Chapter 18 - Mutual Funds: Types and Features (Done) Flashcards
What are Money Market Funds?
Money Market Funds invest in cash or cash-equivalent securities like T-bills, bankers’ acceptances, and corporate paper that mature in less than one year. They must maintain at least 95% of their assets in cash equivalents.
What is the primary objective of Fixed Income Funds?
Fixed Income Funds aim to provide a steady stream of income and safety of principal, primarily investing in bonds that mature in more than one year. The primary source of returns is interest income, which is taxed higher than dividends and capital gains.
What is a Balance Fund?
Balance Funds invest in both stocks and bonds to provide a mix of income and capital growth. Their allocation can range from 5-90% in equities and 10-95% in fixed income, offering a wide range from conservative to aggressive funds.
What are Equity Funds?
Equity Funds invest at least 90% of their non-cash assets in equity securities, focusing on long-term capital growth. They are riskier and more volatile but offer higher potential returns.
What distinguishes Dividend Funds?
Dividend Funds provide tax-advantaged income through dividends and some potential for capital appreciation by investing in preferred shares and high-quality blue-chip stocks. They are less risky than equity funds but riskier than bond funds.
What are Specialty Funds?
Specialty Funds include geographic and sector funds. Geographic funds invest in specific regions, such as emerging markets, while sector funds focus on specific industries, like energy or technology, making them more volatile.
What is a Target Date Fund?
Target Date Funds adjust their asset allocation based on a target date, assuming risk tolerance declines as the investor ages. They are often used for retirement or education savings plans, with a glide path to reduce risk over time.
What are Alternative Funds?
Introduced in 2019, Alternative Funds employ strategies like short selling, leveraging, speculative, and hedging strategies. They are more flexible but potentially riskier.
How do Index Funds operate?
Index Funds aim to replicate the performance of a market index, like the S&P 500, by matching their holdings and weighting. They typically have lower management expense ratios (MER) than actively managed funds.
What are the steps for redeeming mutual fund units?
To redeem mutual fund units, the client contacts the fund manager to sell or redeem units. The trade request is placed, and at the end of the valuation day, the net asset value per share (NAVPS) is calculated, and proceeds are sent to the investor.
What are some common methods to measure mutual fund performance?
Mutual fund performance can be measured using time-weighted rate of return, daily value method, and modified Dietz method. Volatility can be assessed using standard deviation, beta, number of years with losses, and best/worst period performances.
What are some pitfalls to avoid when judging mutual fund performance?
Avoid relying on past performance as it doesn’t indicate future results, consider changes in portfolio managers, be aware of survivorship bias, and ensure comparisons are made between similar types of funds.
