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FIN2303 > Chapter 14: Investing in Mutual Funds > Flashcards

Chapter 14: Investing in Mutual Funds Flashcards

1
Q

Pooled investment fund:

A

an investment vehicle that pools together money from many investors and invests that money in a variety of securities

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2
Q

Marketability:

A

refers to the ease with which an investor can convert an investment into cash

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3
Q

Equity mutual funds:

A

funds that sell units, or shares, to individuals and use this money to invest in stocks

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4
Q

Bond mutual funds:

A

funds that sell units, or shares, to individuals and use this money to invest in bonds

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5
Q

Balanced mutual funds:

A

funds that sell units, or shares, to individuals and use this money to invest in a combination of stocks and bonds

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6
Q

Money market mutual funds:

A

funds that sell units, or shares, to individuals and use this money to invest in cash and investments that can be converted to cash quickly

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7
Q

Advantages of Investing in Mutual Funds

A
  • Provide professional money management
  • Simplify the process of record keeping
    - You only have to evaluate the performance of the mutual fund relative to your goals
  • Mutual funds are available everywhere
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8
Q

Disadvantages of Investing in Mutual Funds

A
  • Management fees and other costs vary substantially among funds
  • Investor has no control over the investments that are -purchased and/or sold within the mutual fund
  • Fund is invested in a group of poorly performing investments
  • Liquidity can be very low
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9
Q

Net Asset Value per Share

A

Net asset value (NAV): the market value of the securities that a mutual fund has purchased minus any liabilities and fees owed
(Any liabilities, such as expenses owed to the mutual fund’s managers, are subtracted to determine the NAV
)

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10
Q

Net asset value per share (NAVPS):

A

calculated by dividing the NAV by the number of shares in the fund

Interest or dividends earned by the fund are added to the market value of the assets
Fund expenses and any dividends distributed to the fund’s shareholder’s are deducted

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11
Q

Open-End Funds

A

funds that sell shares directly to investors and will redeem those shares whenever investors wish to “cash” in

funds that sell shares directly to investors and will redeem those shares whenever investors wish to “cash” in

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12
Q

Closed-End Funds

A

funds that issue shares to investors but do not redeem those shares; instead, the fund’s shares are traded on a stock exchange

Market price per share is determined by the demand for shares versus the supply of shares that are being sold
Price per share can differ from the fund’s NAVPS

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13
Q

Premium:

A

the amount by which a closed-end fund’s unit price in the secondary market is above the fund’s NAVPS

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14
Q

Discount:

A

the amount by which a closed-end fund’s unit price in the secondary market is below the fund’s NAVPS

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15
Q

No-load mutual funds:

A

: funds that sell directly to investors and do not charge a fee

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16
Q

Front-end load mutual fund:

A

mutual funds that charge a fee at the time of purchase, which is paid to stockbrokers or other financial service advisers who execute transactions for investors

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17
Q

Back-end load mutual funds:

A

mutual funds that charge a fee if shares are redeemed within a set period of time

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18
Q

Declining redemption schedule:

A

a fee schedule where the back-end load charge reduces with each year an investor holds the fund

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19
Q

Management Expense Ratio (MER)

A

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 of this calculation is then divided by the number of units outstanding

The higher the expense ratio, the lower the return for a given level of portfolio performance

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20
Q

Reported Components of MERs

A
  • -Management expenses: investment research, portfolio management, marketing costs, and profit
  • -Dealer/adviser compensation: fees paid to advisers and salespeople
  • -Administrative costs: transaction processing, client reporting, and audit and legal fees
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21
Q

Types of Equity Mutual Funds

A 
Growth Funds
Small Capitalization (Small-Cap) Funds
Mid-Size Capitalization (Mid-Cap) Funds:
Dividend Funds
Balanced Growth and Income Funds:
Sector Funds
Index Funds:
International Equity Funds
Ethical Funds
22
Q

Growth Funds

A

Focus on stocks that have potential for above-average growth

23
Q

Small Capitalization (Small-Cap) Funds

A

Focus on firms that tend to have more potential for growth relative to larger firms

24
Q

Mid-Size Capitalization (Mid-Cap) Funds:

A

Focus on firms that are more established than small-cap firms

25
Q

Dividend Funds

A

Focus on firms that pay a high level of dividends

Have less potential for high capital gains and exhibit less risk

26
Q

Balanced Growth and Income Funds:

A

Contain both growth stocks and stocks that pay high dividends

27
Q

Sector Funds

A

mutual funds that focus on stocks in a specific industry or sector, such as technology stocks
More risky, as they are less diversified

28
Q

Index Funds:

A

mutual funds that attempt to mirror the movements of an existing equity index

  • May not contain every stock in the index
  • Fewer expenses than a typical mutual fund
  • Do not incur expenses for researching various stocks
  • Very low transaction costs
29
Q

Tracking error:

A

refers to how closely an index fund mirrors the movements of the existing index it is benchmarked against

30
Q

International Equity Funds

A

Focus on firms that are based outside Canada
Attractive to investors who want to invest in a specific country
Expenses associated with managing an international equity fund are higher
“Global mutual funds” invest in stocks of both foreign firms and Canadian firms

31
Q

Ethical Funds

A

Screen out firms viewed as offensive by some

Other Types of Equity Funds

32
Q

Types of Bond Mutual Funds

A

Canadian Bond Funds
High-Yield Bond Fund
Index Bond Funds
Global bond funds

33
Q

Canadian Bond Funds

A

Focus on investment in Canadian bonds

Types of investments held within a Canadian bond fund vary significantly

34
Q

High-Yield Bond Fund

A

Focus on relatively risky bonds issued by firms that may have a higher default risk

35
Q

Index Bond Funds

A

Intended to mimic performance of a specified bond index

36
Q

Global bond funds

A

mutual funds that focus on bonds issued by non-Canadian firms or governments
May offer higher yields than Canadian bonds

37
Q

Exchange rate risk:

A

the risk that the value of a bond may drop if the currency denominating the bond weakens against the Canadian dollar

38
Q

Return from Investing in a Mutual Fund

A

Interest income distributions
Dividend distributions
Capital gains distributions
Capital Gain from Redeeming Shares

39
Q

Risk from Investing in an Equity Mutual Fund

: Market risk:

A

the susceptibility of a mutual fund’s performance to general stock market conditions

40
Q

Risk From Investing In Hedge Funds

A

limited partnerships that manage portfolios of funds for wealthy individuals and financial institutions
limited partnerships that manage portfolios of funds for wealthy individuals and financial institutions

41
Q

Risk from Investing in a Bond Mutual Fund

A

Performance of a bond mutual fund depends on the general movements in interest rates

42
Q

Interest rate risk:

A

the risk that occurs because of changes in the interest rate. This risk affects funds that invest in debt securities and other income-orientated investments

  • Longer-term bonds are the most sensitive
  • Bond funds that invest in bonds with a high degree of default risk tend to offer a higher potential return
  • Bond funds can have high and/or low levels of either interest rate risk and default risk
43
Q

Determining Your Preferred Mutual Fund Characteristics

A
  • Minimum Initial Investment
  • Investment Objective (Type of Fund)
  • Investment Company
    - Assess the past performance of the type of mutual funds you are considering
    - Compare fees and expenses along with returns and risks
  • Fund Profiles
44
Q

Simplified Prospectus:

A

a document that provides financial information about a mutual fund, including expenses and past performance

45
Q

Investment objective:

A

in a prospectus, a brief statement about the general goal of the mutual fund

46
Q

Investment strategy:

A

in a prospectus, a summary of the types of securities that are purchased by the mutual fund to achieve its objective

47
Q

Deciding among mutual funds

A
  1. determining you preferred mutal fund characteristics
    2.Reviewing a mutual fund’s simplified prospectus
  2. Past performance
  3. fee’s and expenses
  4. Risk
  5. Distribution of interest income, divideneds, and capital gains
    7, minimum investment and minimum balance
  6. how to buy or redeem shares
48
Q

Segregated Funds

A

Insurance products that are regulated through the insurance legislation of the province in which they are sold
Principal Protection
-Offer a guarantee on your deposits when the contract matures
-Usually matures 10 years after the date of purchase
-Deposit guarantee will be between 75 and 100 percent of deposits

Two kinds: 1. Creditory protection
2. death benefit guarentee.

49
Q

Death Benefit Guarantee

A

Determination of the value of the guarantee is made at the time of death of the policy owner
Death benefit is usually between 75 and 100 percent of the amount invested
Benefit is advantageous to older investors
Death benefit can be paid directly to the beneficiary, thereby avoiding probate fees

50
Q

Creditor Protection

A

Money invested in a segregated fund is an asset of the insurance company, not of the policy owner

FIN2303 (11 decks)

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