Chapter 13 Part 4 Flashcards
Asset Allocation Funds
These funds invest in money-market instruments (which is like holding cash), common stocks, and bonds. Fund managers determine what percentage of the fund’s assets to invest in each category based on market conditions. They often use computer models to determine what the proper proportion of each asset class should be. Unlike balanced funds, the percentage of the portfolio invested in any of the three asset classes may drop to zero for a period if the model calls for it
Specialized or Sector Funds
Some funds concentrate their investments in a specific type of stock. they may focus on a particular industry, such as high-tech stocks or pharmaceuticals, or on a particular geographic location. Special situation funds invest in companies that are undergoing some type of change such as bankruptcy. Precious metal funds invest in companies whose value is connected to gold, silver, or other precious metals, or in the actual metals themselves. Specialized funds are riskier than more diversified funds, but they enable fund managers to take advantage of
unusual situations
International Funds
Mutual funds that specialize in foreign securities are often the easiest way for Americans to invest abroad. International funds invest primarily in securities of countries other than the United States. They include funds that invest in a single country and regional funds that invest in a particular geographic region such as Europe or the Pacific Basin. Global funds invest
everywhere in the world, both in the United States and abroad
International funds have more
risks than purely domestic funds, but they have the potential to provide higher returns and allow U.S. investors to diversify their portfolios. One particularly volatile type of international fund is the emerging markets fund, which invests in the stocks and bonds of emerging market countries. These are countries that are evolving from an undeveloped agricultural economy to a modern industrial one (Brazil, for example), or from a socialist economy to a free market system (Eastern Europe and russia)
Money-market funds invest in
short-term debt (money-market) instruments, usually with maturities of less than one year. The two principal benefits of money-market funds are liquidity and safety. Investors can withdraw funds at any time, often by means of a check. Money-market funds are designed to maintain a constant net asset value of $1 per share (although this is not guaranteed). Returns vary along with short-term interest rates. Dividends are typically declared daily and paid on a monthly basis. Some money-market funds invest entirely in U.S. government securities. Tax-exempt money-market funds invest in short-term municipal issues, sometimes exclusively in the securities of one state
An exchange-traded fund represents a
basket of securities that is traded on an exchange. The basket of securities usually represents an index such as the Nasdaq 100, S&P 500 (referred to as SPDH, S&P Depositary receipt), Dow Jones Industrial Average, or an index representing securities in a specific industly or country. Unlike index funds, etf prices are determined by supply and demand and investors pay commissions when ETFs are purchased or sold. Some of the advantages of purchasing ETFs are low expenses, continuous pricing, eligibility to be purchased on margin or sold short, and the availability of options on these securities. Individuals who pursue a market timing strategy are frequent investors in ETFs. Market timers are active investors who trade
frequently based on economic trends, technical factors, and corporate information
Investment companies offer several advantages to investors
diversification, professional management, liquidity, easy, lower commissions
There are many entities and issues involved in the organization and operation of a mutual fund. The entities involved include
a board of directors, investment adviser, custodian bank, and transfer agent. These entities are paid fees that arc an expense to the fund and, ultimately, to the fund’s shareholders. In addition, the fund may use an underwriter (distributor, sponsor) to sell the shares. The underwriter is typically paid through a sales charge
The expense ratio is the
percentage of a fund’s assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio. Thus, a fund with $100 million in average net assets and total expenses of $1 million will have an expense ratio of 1% ($1 million divided by $100 million equals .01or1 %). Expense ratios typically range between .20%
and 2.0% of a fund’s average net assets and must be disclosed in the fund’s prospectus
The board of directors is elected by
the mutual fund shareholders and is responsible for developing and overseeing investment policies. independent directors must constitute at least a majority of the fund’s board of directors. Independent directors are people who do not have an inherent interest in the fund-they are noninterested. they may not work for the fund, its investment adviser, its underwriter (the organization responsible for selling the fund’s shares to the public), or for any affiliated company.
The board appoints officers of the investment company to carry out
its activities and policies. An investment adviser or management company normally manages the investments in the fund’s portfolio, but the board must ensure that management conforms to the fund’s investment objectives
WHAT DOES THE BOARD OF DIRECTORS DO? Establish Investment Policy
SH: Must approve any fundamental changes in investment policy and objectives
WHAT DOES THE BOARD OF DIRECTORS DO? Select and Oversee Investment Adviser
SH: Must approve the initial contract and any fundamental changes in the contract
WHAT DOES THE BOARD OF DIRECTORS DO? Select and Oversee Principal Underwriter, Transfer Agent, and Custodian
SH: Must approve the initial contract with the principal underwriter and any fundamental changes
WHAT DOES THE BOARD OF DIRECTORS DO? Set Dividend and Capital Gains Distribution Policies
SH: None
