Chapter 16 Flashcards
How many individuals own mutual funds?
90 million
How many mutual funds are there today?
over 11,000
What is the combined value of assets owned by mutual funds in 2018?
$18.75 trillion
What are the three major reasons investors purchase mutual funds?
professional management; convenient way to invest; diversification
Elaborate on diversification as a reason for investors to purchase mutual funds.
investors’ funds are used to purchase a variety of investments, which provides some safety
Define closed-end funds. (2)
shares issued by an investment company only when fund is organized; after all original shares are sold, you can purchase shares only from another investor who is willing to sell
How many closed-end funds were there in 2017?
568
What was the value of closed-end funds in 2017?
$289 billion
Define exchange-traded funds. (3)
funds that invest in the stocks contained in a specific stock index; not actively managed; trade like a stock
How many exchange-traded funds were there in 2017?
1,411
What was the value of exchange-traded funds in 2017?
$2 trillion
Describe open-end funds. (2)
shares issued and redeemed by the investment company at the request of investors; investors can buy and sell shares at the net asset value
How many open-end funds were there in 2017?
7,923
What was the value of open-end funds in 2017?
$15.9 trillion
What is net asset value?
the price per share after expenses
What is the formula to calculate net asset value?
(value of fund’s portfolio - liabilities) / number of outstanding shares
Define load fund. (2)
investors pay commission (sales charge) every time they purchase shares; average charge is 2-5% for which an investor can get purchase advice and explanations
Give two synonyms for load fund.
front load; Class A shares
Define no-load fund. (2)
investors pay no upfront sales charge because there are no sales people; deal directly with investment company
Define contingent deferred sales load. (3)
charged upon withdrawal of funds (1-5%); discourages early withdrawal of funds; generally decreases on a sliding scale, depending on the number of years the shares are held
Give two synonyms for contingent deferred sales load.
back load; Class B shares
Define management fee.
charged yearly (0.5 - 1% average) based on a percentage of the fund’s asset value
Define 12b-1 fees.
Annual fee to defray distribution and marketing costs; cannot exceed 1% of a fund’s assets per year; cannot exceed 0.25% to be called “no-load”
Give a synonym for 12b-1 fees.
Class C shares
Define expense ratio. (2)
consists of different management fees and additional fund operating costs for a specific mutual fund; should not exceed 1%
Aggressive growth funds buy
risk-oriented stocks in fast-growing companies, such as Amazon, Facebook, and Uber
Equity income funds invest in
stocks of companies with a long history of paying dividends, such as McDonald’s or AT&T
Global stock funds buy
stock in companies in the U.S. and other countries (Vanguard Global Stock Index Fund: 55% overseas and 45% US)
Growth stock funds buy
stock in companies with higher-than-average revenue and earnings growth, such as Target or ExxonMobil
Index funds buy
stocks that mirror and index, such as Vanguard Inflation-Protected Securities Fund
International funds invest in
foreign stocks sold in securities markets throughout the world, excluding the US, such as Shell Oil
Large-cap funds invest in
companies with a capitalization of $10 billion or more, such as Apple
Mid-cap funds invest in
companies with a total capitalization of $2 to $10 billion, such as Ulta or Best Buy
Regional funds buy
stock in companies in a specific region of the world, such as Europe or the Pacific Rim
Sector funds buy
stock in companies in a particular industry, such as biotechnology or energy
Small-cap funds buy
stock in lesser-known companies with a capitalization of between $300 million and $2 billion, such as Fossil
Socially responsible funds avoid
investing in companies that produce harmful products
High yield (junk) bond funds buy
corporate bonds that are higher risk and higher yield
What is the term length of intermediate corporate bonds?
3-10 years
Intermediate U.S. bond funds buy
Treasury notes with maturities of 3-10 years
What is the term length of long-term corporate bonds?
greater than 10 years
Long-term U.S. bond funds buy
U.S. Treasury and U.S. zero-coupon bonds with maturities greater than 10 years
What are short-term corporate bonds?
investment-grade bonds with maturities of 1-3 years
Short-term U.S. bond funds invest in
U.S. Treasury issues of 1-3 years
Municipal bonds provide
investors a tax-free interest income
World bond funds buy
bonds of foreign companies and governments
Define asset allocation funds.
invest in various asset classes, such as stocks and bonds, with precise amounts within each type
Define balanced funds.
invest in both stocks and bonds, with the primary objectives of conserving principal, providing income as well as growth
Define funds of funds.
invest in shares of other mutual funds
Define lifecycle funds.
initially invest in more risk-oriented securities and become increasing conservative + income-oriented as specified retirement date approaches
Give another name for lifecycle funds.
target date funds
Define money market funds.
invest in CDs, government securities, and other safe investments
What are exchange privileges?
allow you to move your money from one fund to another within the fund family with little or no penalty
An index mutual fund is
mirror image of a specific index
How have most managed funds performed in the S&P 500?
Most managed funds have underperformed in the S&P 500 Index over a long period of time
Which one has a lower expense ratio — managed or indexed funds?
indexed funds, with a lower expense ratio less than or equal to 0.50%
Which types of mutual funds have to be purchased in a securities exchange or in the OTC market?
closed-end funds or exchange-traded funds
Define income dividends.
earnings that fund pay to shareholders from dividend and interest income
How are income dividends taxed?
taxed as regular income (5% if MTR is 10-15%; 15% if MTR is 25-35%)
Capital gains are reported where?
Sch. D of Form 1040
How are shares taxed when selling?
taxed on short-term basis if less than 1 year, taxed on long-term basis if 1 year or greater
What are capital gain distributions?
payments to shareholders from fund’s internal sale of securities
Where are capital gain distributions reported?
Sch. D of form 1040
How are capital gain distributions taxed?
taxed as long-term, regardless of how long you own shares in the mutual fund
Which sources/outputs of money can be reinvested in a mutual fund?
income; capital gains distribution
What is the turnover ratio?
measures percentage of fund that has been replaced in one year
What is the relationship between turnover ratio and tax liability in funds that are NOT tax deferred?
higher turnover ratio = higher tax liability
What are automatic investments?
money is taken from your account monthly and invested in a fund
What are reinvestment plans?
income from dividends and capital gain distributions are automatically used to purchase more shares
What is internal switching?
moving money fro one fund to another in the same family
