Chapter 4 (Mutual Funds) Flashcards

1
Q

Closed-End Fund

A

Shares may not be redeemed, but instead are traded at prices that can differ from net asset value.

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2
Q

Exchange-Traded Funds (ETFs)

A

Offshoots of mutual funds that allow investors to trade index portfolios.

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3
Q

Funds of funds

A

Mutual funds that primarily invest in shares of other mutual funds.

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4
Q

Hedge Fund

A

A private investment pool, open to wealthy or institutional investors, that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

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5
Q

Investment Companies

A

Financial intermediaries that invest the funds of individual investors in securities or other assets.

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6
Q

Load

A

A sales commission charged on a mutual fund.

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7
Q

Net Asset Value (NAV)

A

Assets minus liabilities expressed on a per-share basis.

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8
Q

Open-End Fund

A

A fund that issues or redeems its shares at net asset value.

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9
Q

Soft Dollars

A

The value of research services that brokerage houses provide “free of charge” in exchange for the investment manager’s business.

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10
Q

Turnover

A

The ratio of the trading activity of a portfolio to the assets of the portfolio.

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11
Q

12b-1 Fees

A

Annual fees charged by a mutual fund to pay for marketing and distribution costs

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12
Q

Unit Investment Trust

A

Money pooled from many investors that is invested in a portfolio fixed for the life of the fund.

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13
Q

Characteristics of a Closed-End Fund. 5

A
  • Sold on primary market
  • Fixed Amount of Shares
  • Traded on secondary market
  • Usually sold through brokers
  • Premium/Discount of NAV
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14
Q

Characteristics of an Open-End Fund. 3

A
  • Shares are bought directly from fund
  • Redeem shares (@ NAV) from fund
  • Pays redemption’s from cash
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15
Q

What are some of the Open-End Costs

A
  • Fees from sales are called loads
  • 12b-1 fees- marketing and distribution costs
  • Management fees
  • Operating expenses - record keeping, etc.
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16
Q

Real Estate Investment Trust (REITs)

A

Similar to a closed-end fund. Invests in real estate or loans secured by real estate.

  • > 75% of income from real estate
  • > 90% of income to fundholders
  • High Dividend yields, but taxable
17
Q

What do life cycle funds do?

A
  • shift assets toward safety as retirement nears
  • asset allocation changes as you age
  • life cycle funds- diversified
18
Q

Why invest in life cycle fund?

A
  • time diversification
  • diminishing human capital
  • risk capacity reduces with age
19
Q

What is Active Management?

A
  • a fund where experts pick investments and charge fees
20
Q

What is Passive Management?

A
  • These funds are tied to an index (i.e. S&P 500), low fees
21
Q

What are some things that ruin returns? 5

A
  • Cash holdings
  • Size
  • Heavy Trading and Brokerage expenses
  • Large Turnover and Redemption’s
    - can be reduces through redemption fees
  • Poor investor Timing in Funds
22
Q

What three Investment Styles are involved in the Morningstar Style Box?

A
  • Value - as those with low ratios of market price per share to various measures of value.
  • Blend-
  • Growth- have high ratios, suggesting that investors in these firms must believe that the firm will experience rapid growth to justify the prices at which the stocks sell.
23
Q

What do the three sizes for a morning star style box indicate?

A
  • Large- represents the top 70% of capitalization in the market
  • Mid - represents the next 20%
  • Low - represents the remaining balance
24
Q

What two dimensions are measured in the morningstar style box for a bond?

A
  • Duration of the Bond

- Interest sensitivity

25
Q

What are the load structures for “A” shares

A
  • commission deducted from investment up-front
  • Front-end Loads
  • Lower *****
  • Charged a .25% 12-B1 fee
26
Q

What Type of Share Class has a back-end load?

A

“B” Class shares

27
Q

What are some characteristics of “B” Class shares

A
  • Reduced after each year held, then can convert to “A” share with a lower 12b-1 fee
  • Often charged a 1% 12b-1 fee
28
Q

Breakpoints

A
  • For load mutual funds, the dollar amount for the purchase of the fund’s shares that qualifies the investor for a reduced sales charge (load). The purchase may either be made in a lump sum or by staggering payments within a prescribed period of time. The latter form of investment purchase in a fund must be documented by a letter of intent.
  • For larger investments, “A” shares may be more beneficial
29
Q

Characteristics of class “C” Shares. 4

A
  • lower contingent deferred sales charge than class “B”
  • No Front end load
  • No Breakpoints, does NOT convert to “A” over time
  • More expensive if held for long time-periods
30
Q

What are “I” shares?

A
  • Institutional Shares
  • Carry no load for the most part
  • little or no 12b-1 fees
  • have a low expense ratio
31
Q

What are some general tax rules of a mutual fund?

A
  • Funds are not taxed if diversified and income distributed

- Investor tax on capital gain and dividend distribution

32
Q

What is Portfolio Turnover?

A

The ratio of trading activity to assets of portfolio.

- This may effect investors tax liability

33
Q

What are some of the benefits for ETF’s?

A
  • Generally have lower fees and taxes than managed funds
  • Can be traded just like a stock
  • Traded in Secondary Market near NAV
  • Buy on margin, sold short
34
Q

What style of management do ETF’s use? (Passive or Active)

A
  • ETF’s are Passively Managed