Week 9 Mutual Funds Flashcards
What attracts individuals to managed funds?
The diversification they are able to achieve through their pooled asset volume.
What are the 4 types of mutual funds?
1) Bond funds that invest in fixed income securities
2) Equity funds that invest in common and preferred stock
3) Hybrid funds that invest in stocks, bonds and other securities
4) Money market funds that invest in interest-bearing instruments with a life of less than one year
Which of the four types of managed funds is the most popular?
Equity mutual funds
What is an open ended fund?
A fund where the total number of outstanding shares goes up as investors buy more shares and down as shares are redeemed.
When are mutual funds valued?
4PM each day.
How is a mutual fund valued?
The total value of the fund is divided by the number of outstanding shares.
When can shares be bought from (or sold back to) an open ended fund?
At any time.
When an investor buys/sells shares in a fund, what NAV is used?
The next calculated value (at 4PM on the next business day)
What is NAV?
Net asset value of a fund calculated as total value divided by number of outstanding shares.
What is an index fund?
A fund designed to track a particular equity index
What is the typical accuracy of an index fund?
Fairly poor. Errors average 38 basis points.
What is a front end loaded mutual fund?
A fund that charges a fee when investors first buy shares.
What is a back end loaded mutual fund?
A fund that charges a fee when investors sell their shares. Typically this fee declines with length of time the length of time the shares have been held.
What is the total expense ratio of a mutual fund?
The total annual fees charged per share divided by the value of the shares.
How is the total shareholder cost per year calculated?
Total Expense Ratio + (Front End Load + Back End Load)/number of years shares held for
What is more common, closed or open ended funds?
Open ended funds are more common “by far”.
What is a closed ended fund?
A managed fund with a fixed number of shares outstanding.
What are the two NAVs that may be calculated for closed ended funds?
1) The price at which the shares of the fund are trading
2) The market value of the fund’s portfolio divided by the number of shares outstanding
What is the usual relationship between a closed ended fund’s share price and its fair market value?
Share price < Fair market value
believed to be due to fees paid to fund managers
What is an ETF?
1) An Exchange traded fund.
2) They usually track an index.
Who creates ETFs?
Institutional investors (those with sufficient capital to recieve discounts, be allowed to trade all stuff etc.)
How do institutional investors create ETFs?
They deposit a block of securities with the ETF and obtain shares in the ETF (known as creation units) in return.
As shares in ETFs are sold on the stock exchange, are they more like closed or open ended funds?
Closed ended
How do institutional investors interact with a managed fund after it has been created? (Note this is a key difference between ETFs and closed ended funds)
They can either deposit new assets and receive new shares or reverse that (give up their shares in exchange for the underlying assets).
