Chapter 4: Mutual Funds and Other Investment Companies Flashcards
What is an investment company?
Financial intermediaries that invest the funds of individual investors in securities or other assets.
What are the four major activities that investment companies perform for their investors?
(1) Record keeping and administration
(2) Diversification and divisibility
(3) Professional management
(4) Lower transaction costs
What is Net Asset Value?
NAV = Mkt val of assets - liabilities/Shares outstanding
What is the difference between a managed and unmanaged portfolio?
Unmanaged portfolios are essentially fixed and do not make regular changes to their holdings. Managed portfolios because their securities are bought and sold. Managed portfolios are further classified into closed-end and open-end (mutual funds are open-end).
What is a Unit Investment Trust?
Money pooled from many investors that is invested in a portfolio fixed for the life of the fund. These are unmanaged. The only way to get out is to sell shared back to the trustee (or find someone else who will buy in. Income from these is steady, but unmanaged, so admin fees tend to be lower.
What is the distinction between an open-end fund and a close-end fund?
Open-end: issues or redeems shares at NAV
Closed-end: shares may not be redeemed, but instead are traded at prices that can differ from NAV, often at a discount. Strangely, despite the discount, these funds often have a return greater than NAV.
What is a load?
A sales commission charged on a mutual fund. They make the offering price of an open-end fund above NAV.
What is a co-mingled fund?
Partnerships of investors that pool funds. They offer units rather than shares and sell at Net Asset Value (NEV).
What is a real estate investment trust (REIT)?
Similar to a closed-end fund. They issue shares and raise capital by borrowing. Highly leveraged, debt ratio typically ~70%. REITS are usually either equity trusts or mortgage trusts.
What is a hedge fund?
A private investment pool, open to wealthy or institutional investors, that is largely exempt from SEC regulation and therefore can pursue more speculative policies than mutual funds. Often require a ‘lock-up’ where funds cannot be withdrawn for several years. Work with risky investments: derivatives, distressed firms, currency speculation, convertible bonds, emerging markets, etc.
What is a mutual fund?
The common name for an open-end investment company. Account for the majority of investment company assets. Some examples include: Money Market Funds, Equity Funds, Specialised Sector Funds, Bond Funds, International Funds, Balanced Funds, Asset Allocation and Flexible Funds, Index Funds.
How are funds sold?
Generally marketed directly to the public by the underwriter or indirectly through brokers.
What are the fees involved in purchasing mutual funds?
- Operating expenses (admin, advisory), usually range from .2% to 1.5% of total assets under mgmt.
- Front-end load, commission or sales charge at point of sale, cannot be more than 8.5%. About half of all funds today are no-load, many are low-load ~3%.
- Back-end load, ‘exit’ fee incurred when you sell your shares, ~5-6%
- 12B-1 charges, SEC allows for charges to pay for distributed costs (marketing, promo, etc.)
How do you calculate mutual fund return?
Rate of return =
NAV(1) - NAV(0) + Inc and cap-gain)/NAV(0
What is the major tax-related disadvantage for investors in mutual funds?
The fund does not need to pay taxes on short-term or long-term capital gains, nor dividends. They are ‘passed-through’ to the investors themselves, and in the case of mutual funds, you cannot time buying and selling in the portfolio to suit your needs, which reduces the ability to manage tax.
