CHAPTER 12: Riskier Mutual Fund Products

Question 1

Equity funds

Answer 1

• Contain Equities / Stocks

Question 2

Equity Funds Objective

Answer 2

Growth, which qualifies for capital gains taxation, with some opportunity for dividend income

Question 3

Three Types of Equity Funds

Answer 3

The three main types of Equity Funds are:
1. “Standard” Equity Funds
Combination of Dividend income and capital gains from Canadian Common Stocks
2. Growth Funds
Capital gains, not much dividend income. Smaller firms, more risk and volatility.
3. Indexed Funds
Goal is to replicate the market index. Grow through capital gains

Question 4

Risk and Return of Equity Funds

Answer 4

Risk:

• Only market risk for passive (index) funds
• Market risk and unique risk for actively managed funds

Return:
Mostly Capital gain, some dividend income

Question 5

Balanced funds

Answer 5

Funds invest in fixed-incomes and equities, and contain:
Corporate Bonds
Government Bonds
Common Shares

Question 6

Balanced Funds Objectives

Answer 6

safety, current income, capital gain, and preserving capital

Question 7

Balanced Fund Risks

Answer 7

default risk, interest rate risk and market risk. It may also have some “unique” risk if the manager times the market incorrectly

Question 8

Target Date Funds (life cycle funds)

Answer 8

2 Distinctive Characteristics:

1) Maturity Date
2) Glide Path (more risky at the start, reduce risk when maturity date approaches)

Investors will select a fund with a maturity date that matches a certain life goal or date, such as retirement

Question 9

Global funds / International Funds

Answer 9

• Contains investments outside of Canada

Global
-Hold investments from anywhere including Canada

International
-Hold investments anywhere except Canada

Most common type of Global mutual fund is the global equity fund

Question 10

Global funds / International Funds objectives

Answer 10

Global Equity Fund
- earn capital gain over the long term

International Equity Fund
Earn interest income with some capital gain over a shorter horizon

Question 11

Global / International fund risks

Answer 11

all the risks associated with the investments they hold, plus the additional risk of currency / exchange

Liquidity risk
The foreign funds may not trade as frequently

Efficiency risk
The foreign markets may be less efficient

Foreign market risk
The foreign markets may have less supervision and control of accounting, etc.

Question 12

Specialty Funds

Answer 12

• concentrate in investing in precious metals funds, natural resource funds, gold, high-yield bonds, energy ect.
• Focused on Capital Gains

Question 13

Specialty Funds Objective

Answer 13

aggressive growth. These funds would be considered high risk and may not be suitable for all investors

Question 14

Specialty Fund Risks

Answer 14

Not be well-diversified

Have market risk and unique risk

Question 15

Fund Wraps (SEE PPT)

Answer 15

• consisting of multiple mutual funds to fit a pre-determined asset allocation model