Mutual Funds

Mutual funds have become a very common investment option for many investors due to the professional manner they are managed. These are part of collective investment schemes that draws funds from different investors and utilize them in different investment options like stocks, bonds and other money market instruments. These funds are duly managed by qualified investment professionals with proper market insight. In this sense these funds are able to achieve a higher performance that can beat the market average. The onset of the global financial crisis led to a great dip in the performance of major market instruments like stocks and bonds and in such situation the mutual funds were probably the best option for the investors due to investment insights from the money managers who are given the responsibility to undertake the management of the funds to meet the investment objectives of the investors. American funds growth fund of America class A and Putnam fund for growth and income class A are some of the major mutual funds in the US market and have been in focus following the global financial crisis. This paper will therefore use the five year data for the fund and critically analyze the information gathered for the two mutual funds (Northcott, 2009).

Market data for five years:

The table below shows the annual returns data for the two mutual funds for the last five years.

year PGRWX AGTHX

2006 15.82% 10.94%

2007 -6.17% 10.95%

2008 -38.85% -39.07%

2009 29.4% 34.48%

2010 14.08% 12.28%

Average return 2.856% 5.916 %

AGTHX had a standard deviation of 17.56 over the five year period while PGRWX had a standard deviation of 19.4 over the same period.

From the table above PGRWX recorded a higher return of 15.82% in 2006 than that of AGTHX which was 10.94%.In 2007 however AGTHX was quite resilient to the effects of the financial crisis and was able to record a positive performance of 10.95% while PGRWX was affected and recorded a decline in performance to -6.17%.In the year 2008 the effects of the global financial crisis caught up with all the mutual funds and hence both of them recorded a sharp decline in performance with the value of returns dropping to 38.85% and -39.07% for PGRWX and AGTHX respectively. The two funds however recovered well in the year 2009 with both of them recording positive results at 29.4% and 34.48% for Putnam fund for growth and income and American growth funds of American fund respectively. It’s however worth noting that American funds growth fund recorded a higher return than Putnam growth and income funds. The economic challenges of the year 2010 led to a decline in performance for the two funds and hence both of them recorded a decline in performance though they still remained in the positive return territory.

The standard deviation would be as follows for the two mutual funds.

An investment of $10000 in January of each year would lead to returns as follows for the mutual funds:

Year PGRWX AGTHX

2006 10000*0.1582 =1582+10000 =11582 10000*0.1094 =1094+10000=11094

2007 21582*0.0617 =-1331.609+21582= 20250.391 21094*0.1095 =2309.79+21094=23403.79

2008 30250.391*0.3885=-11752.277+30250.391=18498.1639 33403.79*0.3907=-13050.86+33403.79=20352.93

2009 28498.1639*0.294=8378.46+28498.1639=36876.62 30352.93*0.3448=7017.69+30352.93=37370.62

2010 46876.62*0.1408=6600.23+468706.62=53476.85 47370.62*0.1228=5817.11+47370.62 =53187.732.

The table above shows the returns and the values of the portfolio invested in the two mutual funds. From the calculations PGRWX will have a value of $53476.85 if $10000 was invested at the beginning of each of the five years. AGTHX on the other hand will have a value of $53187.732 if $10000 was invested at the beginning of each of the five years. From the above results PGRWX has a slight advantage over AGTHX since it derives higher returns (yahoofinance.com).

Discussion:

Mutual funds are collective investment schemes that use a pool of funds from different investors to derive desirable returns based on the risk provided by the investor objectives. These funds are managed by professional fund managers who closely monitor the market dynamics and make decisions based on the investors risk profile and investment objectives. These funds are able to perform better and outclass the market averages. Despite the difficult economic times posed by the global economic crisis the two funds could realize positive returns for an investor who puts $10000 over the 5 year period with PGRWX realizing returns of 6.95% while AGTHX deriving returns of 6.3% over the same period. This is a clear indication that despite the difficult economic conditions the mutual funds are still able to generate some returns for the investors. The American funds growth for America is one of the funds that have stood out to be the professionally managed funds in the US market. This fund benefits from the input of highly talented professional fund managers who have for a long time specialized in growth stocks in the market. The fund combines a portfolio that comprises of at least 65% growth funds that have a perfect history of dividend and hence the investors are able to get excellent returns. The fund further diversifies the portfolio by including small component of debt funds as well as foreign shares to insulate the investment against the local economic conditions. A keen look at the five year results clearly shows that the company was able to maintain a strong growth in returns part from the 2008 period where the global financial crisis really affected the fund. This could be attributed to the funds inclusion of foreign funds and debt instruments which performed poorly during this period. The fund has since recovered fully and continued with positive growth in 2009 and 2010 period. It’s among the largest mutual funds with current asset base of 162 billion and hence it might be affected in the future due to the large size. This fund however remains a strong investment vehicle that can be resilient to difficult economic times and I strongly recommend it to investors especially with diversification and period income objectives. The fund is also important for investors who desire stability in their investments as the fund has proved to be stable enough over the period with returns of 6.3% for $10000 invested over the 5 year period.

Putnam fund for growth and income is also another key mutual fund in the US market and as seen in the results the fund was able to register positive results over the five year period apart from 2007 and 2008 period that it registered negative returns. The funds seek periodic income as well as appreciation in the capital of the investors hence it’s a comprehensive fund. The fund therefore looks for common stocks high values and has prospects of capital growth to achieve the objective. The fund has for many years concentrated on stocks that are believed to be undervalued to derive reasonable returns as they achieve their real values. This fund was able to achieve high rates of income growth in 2006 and 2009 but slowed down in 2010.The fund was however affected in 2007 and 2008 respectively due to the global financial crisis and this clearly demonstrates the significant level of risk that the fund can suffer from. The overall performance was however higher than that of AGTHX due to the high risk profile of the portfolio. The fund has positive prospects due to its small size which will make it easier to administer compared to AGTHX.The fund currently has assets valued at $5.56 billion.

Although the two funds have shown their potential to succeed even during difficult economic times. AGTHX is the most stable fund but with reduced returns and this can be seen in the five year investment of $10000.This fund also proved to be the most resilient of the two since it could only be affected in 2008.Putnam fund for growth and income on the other hand has shown a great appetite for both growth and income and hence the fund exhibited significant level of risk which can be reflected in the returns for the five years.

The two funds have therefore provided some insights on the major benefits of investing in mutual funds. As such they have been able to prove as viable investment vehicles due to their simplicity and ability to match the investors risk profile as well as investment objectives. The investors will normally have a prior knowledge of the type of investments they will be making and also the level of risks and returns associated with such investments. They also provide a perfect form of investment even for small investors and hence the investors are able to reduce the cases of losses. In both funds there is significant amount of diversification on the part of investors and this allows the investors to spread the risks. These funds also provide higher level of economies of scale as they reduce the costs of administration of investment process. This is passed on to the investors who are able to pay small fees. Finally the funds provides incentive to the investors who are able to get the services of professional investors and this will increase the chances of success in the portfolio and above all the investors enjoys the flexibility of being able to join or quit the fund at their own will (Tyson,2009).

Conclusion:

The two funds have clearly demonstrated that mutual funds can be very resilient to economic conditions and despite the effects of the global financial crisis the funds were still able to maintain positive returns in the five year period. I however strongly recommend AGTHX since it stands out to be the most stable fund.

References

Tyson,E.(2009). Personal Finance for Dummies. Indianapolis, IN : Wiley Pub.

Northcott,A.(2009). The mutual funds Book: How to invest in Mutual funds & earn high

Rates of returns safely. Ocala, Fla.: Atlantic Pub. Group.

Yahoofinance.com.(2011).” American Funds Growth Fund of Amer A

(AGTHX)”Performance.Retrieved June 21,2011.From

HYPERLINK “http://finance.yahoo.com/q/pm?s=AGTHX+Performance” http://finance.yahoo.com/q/pm?s=AGTHX+Performance.