MUTUAL FUNDS FINAL NOTES Flashcards
a collection of investment money pooled from a lot of people to be invested for a specific objective.
Mutual fund
are investment companies that pool your money with the money of hundreds, thousands, or
even millions of other investors.
Mutual fund
is a type of financial intermediary, which nothing more than an organization that takes
money from people who want to invest and then gives the money to those who need investment capital
Mutual fund
When you invest in a mutual fund, you buy shares and become a _____ of the fund.
shareholder
theoretically have no limit to the number of investors or the amount of money that they hold
Open-end funds
simply means that the fund issues as many (or as few) shares as investors demand.
Open-end funds
they are usually preferable than the other fund
Open-end funds
they attract more investors over time
Management talent
can afford to pay the necessary money to hire leading managers.
Management talent
charge lower annual operating expenses
Expenses
the value of a share (known as the net asset value) always equals 100% of what the fund’s investments (less liabilities) are currently worth.
Fee-free selling
are those where the mutual fund companies decide upfront, before they take on any investors, exactly how many shares they’ll issue.
Closed-end fund
tend to be much smaller and, therefore, more costly to operate.
Closed-end fund
analyze and purchase investments that best meet the fund’s stated objectives
Fund managers
requires you to place your money in different investments with returns that aren’t completely correlated.
Diversification
the most common ownership investment traded on securities markets. 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)
Stock funds
Bonds are the most common lending investment traded on securities markets. If you need current income and don’t want investments that fluctuate as widely in value as stocks do
➢ Bond fund
are lending investments based on short-term loans and are about the safest in terms of risk to your investment among the various lending investments around. If you want to be sure that your invested principal doesn’t drop in value because you may need to use your money in the short term
Money market funds
You have convenient access to your money. You can make your initial investment from the
comfort of your living room by filling out and mailing a simple form and writing a check
The ultimate couch potato investment
important financial steps for you to take before you invest so you get the most from your mutual fund investments
Lining up Your Ducks before You Invest
include balances on such items as credit cards and auto loans.
Consumer debts
are goal-specific tools and humans are goal-driven animals, which is perhaps why the two make such a good match
Mutual funds
simply means how your investments are divvied up among the major types of securities or funds, such as money market, bond, United States stock, international stock, and so on
Asset allocation
if you need to tap into the money within two or
three years or less
Money market or short-term bond fund
if your time horizon falls between three and seven years
Bond funds
for long-term goals, seven or more years down the road
Stock funds
allow existing shareholders of stock to reinvest their dividends
in more shares of stock without paying brokerage commissions
Dividend Reinvestment Plans
you enjoy going to parties and telling of your successes in the stock market
The boaster
you hate delegating jobs to others, especially important ones, because no one does as good a job as you do
The controller
you like to be just a little bit different and independent
The free spirit
index funds that trade like stocks on a stock exchange
Exchange-Traded Funds
have much in common with closed-end funds where they take an amount of money and buy a number of securities that meet the objectives of the UIT
Unit investment trusts (UITs)
Load simply means _____
commission
are quoted as a percentage of the fund’s assets or value.
fund’s operating expenses
usually written and edited by an attorney who wouldn’t know a lively and comprehensible sentence if it clobbered him on the head with a law dictionary.
Prospectus
the date so that you know how recent its information is, table of contents, and particular fund family
Cover page
contain a synopsis of the main attributes of the fund (description of the fund’s investment objectives and the strategies that it employs to accomplish its objectives)
Fund profile
(when dividends and capital gains are distributed, who manages the fund, how long the fund has been in existence, what the fund’s total assets are and so on)
Other fund information
(explains in detail what the fund is trying to accomplish and
what risks the fund is subject to)
Investment objectives and risks
(provides background about the investment adviser who actually manages the investments of this fund)
Investment adviser
is the price per share of the fund.
Net Asset Value (NAV)
represents what investors in the fund have earned historically.
Total Return
tells you how much trading takes place in a fund.
Turnover Rate
includes Net Asset Value, Total Return and Turnover Rate
Financial highlights
explain how well the fund has performed recently and why.
Chairman’s letter
is where the portfolio managers of the fund explain how the
economic environment affected the fund’s performance
Report from the Advisor”
lists every investment the fund owns where you get the details that tell you exactly where your money is invested.
Statement of Net Assets
a supplementary document added to a mutual fund’s
prospectus that contain
Statement of Additional Information (SAI)
contains information about a mutual fund that may not be found in its original prospectus.
Statement of Additional Information (SAI)
a mutual fund service where you can purchase hundreds of funds without paying any transaction fees (that is, you pay the same cost as if you’d bought the funds through the mutual fund company itself).
No Transaction Fee (NTF) funds
tend to have higher operating expenses than non-NTF funds
No Transaction Fee (NTF) funds
no one can predict future movements in the financial markets to know which types of investments will do well and which ones won’t.
crystal ball phenomenon
the compensation that a supplier of funds expects and a demander of funds must pay.
Interest rates and Required Returns
takes on a historical perspective (what return did an investment actually provide)
Actual returns
takes on a forward-looking perspective (what return should we expect the investment to provide in the future given its risk)
Expected returns
weighs more heavily than actual returns do in a decision-making context
Expected returns
occurs at the intersection of the supply function and the demand function
Equilibrium Interest rate
increase in the prices of most goods and services
Inflation
the riskier the particular investment is, the higher return
Risk
the general tendency of investors to prefer short-term securities
Liquid preference
when a loan carries an interest rate below zero, the lender essentially pays interest to the borrower rather than the other way around.
Negative Interest Rate
the actual rate of interest charged by the supplier of funds and paid by the demander
Nominal interest rate
the increase in purchasing power that the investment provides
Real interest rate
Formula in getting the real interest rate
(1 + r) = (1 + r*) (1 + i)
nominal interest rate
r
real interest rate
r*
expected inflation rate
i
