Ch 13 Mutual Funds And Insurance Flashcards
Types of investment companies
FACs - faced amount certificate companies. Not very common. Fixed rate of return
Management companies aka mutual funds - open ended and closed ended. Returns depend on skills of manager.
UITs - fixed portfolio set up to last a predetermined number of years. No managing or overturning of the portfolio and low fees. Risk is missing out on returns if there’s a better investment option.
Classes of mutual fund shares
All are the same mutual fund they just gave different fee types
A - front end sales charge, low or no 12b-1 (annual fee), breakpoints for large purchases. good for inside an IRA
B - no front load but contingent can have deferred sales charge (like a band end fund) if held less than 6-8 years. Always have a 12b-1 fee. Can convert to A after 6-8 years. No breakpoints.
C - good for short term investing. May have a small front end load or small contingent deferred sales charge. Have 12b-1 fee which is what makes them good for short term. No option to convert to A shares
Mutual fund distribution types
Investment income - cash dividends. Can be STCG or LTCG. May be distributed more than once a year
Capital gains - distributed once per year. Always considered LTCG
Can reinvest distributions. Still taxable that year but no sales fees
ETF vs index fund
Both:
hold a basket of securities mirroring an index
have low expenses
ETFs: shares trade on the secondary market aka the exchange so they can be sold short.
Commission paid on trade
Can be day traded
Can be leveraged
Can be inverse ETFs (designed to go in opposite direction of market) allowing to be bearish without risk that comes with short sales
Index: cannot sell short, usually no sales load, only priced and graded once a day, no leverage allowed
ETNs
Exchange traded notes
Unsecured debt
Trade on exchange
Low fees
Linked to an index but index isn’t purchased directly. Basically buying a promise to pay you
Hedge fund
Generally for wealthy investors
Not heavily regulated (covered under Reg D to accredited investors)
Fund of hedge funds
mutual fund that buys hedge funds
Suitable for wealthy investors but can be sold to anyone
Maybe have restricted with withdrawing money
Register under IC act of 1940
REIT
Types:
- Mortgage/ debt - secured loans backed by real estate
- Equity - own and operate real estate (like an office building and leases it)
- Hybrid - combo
Distributions are not qualified
Good for investors seeking current income
At least 75% of asset must be invested in real estate, cash or US government securities. The rest can be invested at manager discretion.
90% of income must be distributed to shareholders
SPAC
Special purpose acquisition companies
Have a manager like a mutual fund
Try to find one private company and take public
Once they have the IPO money, they negotiate buying private companies and it’s considered a merger that shareholders can vote on. Once merged, you un-SPAC and are just a company
Qualified annuity
Type of ERISA plan so tax deferred earnings
Examples include 403bs and 457
Equity indexes annuities (EIA)
Offers guaranteed minimum return
Can be either:
participation rate: eg investor gets credit of 80% of growth but if it declined they get a guaranteed rate at least
cap rate: potential return is capped in good years and in bad years they get guaranteed minimum
1035 exchange
Can do:
Life insurance to annuity
Life insurance to life insurance
Annuity to annuity (both no qualified)
Variable life: premiums and DB
Fixed premiums
Fixed minimum death benefit
Asked price of a open end mutual fund
Can only be at or above the bid
What impacts ask price is whether there are loads. If it’s a loaded fund, the ask price will be above the NAV, it will be the NAV + sales charges
