Unit 2 - Session 7 - Pooled Investments Flashcards
Investment Company
A corporation or a trust through which investors may acquire an interest in large, diversified portfolios of securities by pooling their funds with other investors’ funds. People invest in professional money managers b/c they believe they should outperform the average investor in the market. By investing through an investment company, individuals gain some of the advantages large investors enjoy, such as diversification of investments, lower transaction costs, prof manager and more.
What are the 3 types of investment companies
- ) Face-amount Certificates
- ) Unit Investment Trust
- ) Management Investment Companies
Face-Amount Certificate (FAC)
A contract between an investor and an issuer in the which the issuer guarantees payment of a stated (of fixed) sum to the investor at some set date in the future. In return for this future payment, the investor agrees to pay the issuer a set amount of money, either as a lump sum or in periodic installments.
Unit Investment Trusts (UITs)
Defined by the Inv. Company Act of 1940.
Unmanaged investment company organized under a trust indenture
1.) do not have a board of directors
2.) do no employ an investment adviser
3.) do not actively manage their own portfolios
Trustees usually buy other company shares, stock or bonds to make the desire portfolio. They can sell units or shares in the portfolio, called beneficial interest. when securities are liquidated, proceeds must be distributed
Fixed UITs
Typically a portfolio of bonds and terminates when the bonds in the portfolio matures. Can be equities, but equities do not have a maturity date so usually have a set maturity date at offering
Nonfixed UITs
Purchase shares of an underlying mutual funds
Management Investment Companies
Actively manages securities portfolios to achieve a stated investment objective
Net Asset Value Per Share
Value is the result of fund valuing all of its assets, subtracting its liabilities, and then dividing that by the number of shares outstanding
Closed-end Investment Companies
Conducts a common stock offering, usually IPO, and registers a fixed number of shares with the SEC and offers to the public for a limited time through an underwriting group. Capitalization is fixed unless additional public offering is made. Know as publicly traded funds. After the stock is distributed, anyone can buy or sell on the secondary market. Supply and demand determine the bid and ask price. Closed-end fund shares usually trade at a premium or discount to the shares’ net asset value
Country funds
Funds that concentrate their investments in the securities of companies domiciled in foreign countries. Well known examples are Korea Fund, New Germany Fund, and Mexico Fund
Open End Investment Companies
Does not specify the exact number of share it intends to issues, aka as a mutual fund. Can raise an unlimited amount of investment capital by continuously issuing new shares. Only issue common stock. Each investor owns an undivided interest in the entire underlying portfolio (each investor shares mutually with other investors in gains and distributions)
POP
Open End Investment Company or Mutual Fund public offering price
Redeemable Securities
When an investor sells shares in a mutual fund, the fund redeems them at the NAV.
Forward Pricing Principal
Whenever an order, where to purchase or redeem, is received, the price is based upon the next computer NAV per share
What are the fee types for a mutual fund?
- ) Front End Loads: difference between public offering price (POP) and net asset value (NAV)
- ) Back End Loads: contingent deferred sales loads
- ) 12b-1 fees: asset-based fees, technically not a sales charge
Front-End Loads
Reflected in the public offering price. Charges are added to NAV at the time an investor buys shares. they are frequently referred to as Class A shares and have lower operating expense ratios than other classes.
Back-End Loads
Charged at the time an investor redeems mutual fund shares. The sales load, a declining % that is reduced annually is applied to the proceeds of any share sold in the that year. Usually structured so that the sales load drops to zero after 6-8 yrs, at which time they are usually converted to Class A shares with their lower op ex. ratios. These are usually referred to as Class B shares.
12b-1 Fees
Permits a mutual fund to collect a fee for promotion or sales-related activities in the connection with the distribution of its shares. Fee is determined as a flat dollar amount of a % of the fund’s average total NAV during the year. The annual fee cannot exceed .075% of net assets. If the fee exceeds 0.25% it cannot use the term no-load.
Class A shares
front-end load: investors pay the charge at the time of purchase
Class B shares
back-end load: declines over time so investors pay the charge at redemption
Class C shares
level load: no sales charge to purchase, generally a 1% contingent deferred sales charge for 1 year with a continuous 12b-1 charge.
Breakpoints
A schedule of discounts a mutual fund offers. Breakpoint qualification includes married couples, parents and their minor child, and corporations.
Breakpoint sale
When mutual funds would makes sales just below the breakpoint. This is illegal
Letter of Intent for Breakpoints
If an investor plans to invest additional monies in the next 13 months they may qualify for the next level of breakpoint
Family of Funds
mutual fund companies often offering more than one fund and an investor can usually qualify for a breakpoint if they they invest in 2 or more funds
Exchange of Funds
allows an investor to convert an investment in one fund for an equal investment in another fund in the same family at the net asset value w/o incurring additional sales charge. An exchange of funds is considered a sale for tax purposes
Market Capitalization
Number of outstanding common shares multiplied by the current market price per share
Growth Funds
Invest in stocks of rapidly growing companies - tend to reinvest all or most of their profits in R&D rather than paying dividends
Income Funds
Stress current income over growth - usually invest in stocks of companies with long histories of paying dividends such as utility company stocks
Combination Funds
Combine objectives of growth and income funds - companies that show long-term growth potential and pay high dividends
Specialized Funds
Specialize in specific economic sectors or industries and are more likely to stick to a relatively fixed allocation
Special Situation Funds
Buy securities of companies that may benefit from a change within a corporations or in the economy. Takeover and turnaround situations are common investments
Index Funds
Invest in securities to mirror a market index, such as the S&P 500. Passive style of investment management
Foreign Stock Funds
Invest mostly in securities of companies that have principal businesses outside the US. Long-term capital appreciation is their primary objective aka as International Funds and Global Funds
Bond Funds
Income as their primary investment objective, sometimes solely investment-grade corporate bonds, sometimes government, sometimes capital appreciation
Tax-Free Bond Funds
Invest in municipal bonds or notes that produce income exempt from federal income tax. However, any capital gains distribution from the fund are taxable just as with any other fund
US Government and Agency Securities Funds
Purchase securities by the US Treasury or an agency such as Ginnie Mae which seek income and maximum safety
Foreign Bond Funds
Funds invest in foreign sovereign debt issues. Tend to be less risky than foreign debt b/c these tend to be professionally managed and appropriately diversified
Balance Funds
Invest in stocks for appreciation and bonds for income and different types of securities are purchase according to that formula
Asset Allocation Funds
Split investments between stocks for growth, bonds, for income, money market instruments for stability.
Money Market Funds
No-load, open-end investment companies (mutual funds) that serve as temporary holding accounts for investors; money. Most suitable for investors that have financial goals of liquidity
NAV for Money Markets
Floating NAV for prime money market funds, which allows the daily share prices of these funds to fluctuate along with changes in the market-based value of the fund assets
Are money market funds FDIC insured?
No
Target Date Funds
aka lifecycle funds are designed to offer a convenient way to invest for a person expecting to retire around a particular date. Pursues a long-term investment strategy. use a mix of asset classes that become more conservative over time
What do investors look at when comparing mutual funds
- ) Costs
- ) Taxation
- ) Services offered
