Chapter 17: Mutual Funds - Structure and Regulation Flashcards
A pool of capital gathered to buy securities according to a specific investment mandate. Fund is managed by an investment professional that is paid a management fee to carry it out
Managed products
Document that generally discloses the degree of risk, the main types of securities held in its portfolio, and the historical returns it earned, among other things
Fund Facts document
Continually managed by a fund manager who is an investment specialist. Analyze the financial markets and select securities that best match a particular fund’s investment objectives
Low-cost professional managment
Allows small investors to acquire a diversified portfolio, the fund sponsor enjoys economies of scale, wider range of securities they otherwise wouldn’t have access to
diversification
Enables investors to meet a wide variety of objectives. Can also permit investors to transfer between two or more different funds managed by the same sponsor, or permitted between different purchase plans under the same fund
Variety of types and transferability of funds
They can make one time lump sum payments or they can make regular purchases in small amounts under a pre-authorized contribution plan
Flexible purchase and redemption options
Have continuing rights to redeem units or shares for cash at NAVPS
Liquidity
Shares in a deceased person’s mutual fund continue to be professionally managed during the probate period until estate assets are distributed, when other securities are not.
ease of estate planning
Fund shares can be accepted as a security for a bank loan. Are also acceptable for margin purposes, thus giving aggressive fund buyers the benefit of leverage in their financial planning
loan collateral and margin eligibility
Sponsors of mutual funds file a variety of reports annually to meet their disclosure requirements. Includes the Annual Information Form (AIF), audited annual and interim financial statement statements, and an annual report
Regulatory filing
Most funds emphasize a long-term investment horizon and are generally unsuitable for investors wanting short term gains. Mutual fund companies also generally charge an early redemption fee to discourage short-term trading
Short-term unsuitability
Mutual funds can lose value in falling markets, volatility is not controllable by the fund managers
Systematic risk
Purchases and sales made by the fund manager creates a series of taxable events that may not suit the unit holder’s time horizon
tax complications
The most common structure for a mutual fund. The trust deed establishing the open-end fund covers such things as the fund’s principal investment objectives, policy, and any restrictions on investments. Investors in open-end mutual funds receive units at a price that is the same as or close to the fund’s current NAVPS
Mutual funds structured as a trust
Lack the flow-through status of investment fund trusts, however the corporation can achieve a virtually tax-free status by declaring dividends throughout the year that are equivalent to the corporation’s net income after fees and expenses. Must meet conditions of the Income Tax Act
mutual funds structured as a corporation
NAVPS formula
Total Assets - Total Liabilities / total number of shares or units outstanding
Many mutual funds, primarily those offered by direct distribution companies, banks, and trust companies, have no sale charges when investors purchase or redeem units
no-load funds
Payable to the distributor at the time the units are purchased, usually a percentage of purchase price. Effectively reduces the actual amount invested, which makes the overall offering price higher than the NAVPS
front-end load funds
Front-end load formula
Offering Price = NAVPS / 100% - Sales Charge
Payable to the distributor at the time of redemption or sale of fund. Decrease the longer the investor holds the fund
back-end load
Back-end load formula (original purchase amount)
Selling/redemption price = NAVPS - Sales commission
Selling/redemption price = NAVPS - (NAVPS * Sales Percentage)
back end load formula (NAVPS at time of redemption)
NAVPS - NAVPS at current time * sales commission
A mutual fund manager may pay this fee to the mutual fund sales representative who sold the fund, as long as the client holds the funds
trailer fees/service fees
Fee that applies when the fund is redeemed within 90 days of initial purchase
Early redemption fees
May apply when an investor changes units of one fund to another in the same family or fund company
switching fees
management expense ratio formula (MER)
Aggregate Fees and Expenses Payable During the year / net asset value for the year * 100
Fee based fund with low MER. Charged a percentage of the assets rather than a commission fee for each transaction
F-class funds
Deals with mutual fund prospectus and Fund Facts disclosure.
NI 81-101
Contains requirements and guidelines for the distribution and advertising of mutual funds
NI 81-102
Normally shorter and simpler than a typical prospectus, must be filed annually unless there is a change in the affairs of the mutual fund
simplified prospectus
Provides introductory information about the mutual fund, information about mutual funds in general, and information applicable to funds managed by mutual fund
Part A of simplified prospectus
Contains detailed information about the specific mutual fund
Part B of simplified prospectus
Form that contains significant holdings in other issuers, tax status of issuer, directors, officers, and trustees of the fund and their indebtedness and remuneration, associated persons, principal holders of securities, and the interests of management and others in material transactions, and the particulars of any material contracts entered into by issuer
Annual Information Form (AIF)
