Chapter 13 - Investing in mutual funds Flashcards
Pooled investment fund
An investment vehicle that pools together money from many investors and invests in a variety of securities.
Net Asset value (NAV)
the market value of the securities that a mutual fund has purchased minus any liabilities and fees owed.
Net asset value per share (NAVPS)
calculated by dividing the NAV by the number of shares in the fund.
Open-End mutual funds
funds that sell shares directly to investors and will redeem those shares whenever investors wish to “cash in”
Closed-end funds
funds that issue shares to investors but do not redeem those shares; instead, the fund’s shares are traded on a stock exchange
No-Load mutual funds
sell directly to investors and do not charge a fee
Front-End load mutual funds
charge a fee at time of purchase, which is paid to stockbrokers or other financial service advisers who execute transactions for investors.
Back-end load mutual funds
charge a fee if shares’ are redeemed with a set period of of time.
management expense ratio
the annual expenses incurred by a fund on a percentage basis, calculated as annual expenses of the fund divided by the net asset value of the fund; the result is then divided by the number of units outstanding.
growth funds
focus on stocks that have potential for above-average growth
small capitalization
tend to have more potential for growth than large firms
mid-size capilizations
tend to be more established than small cap firms
dividend funds
focus on firms that pay a high level of dividends
Balanced growth and income funds
contain both growth stocks and stocks that pay high dividends
sector funds
focus on stocks in a specific industry or sector, such as technology stocks
index funds
attempt to mirror the movements of an existing equity index
International Equity Funds
Focus on firms based outside of canada
Ethical funds
screen out firms viewed as offensive by some
asset allocation funds
spread investors money across different types of asset classes
Target date funds
special type of asset allocation funds where the allocation between stocks and bonds changes automatically as the investor grows older
Canadian bond funds
focus on investments in Canadian, federal, provincial, municipal, and corporate bonds
High-Yield bonds
focus on relatively risky bonds issued by firms that may have higher default risk
index bonus funds
intended to mimic performance of a specified bond index
Global bond funds
focus on bonds issued by non-Canadian firms or governments
Maturity classifcations
each type of bond fund can be segmented further by the range of maturities held in the fund
Exchange-traded funds
designed to track other assets such as particular stock index, a particular bond index, a commodity, or a basket of assets
What are the advantages of an ETF
Lower expense ratios
more tax efficient
do not make capital gain distributions
buy or sell them at anytime throughout the day
use limit orders, stop-buy orders, buy on margin
no minimum initial investment
what are the disadvantages of an ETF?
Can be illiquid
have to pay a brokers’ commission
what are some advantages of mutual funds?
Portfolio Diversification
Lower Transaction costs
marketability
professional management
record keeping
modest initial investment
exchange privileges
reinvestment of dividends and capital gains
convenience
What are some disadvantages of mutual funds?
Management fees
load charges
lack of control over investments
poor investment selection
unexpected tax liability
low liquidity
