Mutual Funds

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Mutual Funds

  1. 1. Mutual Funds and Investment Companies <ul><li>Services of Investment Companies </li></ul><ul><li>Types of Investment Companies </li></ul><ul><li>Types of Mutual Funds </li></ul><ul><li>Cost of Mutual funds </li></ul><ul><li>Return of Mutual Funds </li></ul><ul><li>Exchange Traded Funds </li></ul>
  2. 2. Services of Investment Companies <ul><li>Administration & record keeping </li></ul><ul><li>Diversification & divisibility </li></ul><ul><li>Professional management </li></ul><ul><li>Reduced transaction costs </li></ul>
  3. 3. Net Asset Value <ul><li>Used as a basis for valuation of investment company shares </li></ul><ul><ul><li>Selling new shares </li></ul></ul><ul><ul><li>Redeeming existing shares </li></ul></ul><ul><li>NAV= </li></ul><ul><li>Market Value of Assets - Liabilities </li></ul><ul><li> Shares Outstanding </li></ul>
  4. 4. Types of Investment Organizations <ul><li>Unit Trusts </li></ul><ul><li>Managed Investment Companies </li></ul><ul><ul><li>Open-End </li></ul></ul><ul><ul><li>Closed-End </li></ul></ul><ul><li>Other investment organizations </li></ul><ul><ul><li>Commingled funds </li></ul></ul><ul><ul><li>REITs </li></ul></ul><ul><ul><li>Hedge Funds </li></ul></ul>
  5. 5. Open-End and Closed-End Funds <ul><li>Shares Outstanding </li></ul><ul><li>Closed-end: no change unless new stock is offered </li></ul><ul><li>Open-end: changes when new shares are sold or old shares are redeemed </li></ul><ul><li>Pricing </li></ul><ul><li>Open-end: Net Asset Value(NAV) </li></ul><ul><li>Closed-end: Premium or discount to NAV </li></ul>
  6. 6. Investment Policies <ul><li>Money Market </li></ul><ul><li>Equity </li></ul><ul><li>Specialized Sector </li></ul><ul><li>Bond </li></ul><ul><li>Balance & Income </li></ul><ul><li>Asset Allocation </li></ul><ul><li>Indexed </li></ul><ul><li>International </li></ul>
  7. 7. Costs of Investing in Mutual Funds <ul><li>Fee Structure </li></ul><ul><ul><li>Front-end load </li></ul></ul><ul><ul><li>Back-end load </li></ul></ul><ul><li>Operating expenses </li></ul><ul><li>12 b-1 charges </li></ul><ul><ul><li>distribution costs paid by the fund </li></ul></ul><ul><ul><li>Alternative to a load </li></ul></ul><ul><li>Fees and performance </li></ul>
  8. 8. Example <ul><li>An open-end fund has a total asset of $120 million and a liability of $10 million. It has 10 million shares outstanding. What is its NAV? It is sold with a front-end load of 5%. What is its offering price? </li></ul>
  9. 9. Fund Returns <ul><li>Page 106 </li></ul><ul><li>A sophisticated example: </li></ul><ul><li>Problem 4.16 on page 121 </li></ul>
  10. 10. Table 4.2 Impacts of Costs on Investment Performance
  11. 11. Exchange Traded Funds <ul><li>ETF allow investors to trade index portfolios like shares of stock </li></ul><ul><li>Examples - SPDRs and Webs </li></ul><ul><li>Potential advantages </li></ul><ul><ul><li>Trade continuously </li></ul></ul><ul><ul><li>Lower taxes </li></ul></ul><ul><ul><li>Lower costs </li></ul></ul><ul><li>Potential disadvantages </li></ul>
  12. 12. First Look at Mutual Fund Performance <ul><li>Average mutual fund performance is generally less than broad market performance </li></ul><ul><li>Over certain horizons there is persistence in positive performance </li></ul><ul><ul><li>Evidence is not conclusive </li></ul></ul><ul><ul><li>Some inconsistencies </li></ul></ul>
  13. 13. Figure 4.3 Diversified Equity Funds versus Wilshire 5000 Index
  14. 14. Sources of Information on Mutual Funds <ul><li>Wiesenberger’s Investment Companies </li></ul><ul><li>Morningstar (www.morningstar.com) </li></ul><ul><li>Yahoo (biz.yahoo.com / funds) </li></ul><ul><li>Investment Company Institute (www.ici.org) </li></ul><ul><li>Popular press </li></ul><ul><li>Investment services </li></ul>

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