Investment portfolios are fixed and unmanaged (lower operating expenses than actively managed funds)
Managed Investment Companies
Closed-End vs. Open-End Funds
Discount puzzle of closed-end funds:
Various commissions (sales, management, performance fees, etc.)
Unrealized capital gains and taxes
Individual investors’ sentiment
NAV Premium or discount to NAV Pricing Changes daily as new shares are sold or old shares are redeemed No change unless new share is offered Shares outstanding Can redeem or issue its shares at NAV, but not listed on exchanges Cannot redeem its shares, but traded on stock exchanges Redemption of shares Open-end Closed-end
Front-end load: sales commission paid at time of purchase (about 6%)
No-load funds: no front-end sales charges
Back-end load: redemption fee at time of redemption (about 6%, and gradually lowers every year)
Administrative expenses and advisory fees paid to the investment manager (0.2% to 2% of total assets)
Periodically deducted from the fund assets
12 b-1 charges
Annual fees charged by a fund manager to pay for marketing and distribution costs of annual reports and prospectuses, and sales broker commissions (limited to 1% of a fund’s average net assets per year)
Annually deducted from the fund assets
Different classes of shares have different fee structures
Allow investors to choose the best combination of fees, depending on their investment horizons.
“ Late trading” or “market timing” is discouraged or prohibited
Mutual fund companies state in their prospectuses that they discourage or prohibit " late trading " and " market timing " by large investors. However, mutual fund managers were found to permit certain companies to conduct such trades in exchange for payments and other inducements.
Late trading involves purchasing mutual fund shares at the 4 pm price after the market closes, a practice which is illegal, and like allowing betting on a horse race after the horses have crossed the finish line.
Market timing is a short-term, "in and out" trading of mutual fund shares. It is designed to exploit market inefficiencies by buying mutual fund shares at the stale NAV, and realizing a profit later when selling them.
Typically, funds limit the number of round trips an investor can make during a 12-month period, and allow exchanges from one fund to another within the same fund family several times a year for a low or no fee.