Mutual Funds Flashcards
Define
“Mutual Funds”
- MF is a collection of investment money pooled from many investors to be invested for a specific objective.
- Consider a mutual fund a bucket that contains other investments such as stocks, bonds, cash, etc.
- When you invest in a fund, you buy shares of the fund, therefore you become a shareholder of the fund.
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Keep in mind that when you buy or sell a mutual fund, the transaction occurs at the closing price on the day that you place the trade
- ( that is if the trade is placed before the market closes).
- The fund manager and his team of assistants determine which specific securities they should invest the shareholders’ money into to accomplish the objectives of the fund.
Define
“Exchange Traded Funds”
- Exchange-traded funds (ETFs) are a very close relative of mutual funds and differ from them in one particular way.
- ETFs trade like stocks on a stock exchange and thus can be bought or sold during the trading day when the financial markets are open.
How are funds categorized?
- Funds broadly categorize by their investment objective, like the way an automaker labels a car a sedan or a sport utility vehicle.
Describe
“lending type of investment”
- Lending investment is a type of investment in which the lender (you) charges the borrower (bank, etc) a fee (interest) until the original loan (the principal) gets paid back.
- Familiar lending investments include bank certificates of deposit (CDs), United States (U.S.) Treasury bills, and bonds issued by corporations, such as Chipotle.
Describe
“ownership type of investment”
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Ownership investments can generate profits in two ways:
- Through the investment’s own cash flow/income (e.g. dividends)
- Through appreciation in the value of the investment
- When you purchase an asset you’re an owner.
- Whether a building or part of a multinational corporation, that has the ability to generate earnings or profits.
- Real estate and stock are common ownership investments.
Describe
“Money Market Funds”
Ref:
- A money market fund is a kind of mutual fund that invests only in highly liquid near-term instruments such as cash, cash equivalent securities, and high credit rating debt-based securities with a short-term, maturity—less than 13 months, such as U.S. Treasuries.
- As a result, these funds offer high liquidity with a very low level of risk.
Define
“Publicly Held Companies”
- Companies that sell stock to the general public
- When you hold stock in a company, you share in the company’s profits in the form of annual dividends (although some companies don’t pay dividends) as well as in an increase (you hope) in the stock price if the company grows and makes increasing profits.
Why should an investor contribute to an employer-sponsored plan instead of an annuity?
- Annuities also charge relatively high fees.
- That’s why it makes sense to consider contributing to an annuity after you fully fund the tax-deductible retirement accounts that are available to you.
Describe
“Annual Return”
Ref: https://www.investopedia.com/terms/a/annual-return.asp
- An investment’s return measures how much the investment has grown (or shrunk, as the case may be).
- Return figures are usually quoted as a rate or percentage that measures how much the investment’s value has changed over a specified period of time.
- So if an investment has a five-year annualized return of 8 percent, then every year for the past five years that investment, on average, has gotten 8 percent bigger than it was the year before.
Describe
“Volatility”
- Volatility is the size of the fluctuations in the value of an investment
Describe
“Diversification”
- Diversification is one of the most powerful investment concepts.
- It requires you to place your money in different investments with returns that aren’t completely correlated.
- With your money in different places, when one of your investments is down in value, the odds are good that at least one other is up
- A fund owns stocks or bonds from dozens of companies, diversifying against the risk of bad news from any single company or sector
Describe
“Closed-end Funds”
- Closed-end funds are those where the mutual fund companies decide upfront before they take on any investors, exactly how many shares they’ll issue.
- After they issue these shares, the only way you can purchase shares (or more shares) is to buy them from an existing investor through a broker.
Describe
“Net Asset Value”
- The NAV represents the per share/unit price of the fund on a specific date or time.
- Mutual funds don’t trade in real-time. Instead, mutual funds are priced based on the end of the day methodology based on their assets and liabilities.
Describe the fund’s risk levels
- Stock funds: If you want your money to grow over a long period of time (and you can put up with some bad years thrown in with the good), select funds that invest primarily in stocks
- Bond funds: If you need current income and don’t want investments that fluctuate as widely in value as stocks do, consider bond funds
- Money market funds: If you want to be sure your invested principal doesn’t drop in value because you may need to use your money in the short term, you can choose a money market fund
Describe a loss in a Mutual Fund
- That’s not to say that you can’t lose money in a mutual fund or exchange-traded fund. The share price of a fund is tied to the value of its underlying securities: If the underlying securities, such as stocks, decrease in value, so, too, does the net asset value (share price) of the fund.
- you can’t lose all your investment in a fund unless every single security owned by that fund simultaneously becomes worthless — an extraordinarily unlikely event.
- specific stocks and/or bonds that a mutual fund buys are held by a custodian — a separate organization or affiliate of the fund company. The employment of a custodian ensures that the fund management company can’t embezzle your money
Why should you invest in retirement accounts before investing in non-retirement accounts?
- Some investors make the common mistake of neglecting to take advantage of retirement accounts in their enthusiasm to invest in nonretirement accounts.
- Doing so can cost you hundreds of thousands of dollars over the years.
Why is it important to identify investors’ tax brackets before investing in non-retirement accounts?
- When you’re investing in mutual funds outside of tax-sheltered retirement accounts, the profits and distributions that your funds produce are subject to taxation.
- If you’re in a high-income tax bracket, give preference to mutual funds and exchange-traded funds, such as tax-free bond funds and stock funds with low levels of distributions (especially highly taxed short-term capital gains).
- In other words, focus more on stock funds that derive more of their expected returns from appreciation rather than from taxable distributions.