t7 Flashcards
Type of Investment Companies
Mutual funds (legally known as open-end companies)
Closed-end funds
Unit Investment Trust (UITs)
Exchange Traded Fund
mutual funds
An investment company that pool the resources of many investors and invests its shareholders’ money in a diversified portfolio of securities
1) Investors can redeem or buy shares, without a secondary market, at the fund’s Net Asset Value.
2) Continually create/eliminate shares on demand.
3) Investors own a share of the fund proportional to the amount of their investment.
4) All purchases and sales are completed at the end of the day after the stock markets have closed.
close end funds
Sell a fixed number of shares at one time (in an initial public offering), after which the shares typically trade on a secondary market (i.e. NYSE).
The price after IPO is determined by the market and may be greater or less than NAV.
Shares generally are not redeemable (except interval funds).
Invest in a greater amount of “illiquid” securities than are mutual funds.
Unit investment trusts
Redeemable securities (or “units”), like a mutual fund, which means that the UIT will buy back an investor’s “units,” at the investor’s request, at their NAV
One-time “public offering” of only a specific, fixed number of units (like closed-end funds).
Have a termination date. When a UIT terminates, any remaining investment portfolio securities are sold and the proceeds are paid to the investors.
No active trading. Buys a relatively fixed portfolio and holds them with little or no change for the life of the UIT.
No board of directors, corporate officers, or an investment adviser to render advice during the life of the trust.
Exchange traded funds
Basket of securities similar in many to traditional mutual funds. BUT:
Only issue shares in large blocks (i.e. 50000 shares) known as creation units.
Institutions (i.e. authorized participants) can buy these creation units (generally with a basket of securities mirroring ETFs portfolio), then can split and sell individual shares in the secondary market.
Other investors can then buy and sell individual shares in the secondary market. Hence, they can be traded continuously like stocks.
Low management fees ( between 0.1% and 0.65%). Index funds charge anywhere from 0.1% to more than 3%. Active funds may charge up to 10%.
Tax efficiency (redemption in the secondary market + “redemption-in-kind” in the primary market)
advantages of mutual funds
Diversification
Professional management:
Variety: Investors can choose among a variety of investment approaches that meet their needs
Liquidity and transaction costs: Shares in a mutual funds can be bought and sold on any business day. Transaction costs within the mutual fund may be much smaller than those incurred with individual investor’s transactions.
Low cost
Shareholders’ services: Mutual funds offer services that make investing easier and convenient
drawbacks of mutual funds
Fund fees and trading costs
“loads” or sales charges and 12-b1 fees which reduce returns.
Trading costs include broker commissions, bid-ask spreads, and price impact of trade
Soft-dollar commissions: fund managers receive research, data terminals and other benefits in return for paying higher commissions to brokers.
Inability to plan tax:
types of mutual funds
Money market funds ( lower risk and return)
Fixed income funds ( moderate risk and return)
equity funds ( higher risk and return)
Specialty Funds:
Balanced funds:
Fund fees ( ongoing expenses)
Management (advisory) Fees: paid out of fund assets to the fund’s investment adviser (or its affiliates) for managing the fund’s investment portfolio (0.5-1%)
12b-1 fees (marketing and distribution): fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature (up to 1 %)
Other expenses: legal, transfer agent, accounting, custodial etc. expenses
fund fees (shareholder fees)
Front Load Fees: Fees that investors pay when they purchase fund shares (3-8%)
Deferred Sales Charge (also known rear load fees): Fees that investors pay when they redeem fund shares. It may depend on how long the investor holds his or her shares and typically decreases to zero if the investor hold his or her shares long enough
Redemption Fees: Fees paid when shareholders redeem their shares. Unlike deferred ales load, which is used to pay brokers, a redemption fee is typically used to defray fund costs associated with a shareholder’s redemption and is paid directly to the fund, not to a broker. (limit to 2%)
Exchange Traded Funds
ETFs offer public investors an undivided interest in a pool of securities and other assets similar to mutual funds
