Chapter 4 - Mutual Funds Flashcards
mutual fund
1) means of pooing funds of a large group of investors
2) Advantages: diversification, professional management, minimum initial investment
3) drawbacks: risk (MF value could fall below initial investment) , costs (fees), taxes (on dividends and capital gains and profit from sales)–IRA exception
Investment Company
1) a business that specializes in pooling funds from individual investors and investing them (not all are MFs)
Open-end fund
1) an investment company that stands ready to buy and sell shares at any time
2) if investor wants to buy, fund issues them and invests received money
3) investor wants to sell - fund sells assets to cover sale
4) more popular than closed- end stocks
5) include MMF and l-t funds and mutual funds
Closed-End Fund
1) investment company with a fixed number of shares that are bought and sold only in the public market
2) Does NOT buy or sell stocks directly
Net asset Value
1) the value of assets less liabilities held by a mutual fund, DiVided by shares outstanding (NAV)
2) changes essentiallly every day as stock value fluctuates
Front-End Loads
1) a sales charge levied on purchases of shares in some mutual funds
2) percentage charge of the offering price (Excess of NAV), not NAV
3) 2-3% = low-load fund, most 5%
4) A-shares
Prospectus
1) contains financial statements and specific budget info
2) required to be ditrubted by fund to its investors
Types of Expenses and Fees
1) Sales charges or “loads”
2) 12b-1 fees
3) mgt fees
4) transaction costs
No-load funds
1) no load charges
2) sold at NAV
CDSC
1) Contingent Deferred Sales Charge
2) levied when investor’s redeem shares, also called a “back-end” loan
3) also known as B-shares
Level Load
1) fixed fee
2) often leads to increases in other fee areas
12b-1 Fees
1) named for SEC rule 12b-1 which allows funds to spend up tto 1% of fund assets annually to cover distribution and marketing costs
2) frequently used in conjuction with back-end loads
Trading costs and Turnover
1) Turnover - a measure of how much trading a fund does, calculated as the lesser of total purchases or sales during a year divided by average daily assets
2) higher turnover = more more trading = more commssion / trading costs
Reasons to pay loads/fees
1) invest in a well managed fun
2) ex. fidelity magellan fund
3) invest in specialized fund (ex foreign investment)
Money Market Mutual Funds (MMMF)
1) a mutual fund specializing in money market instruments
2) S-t debt obligations issued by govts and corps
3) all MMF are open-end funds
4) low-risk investments
5) NAV always = $1 / share
MMF Accounting
1) NAV always = $1
2) as fund earns interest on investments fund simplu gives more shares to owners
3) NAV = $1 to resemble bank account
4) “breaking the buck” = when NAV < $1 bad and rare
MMF and taxes
1) either taxable or tax exempt (muicipal)
2) can avoid state tax by investing in secuirties only issued by one state
3) securities by NYC = “triple-tax free” = no fed, state, local taxes
Types of stock funds - Capital appreciation vs income
1) Capital appreciation - invest in companies that have highest prospects for share price appreciation (invest in unproven companies)
2) Growth - seek to capital appreciation, but invest in larger, more established co’s(less volatile than 1), dividends not imp
3) Growth and Income - capital appreciation sitll main goal, but some focus on divided paying co’s
4) equity income - focus entirely on stocks with high dividend yields, maximizing current portfolio inc
5) greater emphasis on groth = greater tisk
Types of Stock Funds - Company-size
1) Small Company - small-cap emphasize capital appreciation
2) Midcap - stocks too small to be in S&P 500 but to large to be small-cap
3) large company (large-cap) - invest in cos with high market values
Index Fund
1) hold stocks that make up a particular index in same proportion as index
2) most imp = S&P 500 index funds
3) generally largest stock mutual funds ex. vangaurd 500
4) low turn-over and operating expense (bs passively managed)
Mutual Fund styles and sizes
style - value - blend -growth size - largecap -midcap - small cap
Exchange-traded funds (ETFs)
1) relatively new innovation
2) an index fund that seeks to achieve the same return as a particular market index (buy an ETF = buy index basket)
3) Well known ETFs and their indexes
SPDR - S&P 500
Cubes “QQQQ” - NASDAQ 100
Diamonds “DIA” - DOW
4) heavily traded
5) there are specialized ETFs
6) created when sponsor sets aside shares adn files with SEC
ETFs vs index funds
1) ETFs traded like a closed -end fund
2) commission when buy/sell
Hedge Funds
1) investment company not accessed by the public (do not sell securities to public)
2) few limitations/regulations - register with SEC, subject to inspection
3) limit number of investors to 50 - 100 inst/indiv
4) charge management feees - 2/20 2% fee + 20% profit
Fund of Funds
1) investing in a number of hedge funds
2) diersificatoin
3) more fees
Bond Mutual Funds
may specialize in
1) Short-term bonds
2) intermediate -term bonds
3) high-yield bonds
4) mortgages
5) int bonds
