Investment Companies Flashcards
Investment Company Act of 1940
Regulates investment companies
Investment Advisor Act of 1940
Regulates entities that provide advice for a fee (advisors)
UIT (unit investment trust)
Creates a fixed or non fixed portfolio of Securities then sells units to investors
Fixed Portfolio: contains bonds and fixed securities
Non-Fixed Portfolio: contains mutual funds shares. (Provides a way for investors who can’t reach the investment dollar minimums to still invest in the mutual funds desired)
Face amount company
All they will ask you on the test is
which of the following is an example of an investment company?
=> Face amount company
Management company with an open ended fund
Has
Ultimately continuos primary offering
You can buy full and fractional shares
Only offers Common stock shares
No secondary market. Shares are purchased and redeemed to the fund company
Management Company Closed End Fund
Has
a single IPO
Investor can purchase full shares only no fractional
portfolio can have common and preferred stock and bonds in it
Has Secondary market trading. Not redeemed to company when investor wants to sell it.
Diversified Fund
In order to market themselves as a diversified Fund they have requirements they must meet:
1) 75% of fund assets must be invested in securities other than issuers. Cash and cash equivalents (also T-bill or money market instruments) are counted as part of the 75%
2) No more than 5% can be invested in any one company
3) You cannot have more than a 10% ownership of a companies voting stock
What are the investment company registration requirement?
Minimum net worth of $100k
Must maintain at least 100 share holders after 90 days from start period
Must have clearly defined investment objectives
What components does an investment company have?
Board of Directors - defines investment objectives
Investment Advisor - manages the investment portfolio
Custodian Bank - holds the funds cash and securities
The transfer agent - issues cancels and redeems shares
How are the mutual fund shares distributed?
It’s done 1 of 2 ways
1) No Load - mutual fund company sells to investors directly
2) Load - investment company sells the shares to the sponsor underwriter or distributors
The Mutual Fund Prospectus
Must be given to investors at the time of sales presentation.
required to be updated every 13 months but should be updated every 12 months
After 16 months from publication, it should be discarded by representatives
Statements of Additional Information
Contains the following:
- Funds Securities Holdings
- Balance Sheet
- Income Statements
- Portfolio Turnover Data
- Compensation paid to the board of directors and investment advisory board
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Mutual Fund Portfolio Types
Equity Funds Bond Funds Sector Funds Index Funds Money Market Funds Alternative Funds
How Mutual Funds are valued
Mutual Funds must determine their net asset value at least once/ business day
Mutual Funds Prospectus will say when the funds calculate their NAV
NAV (Net Asset Value) Formula
NAV = Assets - Liabilities
NAV per share means you divide the NAV by the number of shares outstanding
Forward Pricing
The investor buys/ redeems shares of mutual funds at whatever the price/ share of the mutual fund is at the end of the day. (Buyer doesn’t know what the price is going to be until it’s calculated at the end of the day)
Mutual Fund Formula
NAV + Sales Charge = Public Offering Price
Max Mutual Fund Sales Charge
8.5% of Public Offering Price
Requirements if the mutual fund is charging the max sales charge
1) Breakpoint Schedule - the more you invest, the cheaper the sales charge
2) Rights of accumulation - as investment grows it counts towards the breakpoint schedule
3) Cannot charge additional sales charge for buying more units of that fund
12B1 Fee
Annual Fee charged quarterly to the shares to cover expenses like printing, advertising, commissions to sales reps
The max fee is .25%
Combination Privileges
Allow the investor to invest in different funds offered by the same investment company and those investments will be seen as one investment when figuring the breakpoints and sales charges
Conversion Privilege’s
The investment company will not charge an additional sales charge from moving money from one fund to another one if its still within their family of investments (or their company)
On the test you want to see if the investor can stay within the same investment company when changing funds so they don't get charged
Dollar-Cost Averaging
Basically the higher the Mutual fund price the less shares you buy.
Average Cost = Total Dollars Invested / Total Shares purchased
Average Price = Total of purchase Prices / Number of Purchases
If a mutual fund is a growth fund is it going to have higher or lower investment fees
Higher Fees
If a mutual fund is a passive fund is it going to have higher or lower investment fees
Lower Fees
