some investors' tastes.

The Extinction of Socially Irresponsible Funds

If supporters of socially irresponsible funds believe that the underlying companies will
display strong earnings in both good and bad markets, why are these funds hard to find
today? Socially irresponsible mutual funds became popular in the 1980s in response to the
increased popularity of socially responsible funds; however, more recently these funds have
largely disappeared from the market. The reason could be that these funds border a very thin
line between insult and profit.

For example, Morgan Funshares, which began in 1989 and was liquidated in 2003 with the
death of its founder, was originally called Morgan Sinshares. Because the original name was
not politically correct, it risked offending potential investors. As an alternative to socially
irresponsible mutual funds, many well-known equity mutual funds hold sinful stock along
with the stock of mainstream companies such as banks, retailers, technology and
manufacturing firms.

Challenges Within the Sinful Industries

A further reason for the disappearance of sinful funds is the changing views of people in
regards to health and the environment. This can slow business for sin stock companies. In
addition, the Environmental Protection Agency is continually approving heightened
restrictions in its environmental laws and regulations. Companies are increasingly being
required to reduce emissions and to adopt practices that provide for sustainable development.
As a result, companies that have historically been heavy polluters may be forced to clean up
their acts – and empty their wallets.

The Bottom Line

Your beliefs will determine whether sinful stocks should have a place in your portfolio. The
screening process of any investment, however, should not be aimed specifically at a firm's
social responsibility – or lack thereof. Instead it should be about selecting quality companies
that, regardless of the industries in which they operate, have good earnings, management and
high-growth potential.

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Socially Responsible Mutual Funds
By Shauna Carther | Updated April 21, 2017

Some people believe that unscrupulous means are sometimes necessary for making gains in a
portfolio. However, it is possible to profit while using an ethical investment strategy – and
you don't need to join Greenpeace in order to do it. Here we'll take a look at socially
responsible investing (SRI) and how you can use socially responsible mutual funds to
activate this strategy in your portfolio. (Is it possible to be environmentally friendly and still
make money? Read our Green Investing Featurefor both sides of the issue.)

What is socially responsible investing?

A socially responsible investing strategy is one that views successful investment returns and
responsible corporate behavior as going hand in hand. SRI investors believe that by
combining certain social criteria with rigorous investment standards, they can identify
securities that will earn competitive returns and help build a better world.

SRI analysts gather information on industry and company practices and review these in the
context of a country's political, economic and social environment.

Generally, these seven areas are the focus of socially responsible investors:

1. Corporate governance and ethics

2. Workplace practices
3. Environmental concerns
4. Product safety and impact
5. Human rights
6. Community relations
7. Indigenous peoples' rights

It should be noted that socially responsible investing is essentially interested in promoting the
adherence to the positive aspects of these areas with publicly-held companies. However, SRI
also gets a lot of attention for industries and companies that it opposes as "bad" for society.
The latter would include, among others, businesses involved in gambling, tobacco, weapons

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and alcohol. These so-called "sinful" investment categories are often eliminated through SRI
screening.

What are socially responsible mutual funds?

Socially responsible mutual funds hold securities in companies that adhere to social, moral,
religious or environmental beliefs. To ensure the stocks chosen have values that coincide with
the fund's beliefs, companies undergo a careful screening process. A socially responsible
mutual fund will only hold securities in companies that adhere to high standards of
good corporate citizenship.

Because people hold such a wide variety of values and beliefs, fund managers have quite a
challenge in determining the stocks that reflect the optimal combination of values for
attracting investors. The specific criteria used when screening for stocks all depend on the
values and goals of the fund.

For example, funds with a strong sensitivity toward issues of environmental concern will
specifically pick stocks in companies that go beyond fulfilling minimal environmental
requirements. (For more insight, read Go Green With Socially Responsible Investing.)

Many socially responsible mutual funds will also partition a portion of their portfolios for
community investments. A common misconception is that these investments are donations.
This is not the case. These investments allow investors to give to a community in need while
making a return on their investment. Many community investments are put toward
community development banks in developing countries or in lower-income areas in the U. S.
for affordable housing and venture capital.

Ownership is Taken Seriously

Shareholder activism is one of the most important issues for socially responsible funds. SRI
funds use their ownership rights to influence management through policy change suggestions.
This advocacy is achieved through attending shareholder meetings, filing proposals, writing
letters to management and exercising voting rights.

Because it is difficult for fund shareholders to exercise their votes, voting is achieved
by proxy; fund shareholders assign management to vote on their behalf. Most socially

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responsible mutual funds have a strict policy to maintain transparency in their decisions and
disclose all proxy voting policies and procedures to their shareholders.

Proof that individuals can make a difference is illustrated by the proposal the Securities and
Exchange Commission (SEC) passed in January 2003, which states that all mutual fund
companiesmust disclose proxy voting policies and procedures and the actual votes to their
shareholders. The SEC's decision was brought about by the thousands of proposal requests
sent to them by socially responsible investors.

Does good triumph over all?

As an investor, you cannot be completely philanthropic and expect nothing in return for your
investment other than that pure feeling of having invested in a company that reflects your
own values. So how does the performance of socially responsible mutual funds measure up to
that of a regular portfolio? On average, its performance has been close to that of regular
mutual funds. There are several indexes that track the performance of stocks considered to be
socially responsible investments. According to KLD Indexes, the total returns for the MSCI
KLD 400 Social Index (initially called the Domini Social 400 Index) between 1990 (its
inception) and May 2015 was 10.46%. Over the same period, the S&P 500 returned 9.93%.
The socially-responsible index has outperformed the broader index for over 25 years now.

The Price of Doing Good

Socially responsible mutual funds tend to have higher fees than regular funds. These higher
fees can be attributed to the additional ethical research that mutual fund managers must
undertake. In addition, socially responsible funds tend to be managed by smaller mutual fund
companies and the assets under management are relatively small. Under these circumstances,
it is difficult for SRI funds to make use of the economies of scale available to their larger
rivals.

Keep a Level Head

Before you let your emotions become your investment advisor, it is wise to maintain a level
head. Here are some important tips to follow in order to maximize your chances for earning
decent returns and investing in qualified socially responsible funds:

1. Get Informed – Learn about socially responsible investing, which funds qualify and
where you can buy them. Socialfunds.com is a good place to start your research.

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 2. Know Your Values – Everybody's values are different. Some may feel strongly about
environmental causes while others are more concerned with social programs. Rank
your concerns. Once you have established a few top values, you may narrow your
fund choices down to a few select funds whose values closely match your own.
3. Go Beyond Your Values – Research the fundamentals and fees of the funds in which
you are interested. Some items to consider include the level of the
management expense ratio, the cost of load fees, the fund manager's track record and
how the fund has performed over the last few years. There is no need to sacrifice
investment quality when considering an SRI fund. Do your homework as you would
for any fund investment. (Visit our Mutual Fund Basics Tutorial for further tips and
information on mutual funds.)
4. Diversify – A consequence of investing in SRI funds is that you may be limiting your
investment to a few companies who have a lot in common socially, ethically and
financially. Think of a sector fund with a portfolio formed mainly from stocks in the
internet industry. If you had all of your eggs in this basket during the internet market
crash, all your eggs would have been broken. If your investment is placed
strategically in different types of investments, the possibility of losing all of your
investment is minimal. If you want to be a socially responsible investor, it is still
possible to diversify your portfolio with other stocks, bonds or Treasuries without
going against your values. Investing in socially responsible securities with values that
differ somewhat from the specific focus of your chosen fund can help.

The Bottom Line

Socially responsible investing opportunities suggest that investors need not compromise their
values to make money. If you approach socially responsible mutual funds like any other
investment, you may be able to put your money into something that both supports your values
and lines your pocketbook.

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When Socially Responsible Investing Hurts
By Donna Fuscaldo | Updated April 17, 2017

These days, thanks in part to millennials, a lot of investors care about the companies they
choose to invest their money with. For a growing number of investors, investing is not only
beating projections or having a big growth in sales. Some investors want to invest only in
companies that are doing right by the environment or society at large. That means they avoid
investing in tobacco stocks, defense companies, oil producers, and gun manufacturers to
name a few. Socially conscious investors embrace those companies that believe in the
environment, feel it’s important to give back to their community and want to play a role in
helping improve society. However, while socially responsible investing will help people
sleep well at night, it turns out it may not make a lot of financial sense. (Read more,
here: What Is Socially Responsible Investing?)

There Isn’t a One Size Fits All Definition of Socially Responsible Investing
For one thing, critics of socially responsible investing argue there aren’t any clear definitions
of what makes a company socially responsible, so crafting a portfolio of socially responsible
stocks is more subjective than science. Even the funds that claim to invest only in socially
responsible companies have varying definitions of what constitutes a socially responsible
company, making it hard to have a cohesive investment strategy in that area.

Proponents of socially responsible investing contend that if companies care about society
and/or the environment, then over time the company's efforts will be reflected in an increased
share price. But making the leap that a company's efforts to recycle or give back to the
community will somehow result in a higher stock price is a flawed argument. Increasing sales
and earnings usually help a stock, not the fact that the company is doing right from a social
perspective.

Socially Responsible Funds May Not Be Cheaper Than Others

When it comes to investing, fees matter a lot, and that is particularly true of socially
responsible funds, otherwise known as SRI funds. Just like with other funds, the fees can
vary, which means some of these SRI funds are going to cost you more than they are worth.
Sure you may not be exposed to big oil or gun makers but if you are paying too much to
avoid those industries than it is going to eat away at your profits. Even with ETFs, which

56
traditionally have lower fees than mutual funds, not all SRI ETFs are charging rock bottom
prices – making the investment in socially responsible stocks sometimes costlier than
investing in the so-called bad companies.

Investing Socially Could Shut You Out of Market Gains

Feeling strongly about an idea and a belief is great but when it comes to investing people
can’t lose sight of the end game: making money. Sometimes investors will get so caught up
in making sure they are investing in socially responsible companies that they end up missing
out on a run up in other industries. That run up could have made them more money, which
they then could have used to donate to their causes.

The Bottom Line

Socially responsible investing has a place in some investor’s portfolios, but if all your choices
are being dictated by the social actions and behaviors of corporations, you may end up losing
a lot of money in the long run. Gauging just how socially responsible a company is can be
tough to do and if you invest in a SRI fund you may be overpaying. Not to mention that
having a singular focus on the social behaviors of companies could shut you out of gains
from other industries.

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Top 5 Biggest Mutual Funds of 2017
By Sheila Olson | April 14, 2017

There's safety in numbers, the old saying goes, and when it comes to mutual fund investing,
it's not a bad principle. Larger funds typically have lower expense ratios, which may improve
performance over time, and larger funds provide access to premiere money managers who
specialize to a very granular level. (See also: Mutual Funds: The Costs.)

Currently, two companies dominate the domestic mutual fund market. Vanguard, with $3
trillion in assets under management (AUM) in its mutual funds, is the clear leader, with eight
of the top ten largest mutual funds. Fidelity, with $1.86 trillion in AUM, is a distant second,
but it is still more than respectable in terms of its family of funds. (See also: Fidelity vs.
Vanguard: Which Is Better Suited to You?)

If you're looking to cash in on the potential advantages of size in your mutual fund
investments, here are the five largest mutual funds for 2017. Note: All figures were current as
of April 10, 2017.

Vanguard 500 Index Fund Admiral Shares (VFIAX)

Issuer: Vanguard

Assets under management: $196.35 billion

Expense ratio: 0.05 percent

Year-to-date (YTD) performance: 5.79 percent

This is the granddaddy of all index funds – the first of its type, with an inception date of
November 2000. Pegged to the S&P 500, VFIAX offers broad exposure at extremely
low holding costs. In fact, although the S&P comprises entirely domestic stocks, the
companies in the index generate roughly 50 percent of their sales internationally, giving you
global exposure (or so Warren Buffett and Jack Bogle, Vanguard's founder and the first to
introduce indexing in funds, believe). It's worth noting that, unlike Vanguard's Investor-class
funds, which require a $3,000 minimum, you'll need $10,000 to get into VFIAX. (See
also: Buffett's Bet With the Hedge Funds: Year Nine.)

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Vanguard Total Stock Market Index Fund Admiral (VTSAX)
Issuer: Vanguard

Assets under management: $163 billion

Expense ratio: 0.05 percent

YTD performance: 5.40 percent

Like VFIAX, its S&P sibling, FTSAX is an indexed fund, tracking the CRSP U.S. Total
Market Index. It offers broad exposure to the entire domestic equity market, including a blend
of small, mid and large caps plus value stocks. There are over 3,500 equities in the
fund's basket of holdings, which is heavily tilted toward financials and technology. It's a great
choice for both growth and income investors, with a 52-week average return of 18.7 percent.
A $10,000 minimum is required for Admiral-class funds. (See also: Vanguard Mutual Funds
Overview.)

Fidelity Government Cash Reserves (FDRXX)

Issuer: Fidelity

Assets under management: $137 billion

Expense ratio: 0.37 percent

YTD performance: 0.08 percent

This is a very old, established money market fund that aims to

preserve capital and liquidity for income investors. The fund's assets are virtually entirely
invested in cash, CDs and government Treasury bills. If you're looking for a stable place to
park some cash, this is a solid choice, with low expenses for a fund of this type. (See
also: Introduction to Money Market Funds.)

Vanguard Institutional Index Mutual Fund (VINIX)

Issuer: Vanguard

Assets under management: $129 billion

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Expense ratio: 0.04 percent

YTD performance: 5.80 percent

VINIX is benchmarked to the S&P 500 and is passively managed, essentially replicating the
index. As an Institutional-class investment, VINIX is usually reserved for elite corporate
clients (the minimum investment to get in is $5,000,000) and is a popular choice for 401(k)
plans. Donald Butler, a Vanguard principal, manages the fund. (See also: How to Pick a
Good Mutual Fund.)

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)

Issuer: Vanguard

Assets under management: $111.4 billion

Expense ratio: 0.14 percent

YTD performance: 5.47 percent

This is another passively managed fund that tracks the CRSP U.S. Total Market Index.
Expenses are a bit higher than the Admiral-class VTSAX, but the minimum investment is
also considerably lower at just $3,000. The fund's top ten holdings include household names
like Apple Inc. (AAPL

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The Value in Socially Responsible Investing
By Marc L. Ross, CFP, CPA, CLU | Updated April 14, 2017

Once considered a niche area of investment practice, socially responsible investment

(SRI) now embraces a wide investment audience that includes individuals, high net worth and
otherwise, and institutions such as pension plans, endowments and foundations. Religious
tenets, political beliefs, specific events and the broad remit of corporate responsibility (i.e.
green investing, social welfare) all drive this investment practice.

Indeed, the professional association USSIF: The Forum for Sustainable and Responsible
Investment, estimates in its "2016 Report on Socially Responsible Investing Trends" that
around $8.72 trillion in assets under management subscribe to one or more of the
aforementioned approaches to socially responsible investing; that's a rise of 33% since 2014.

In the United States alone, around 519 registered investment companies – including mutual
funds, variable annuity funds, exchange-traded funds and closed-end funds – utilize a social
screening process, with assets of approximately $1.74 trillion, according to the USSIF's most-
recent report.

Socially responsible investing expresses the investor's value judgment of which several
approaches may be used. One example is when an investor avoids companies or industries
that offer products or services the investor perceives to be harmful. The tobacco, alcohol and
defense industries are commonly avoided by people who try to be socially responsible
investors.

In the 1980s, divestment of American companies doing business with South Africa was
highly publicized. Another is a performance ranking in terms of how well a company
achieves on not only financial metrics, but also on social, environmental, governance and
ethical issues.

Yet another involves active engagement between the company's shareholders and its
management. Finally, there is the activist tack that involves the investor advocating specific
issues. Any one or a combination of these approaches is a critical driver in the process of
portfolio management and fiduciary oversight.

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Moreover, the practice is global, with different approaches emphasized in various countries
as a function of their culture, government, business environment and their interrelationship.
What obtains as socially responsible or not has led to differing opinions on whether these
approaches yield competitive returns.

For Whose Benefit?

Socially conscious investors may assume a more holistic view of a company when making
investment decisions, looking at how it serves its stakeholders, a rubric under which are
subsumed not only shareholders, but also creditors, management, employees, the community,
customers and suppliers. Within this context, socially responsible investment seeks to
maximize welfare while earning a return on one's investment that is consistent with the
investor's goals.

On the surface, these two notions may appear contradictory. For example, there may be an
implicit cost of such an approach to the extent that it eschews profitable companies and
sectors. Tobacco, alcohol, firearms and gambling have been lucrative industries.

However, to a socially conscious investor, their inclusion in a portfolio would fail to serve the
investor's objectives of living in a world void of conflict and legal stimulants and depressants.
As with any investment approach, the socially conscious investor needs to:

 Define his, her or its risk and return objectives and constraints.
 As to the latter, the investor needs to determine what its socially conscious constraints
are. These may differ considerably, depending upon the investor. Muslims who wish
to be compliant with Sharia law would exclude any companies connected with the
production, sale and distribution of alcohol, any financial institution that lends and
any business that profits from gambling. Investors opposed to armed conflict as a
means of dispute resolution may avoid any company or industry associated with
defense, national security or firearms.
 Once the investor defines its constraints, it must decide upon an approach to
implement them, be it the use of inclusionary or exclusionary screens, best practices
criteria or advocacy. The type of investor may determine the most suitable approach.
For example, advocacy and dialog with a company or industry would be better suited
to a large public pension fund.

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 Consider the work of CalPERS or the Swiss billionaire activist Martin Ebner, the
latter more an example of individual shareholder activism. By contrast, an individual
investor working with an advisor would find the screening process more feasible.

 Social investing has implicit costs – the returns potentially foregone through the
exclusion of companies with unacceptable products or business practices – and
explicit costs.

For those considering an active approach, fees for exchange-traded and mutual funds
tend to be a bit higher. For investors seeking a passive management, there are fewer
indices to replicate and the funds that do typically bear higher costs.

 Diversification is always an important consideration. Screens may hamper this

process, unintentionally or otherwise.

Utilizing this type of traditional investment framework would appear to make the process
manageable, so long as the investor weighs the costs and benefits of this type of investment
approach carefully.

However, there could appear to be a dilemma upon whose horns the investor invariably
would be impaled. For example, if investment in such "vice" products as alcohol and tobacco
is anathema to a socially conscious investor, what about the transport and energy industries?

After all, the products have to be shipped to the point of sale which requires various means of
transport which, in turn, require fuel. These types of considerations make the precise
definition of one's socially responsible investment goals all the more crucial.

Depending upon the perspective of the individual, companies may display characteristics that
are both irresponsible and responsible. (For additional reading, check out Extreme Socially
Responsible Investing.)

The Bottom Line

Socially responsible investment reflects an investor's values. While the opportunities in this
realm of investment management have grown considerably, one may not ignore best practices
of investing.

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The investor must clearly define their goals when undertaking this sort of approach,
recognizing its potential trade-offs and clearly articulating a policy that considers all the
variables when looking to maximize the good over the plentiful and abundant.

Risk management and attention to costs are essential. Research seems to indicate that results
from socially conscious investing are not statistically significant from a more conventional
approach. (For more information, read how to Change The World One Investment At A Time.)

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Consider These Fees When Evaluating Mutual Funds
Rebecca Dawson April 12, 2017

There is a common belief that investing in mutual funds is a conservative way to accumulate
wealth in the stock market. We have all seen the cover of financial magazines that read: “Our
100 Best Mutual Funds for 2017.” Yes, magazine companies are in the business of selling
their magazines.

If you are looking at whether or which fund to buy you usually look at its track record or
performance history. Although we all know at the bottom of every mutual fund brochure is
the disclaimer: "Past performance is not indicative of future results." Since most investors are
dazzled by performance, I beg to differ. (For more, see: How Mutual Fund Companies Make
Money.)

The Costs

The first question should be: What are the costs? The annual cost of owning a mutual fund is
called the expense ratio. There is also a separate charge called the sales load which I will
cover later. The expense ratio is the percentage of the fund’s assets that go toward running
the fund. But there are three additional components to be aware of:

1. Management fees
2. Administrative costs
3. 12b-1 fees

Management fees or investment advisory fees go to pay the portfolio manager. You know it
keeps up his Hampton beach house. Seriously, that is how he gets paid as well as from firm
bonuses.

Administrative costs are for operating expenses like recordkeeping, client mailings,
maintaining a customer service phone line, etc. These vary with the size of the fund.

Lastly, there is the 12b-1 fee. This fee is for marketing and advertising. Think about this fee
when you see your fund advertised during Super Bowl half time. It also includes trailer
commissions paid to the broker of record as an incentive to sell the fund. It works like
an annuity for the sales person over the life of the fund. It is usually paid to the broker

65
quarterly as it is taken out of the net asset value of the fund fractionally. I have even seen
some funds that are closed to new investors and are still charging 12b-1 fees. (For more,
see: 12b-1: Understanding Mutual Fund Fees.)

Regarding the sales load, mutual funds come in different share classes and this will determine
whether you pay an up-front, back-end, contingent deferred sales load or no-load. The
expense ratio usually differs with which share class you buy. Sounds confusing, doesn’t it?
That is the way the mutual fund industry prefers it.

The bottom line is that these fees are rising as funds shift away from the up-front loads that
are driving away sales and into the annual expense ratios where they are not as detectable.
And these fees are charged every year whether or not the fund has performed. I have seen
mutual fund holdings that have been held for years and the only one who has profited is the
mutual fund company.

Other Issues

The other issue with mutual funds is the high turnover of assets in the fund. Buying and
selling stocks have transactional costs which cut into the net return. A fund with a high
turnover will end up distributing yearly capital gains to their shareholders and that will
generate a tax bill for the investor thereby reducing net returns.

Additionally, mutual funds are required to maintain liquidity and the capacity to
accommodate withdrawals. Funds typically have to keep a portion of their portfolio as cash.
The funds are keeping cash balances of usually around 8% of the fund, which is not
generating any returns. The average fund is charging around a 1.5% expense a year on the 8%
that it is keeping in cash.

Mutual fund companies aggressively market funds awarded 4 or 5 stars by rating agencies.
But the rating agencies merely identify funds that have performed well in the past. It provides
no help in finding future winners. Historically, mutual funds have not outperformed the
market. Research indicates that around 72% of actively-managed large cap funds failed to
outperform the market over the last 5 years.

Mutual Fund Alternatives

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There are alternatives to mutual funds that are structured differently and will also give you
diversification. Unit investment trusts (UITs) are a fixed portfolio of securities usually with a
12 to 24 month term, therefore, no annual expenses only an upfront commission.
Additionally, exchange-traded funds (ETFs) offer diversification and liquidity with lesser
fees relative to mutual funds.

The bottom line is that mutual funds are not always the safe haven that they have been touted.
The companies that manage mutual funds face a fundamental conflict between producing
profits for their owners and generating superior returns for their investors. The best way to
evaluate a fund is by digging a bit deeper into the fees and also looking at the turnover ratio
prior to investing. It is important to understand the good and bad points. The probability of a
successful portfolio increases dramatically when you do your homework. (For more,
see: Mutual Funds: The Costs.)

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Women: Invest in Your Financial Literacy
By Lisa Smith | Updated April 10, 2017

If you want to learn about anything (how to cook fine meals, drive a car, practice yoga or
raise a baby), you can probably find a good book or web page, or take a class to get a good
basic overview of the topic in relatively short order. If you want to learn about money,
however, the path to knowledge isn’t as clear, quick or easy. It’s a bit ironic too, considering
that dealing with money is something we all need to do in some way or form. Becoming
financially literate should certainly be one of the tasks on our “to do” list. Even if someone
else takes care of the bills today, the harsh realities of life dictate that, at some point, you are
likely to benefit from having a basic understanding of money and finance.

The Challenge
Even the language associated with finance and money sound complex to the point of
intimidation. Stocks, bonds, mutual funds, hedge funds, derivatives, beta and the Sharpe
ratio are just some examples. It’s a major disincentive that causes many people to give up
before they even start. While it’s true that developing an advanced understanding of money
and finance can take years of effort, getting the basics under control is easier than one might
think. Start with a few simple guidelines and tasks. Once you have mastered those, let your
interests guide your next steps. You don’t need to spend years learning formulas and
memorizing complex terminology. So let’s get started!

Understand What You Spend

Nothing gets you in financial trouble faster than spending more than you earn. And nowhere
is this a bigger problem than with women, according to a study published by the Financial
Industry Regulatory Association (FINRA). The study, In Our Best Interest: Women,
Financial Literacy and Credit Card Behavior, reveals that women are more likely to carry a
credit card balance, pay late fees and make minimum payments on their debts than their male
counterparts. Understanding your spending habits is a great place to start on your road to
financial literacy. You can get started with a quick and easy 30-day plan. Best of all, there are
no complex terms to memorize or fancy mathematical formulas and calculations required.

There are just three steps. Step 1: For one month, pay all of your bills with cash or a check.
No credit cards allowed. Step 2: Save your receipts. This makes it easy to track what you

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have spent. Step 3: Do the math at the end of the month. This little exercise provides several
valuable insights, including a good overview of your spending habits. You can tell how much
money you spend in a month and what you spend that money on. From here, it’s easy to
identity your recurring bills, so you can tell how much your cash outlay needs to be in a given
month. You can also tell what percentage of your money goes for discretionary spending,
such as dining out. The exercise makes it quite obvious if you usually spend more than you
earn, because if you don’t use credit cards, at some point the money runs out.

Pay Off Your Debts

Now that you are spending less than you earn, you can take your efforts to the next level.
Your surplus cash can be used to pay down your debts. This financial strategy reduces the
amount of money you will spend over your lifetime on interest payments to creditors. It’s
also a good opportunity to spend a few minutes learning more about interest. You will
become aware of how interest adds up over time, causing you to pay way more than face
value for your purchases.

While we’re on the topic of interest and the power of compounding, it’s a two-way street.
The same math that works for creditors also works for investors. Understanding the power of
compounding and how it works provides insight into an important strategy that investors use
to make money, and highlights why it is a strategy that you want to have working for you, not
against you.

Start to Save
Once you are spending less that you earn, it’s time to save. Anything you save has the
potential to grow. There are two basic types of savings: short term (emergency fund,
upcoming expenses) and long term (investing for retirement). If you don’t know much about
investing, that’s okay. There’s a simple way to start both your short-term and long-term
savings plans. For short-term needs, open up an account at the local bank. There are no-fee,
no-interest checking accounts for when you first start out, and then interest-bearing savings
accounts when your balance is high enough. For your long-term needs, you can start
by putting your money in a mutual fund that tracks the Standard and Poor’s 500 Index. It’s a
simple, inexpensive way to dip your toe into the stock market, and since S&P activity is
reported in the news every day, you will also have some sense of how your money is doing.

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You’ll generate investment returns that keep pace with the general stock market, as the S&P
is a good gauge for measuring market behavior.

The Next Level

Sophisticated investors are quick to point out that saving at your local bank will never
generate the type of investment returns that will make you rich, and that the S&P 500 is just
one of the many thousands of possible investments in the market (not to mention bonds,
commodities, real estate and a host of other money-making ventures). They are, of course,
correct.

After you’ve dipped your toe in the water, you may want to develop a more sophisticated lens
yourself by continuing to enhance your knowledge and understanding of investing. Learning
about mutual funds is an easy way to do it. From there, you can expand into learning about
stocks, bonds and more. Your strategy for doing so will be to take advantage of the many
tools available to you, including newspapers, magazines, books, videos and websites. Your
employer may offer educational seminars on topics like your company’s 401(k) plan, estate
planning and saving for a child’s college education. Local community centers may also offer
programs.

The Sky’s the Limit

A self-study program motivated by your specific interests will lead you down the path to
increasingly complex ideas and investments. Formal programs and certifications are
available; and of course, professional assistance is always available. Insurance companies,
banks, brokerage firms and other entities all have financial services professionals who usually
offer a free initial consultation. After speaking with several experts, you may even decide to
hire one. If you do, the basic understanding that you have developed will help you understand
expert advice.

The Bottom Line

The path to greater financial literacy begins by taking the first steps of knowing how much
money is coming in, and doing your best to keep as much of it as possible for smart
investments. From there, it is simply a matter of making an effort to research and learn about
investing strategies that capture your attention. What are you waiting for? Get started today.

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VGENX: Vanguard Energy Fund Risk Statistics Case Study By Steven
Nickolas | Updated September 2, 2016

The energy sector has been pummeled by the bear market in oil prices, which began in the
second half of 2014 and has continued through the first quarter of 2016. This trend has
caused some energy-related funds to have increased volatility during the period. However,
energy funds have historically exhibited higher-risk characteristics coupled with the potential
for higher rewards. The Vanguard Energy Fund Investor Shares ("VGENX") is one energy
mutual fund that has experienced below-average and low levels of risk compared to its
Morningstar category of equity energy funds. When considering a mutual fund, investors
should analyze its modern portfolio theory (MPT) and volatility statistics, such as its R-
squared value, beta, standard deviation and Sharpe ratio. Additionally, investors may want to
analyze the fund's upside-downside capture ratio.

Fund Overview
The Vanguard Energy Fund Investor Shares seeks to provide exposure to U.S. and foreign
companies primarily engaged in activities relating to the energy business. In an attempt to
provide long-term capital appreciation, the fund normally invests at least 80% of its total net
assets in common stocks of energy companies, and it may invest 100% of its total net assets
in foreign stocks. As of Feb. 29, 2016, it had one-, three- and five-year average annual returns
of -25.32, -9.73 and -7.36%, respectively. It holds 147 stocks, and the investor share class has
total net assets of $2.7 billion. The fund requires a minimum initial investment of $3,000, and
it charges an annual net expense ratio of 0.37%, which is 75% less than that of similar funds.

Historical MPT and Volatility Statistics

The first MPT statistic investors may want to consider is the R-squared value, which
measures the percentage of a security's past price movement that could be explained by
movements in a benchmark index. As of Feb. 29, 2016, based on trailing three-year data
measured against the Morningstar U.S. Energy Total Return USD Index, the Vanguard
Energy Fund Investor Shares' best-fit index, the fund had an R-squared of 95.1%. This figure
indicates that 95.1% of the fund's past price movements in the period can be explained by
movements in its best-fit index.

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Investors may also want to consider a fund's beta when analyzing its historical performance.
A fund's beta measures whether an investment in it would be more or less volatile than a
benchmark index. As of Feb. 29, 2016, based on trailing three-year data, the fund had a beta
of 0.99 against its best-fit index. This figure indicates that the fund was, theoretically, slightly
less volatile than the index. Additionally, it indicates the fund had a near-perfect correlation
to the Morningstar U.S. Energy TR USD Index.

Upside-Downside Capture Ratio

The upside-downside capture ratio measures the overall performance of a portfolio during up-
markets and down-markets. Generally, an up-market capture ratio above 100% and a down-
market capture ratio below 100% are preferred. If a portfolio has a down-market capture ratio
below 100%, it indicates that the portfolio has outperformed its benchmark during down-
markets, and vice versa. If a portfolio has an up-market capture ratio above 100%, it indicates
that the portfolio has outperformed its benchmark during up-markets, and vice versa.

As of Feb. 29, 2016, over the past one-year period, the Vanguard Energy Fund Investor
Shares had an up-market capture ratio of 106.78% and a down-market capture ratio of
167.23%, measured against the MSCI ACWI NR USD Index, which is the global standard
index. This trend indicates that the fund has slightly outperformed the standard index in up-
markets, but has significantly underperformed in down-markets during the period. Based on
trailing three-year data, the fund had an up-market capture ratio of 71.96% and down-market
capture ratio of 162.89%. These figures indicate that the fund has underperformed the
standard index in both up-markets and down-markets during the three-year period. Based on
trailing 15-year data, the fund had a down-market capture ratio of 103.49% and an up-market
capture ratio of 117%. This indicates that the fund outperformed the standard index by an
average of 17% during up-markets, and only underperformed by an average of 3.49% over
the past 15 years.

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USAGX: USAA Precious Metals Fund Performance Case Study By David
Gorton | Updated September 2, 2016

The USAA Precious Metals and Minerals Fund (“USAGX”) strategically invests in precious
metals, and never in bonds. As of Nov. 30, 2015, 86.02% of total fund assets were invested in
foreign stock, while 9.11% of total fund assets were invested in U.S. stock. USAGX
performed well over the past year with a one-year return of 13.78%. However, it did struggle
for a long period, as indicated by its three-year and five-year average losses of 10.24 and
17.84%, respectively. It has a total market capitalization of $659.4 million and an expense
ratio of 1.25%.

January Through March

USAGX historically has been successful to start the calendar year. It reported a gain in three
of the past four years in the month of January, including two gains of at least 11%. January
and February are the only two months to have had two double-digit gains in the past five
years. Although February had three losses in the past five years, two of these losses were less
than 4.5%. USAGX had a gain of 31.5% in February 2016, the best performance in a single
month in the past five years. However, March has not typically been kind to USAGX. All
three of the losses in the past five years were at least 8.2%. Meanwhile, both gains were less
than 4.1%.

April Through June

USAGX had a gain in the month of April for each of the past two years. April was one of
only three months to be able to boast a gain in both 2014 and 2015. The month of May was
among USAGX’s worst months. USAGX failed to record a single gain in May in the past
five years. While four of the five losses were greater than 6.2%, the highest loss was only
10.3%. The loss of 10.3% in May 2012 was the fund's largest loss. Finally, June is another
month that has typically struggled. Although USAGX experienced a 20% gain in June 2014,
two of the past three years have resulted in losses greater than 7.7%.

July Through September

July is among USAGX’s most inconsistent months. Its highlight was the 12.7% gain in 2013,
but it also suffered a loss of 21.5% two years later. The other three results in the past five

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years were all changes less than 5%, indicating no real trend in July. On the other hand,
August could not be more straightforward. USAGX didn't have a loss in August at any point
in the past five years. Although only one of these gains broke 10%, it is the only month to
have had a gain in each year. In fact, it is the only month to have at least four gains in the past
five years. These gains were typically reversed in September, as USAGX had a loss in four of
the past five years. Although the sole exception was a 13.7% increase in 2012, two of the four
losses were at least 13.7%. September is the only month to have had two double-digit losses
in the past five years.

October Through December

USAGX failed to show consistency during the month of October. The month's two losses
were separated by almost 15%. When USAGX loses in November, it is usually bad. Three of
the past four years resulted in a loss, with each of these losses being at least 9.2%. Finally,
USAGX failed to record a single gain in the month of December during the past five years.
While only one loss was greater than 4.4%, this was a 23.1% decline in net asset value. This
23.1% drop in December 2011 was the single worst month for USAGX in five years.

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References/ Bibliography

1. https://www.moneysimplified.in/home.aspx?utm_source=menu&utm_medium=home
&utm_campaign=web
2. https://investeasy.reliancemutual.com
3. https://en.wikipedia.org/wiki/Mutual_fund
4. Robert Pozen; Theresa Hamacher (2015). The Fund Industry: How Your Money is
Managed (2nd ed.). Hoboken, NJ: Wiley Finance. ISBN 978-1118929940.
5. Thomas P. Lemke; Gerald T. Lins; A. Thomas Smith (2016). Regulation of
Investment Companies. Matthew Bender. ISBN 978-0-8205-2005-6.
6. Thomas P. Lemke; Gerald T. Lins; W. John McGuire (2015). Regulation of
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