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Chapter 3 Investment Funds
<ul><li>Distinguish between direct and indirect investing. </li></ul><ul><li>Define open-end and closed-end investment fun...
<ul><li>Refers to buying and selling the shares of intermediaries that hold a portfolio of securities </li></ul><ul><ul><l...
<ul><li>Financial company or trust fund that sells shares to the public and uses the proceeds to invest in marketable secu...
<ul><li>Unit Investment Trust : an unmanaged, fixed-income security portfolio put together by a sponsor and handled by an ...
<ul><li>Closed-end investment fund : No additional shares sold after initial public offering </li></ul><ul><ul><li>Share p...
<ul><li>Open-end investment fund : Shares continue to be sold to the public at NAV after initial sale that capitalizes the...
<ul><li>Money Market Funds </li></ul><ul><ul><li>Objectives of income and liquidity </li></ul></ul><ul><ul><li>Short-term ...
<ul><li>(a) Balanced Funds </li></ul><ul><ul><li>Objectives of safety, income and capital appreciation </li></ul></ul><ul>...
<ul><li>Growth Funds </li></ul><ul><ul><li>Tend to invest in small-cap stocks, i.e. small companies with growth potential ...
<ul><li>(a) Real Estate Funds </li></ul><ul><ul><li>Invest in income-generating properties for long-term growth and capita...
<ul><li>Index Funds </li></ul><ul><ul><li>Objective is to mirror the performance of a market index (e.g., S&P/TSX 60) </li...
<ul><li>ranked from lowest risk/return to highest risk/return as follows: </li></ul><ul><li>Money market </li></ul><ul><li...
<ul><li>Money market mutual funds invest in a portfolio of money market securities </li></ul><ul><ul><li>Treasury bills </...
<ul><li>Equity, bond, and income funds invest in portfolios of securities consistent with the objectives of the particular...
<ul><li>Most mutual fund assets are in equity funds rather than bond or income funds </li></ul><ul><li>Most equity funds a...
<ul><li>Closed-End Funds </li></ul><ul><ul><li>NAV > market price, selling at a discount </li></ul></ul><ul><ul><li>NAV < ...
<ul><li>Units of these trusts hold shares of firms in market indices in proportion to their weights in the index </li></ul...
<ul><li>I-60s </li></ul><ul><ul><li>Represent units in the S&P/TSX 60 Index </li></ul></ul><ul><ul><li>Trade on the TSX (t...
<ul><li>TD S&P/TSX Index Fund </li></ul><ul><ul><li>The S&P/TSX Composite Index is the underlying index; MER is 0.25%  </l...
<ul><li>ETFs </li></ul><ul><ul><li>Trade all day on exchanges, can be bought on margin, and can be shorted </li></ul></ul>...
<ul><li>Segregated funds </li></ul><ul><ul><li>Provide death benefits </li></ul></ul><ul><ul><li>Must guarantee a minimum ...
<ul><li>Labour Sponsored Venture Capital Corporations (LSVCCs) </li></ul><ul><ul><li>No 10% maximum ownership restriction ...
<ul><li>Reported on a regular basis (usually daily) in the popular press </li></ul><ul><li>Measured over a given time peri...
<ul><li>Investors relate the performance to some benchmark to judge relative performance </li></ul><ul><li>An important is...
<ul><li>Some mutual funds specialize in international securities </li></ul><ul><ul><li>Canadian investors can participate ...
<ul><li>Mutual fund “supermarkets” </li></ul><ul><ul><li>Various mutual fund families can be purchased through a single so...
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ch03.ppt

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ch03.ppt

  1. 1. Chapter 3 Investment Funds
  2. 2. <ul><li>Distinguish between direct and indirect investing. </li></ul><ul><li>Define open-end and closed-end investment funds. </li></ul><ul><li>State the major types of mutual funds and give their features. </li></ul><ul><li>Define exchange-traded funds (ETFs). </li></ul><ul><li>inguish between direct and indirect investing. </li></ul><ul><li>Define open-end and closed-end investment funds. </li></ul><ul><li>State the major types of mutual funds and give their features. </li></ul><ul><li>Define exchange-traded funds (ETFs). </li></ul>Learning objectives
  3. 3. <ul><li>Refers to buying and selling the shares of intermediaries that hold a portfolio of securities </li></ul><ul><ul><li>Shares are ownership interest in the underlying portfolio </li></ul></ul><ul><ul><li>Shareholders are entitled to portfolio income </li></ul></ul><ul><ul><li>Shareholders also pay expenses efers to buying and selling the shares of intermediaries that hold a portfolio of securities </li></ul></ul><ul><ul><li>Shares are ownership interest in the underlying portfolio </li></ul></ul><ul><ul><li>Shareholders are entitled to portfolio income </li></ul></ul><ul><ul><li>Shareholders also pay expenses </li></ul></ul>Indirect Investing
  4. 4. <ul><li>Financial company or trust fund that sells shares to the public and uses the proceeds to invest in marketable securities </li></ul><ul><ul><li>Acts as conduit for distribution of dividends, interest, and realized gains </li></ul></ul><ul><ul><li>Offers the benefits of diversification </li></ul></ul><ul><ul><li>Offers professional management </li></ul></ul><ul><li>Offers professional management </li></ul>Investment Fund
  5. 5. <ul><li>Unit Investment Trust : an unmanaged, fixed-income security portfolio put together by a sponsor and handled by an independent trustee </li></ul><ul><ul><li>Passive investments designed to be bought and held with capital preservation as a major objective </li></ul></ul><ul><ul><li>Currently represent a very small part of total investment company assets Unit Investment Trust : an unmanaged, fixed-income security portfolio put together by a sponsor and handled by an independent trustee </li></ul></ul><ul><ul><li>Passive investments designed to be bought and held with capital preservation as a major objective </li></ul></ul><ul><ul><li>Currently represent a very small part of total investment company assets </li></ul></ul>Fund Types
  6. 6. <ul><li>Closed-end investment fund : No additional shares sold after initial public offering </li></ul><ul><ul><li>Share prices determined and traded in a secondary market </li></ul></ul><ul><ul><li>Price may not equal Net Asset Value of the shares </li></ul></ul><ul><ul><ul><li>Net Asset Value (NAV) : Total market value of the security portfolio divided by total shares </li></ul></ul></ul>Fund Types
  7. 7. <ul><li>Open-end investment fund : Shares continue to be sold to the public at NAV after initial sale that capitalizes the company </li></ul><ul><ul><li>Shares may be sold back (“redeemed”) to the company at NAV </li></ul></ul><ul><ul><li>Capitalization constantly changes </li></ul></ul><ul><ul><li>Popularly called mutual funds </li></ul></ul>Fund Types
  8. 8. <ul><li>Money Market Funds </li></ul><ul><ul><li>Objectives of income and liquidity </li></ul></ul><ul><ul><li>Short-term money market instruments </li></ul></ul><ul><ul><li>Low risk and high liquidity </li></ul></ul><ul><li>(a) Mortgage Funds </li></ul><ul><ul><li>Investment terms may be  5 years </li></ul></ul><ul><ul><li>Riskier than money market (more interest rate risk), but less risky than bond funds (shorter maturities) </li></ul></ul><ul><li>(b) Bond Funds </li></ul><ul><ul><li>Objectives of income and safety </li></ul></ul><ul><ul><li>Subject to capital gains/losses due to interest rate risk </li></ul></ul>Types of Mutual Funds
  9. 9. <ul><li>(a) Balanced Funds </li></ul><ul><ul><li>Objectives of safety, income and capital appreciation </li></ul></ul><ul><ul><li>Min./max. rules apply for percentage invested in each asset class. </li></ul></ul><ul><li>(b) Asset Allocation Funds </li></ul><ul><ul><li>Similar objectives as balanced funds, but typically not restricted by asset class percentage rules </li></ul></ul><ul><li>Equity/Common Stock Funds </li></ul><ul><ul><li>Objective of capital gains </li></ul></ul><ul><ul><li>Bulk of assets are in equity, but other assets held for liquidity, income and diversification purposes </li></ul></ul><ul><ul><li>May vary greatly in degree of risk and growth objectives </li></ul></ul>Types of Mutual Funds
  10. 10. <ul><li>Growth Funds </li></ul><ul><ul><li>Tend to invest in small-cap stocks, i.e. small companies with growth potential </li></ul></ul><ul><ul><li>Riskier than equity funds (small firms pay no dividends) </li></ul></ul><ul><li>Specialty Funds </li></ul><ul><ul><li>Objective of superior capital gains (through minimal diversification) </li></ul></ul><ul><ul><li>Tend to focus on one industry, market, or segment </li></ul></ul><ul><ul><li>International/Global Funds, for example, invest in foreign securities (and carry the risk of foreign exchange exposure) </li></ul></ul>Types of Mutual Funds
  11. 11. <ul><li>(a) Real Estate Funds </li></ul><ul><ul><li>Invest in income-generating properties for long-term growth and capital gains </li></ul></ul><ul><ul><li>Portfolio valuation is based on infrequent external appraisal </li></ul></ul><ul><ul><li>Less liquid than other funds – investors may need to give advance notice when selling </li></ul></ul><ul><li>(b) Ethical Funds </li></ul><ul><ul><li>Relatively new type of fund </li></ul></ul><ul><ul><li>Investments are guided by moral criteria (e.g., not investing in tobacco-related firms) </li></ul></ul>Types of Mutual Funds
  12. 12. <ul><li>Index Funds </li></ul><ul><ul><li>Objective is to mirror the performance of a market index (e.g., S&P/TSX 60) </li></ul></ul><ul><ul><li>Generally lower management fees than other funds. </li></ul></ul><ul><li>Dividend Funds </li></ul><ul><ul><li>Objective of tax reduction through favourable treatment of dividend </li></ul></ul><ul><ul><li>Inappropriate for RRSPs or RRIFs </li></ul></ul><ul><ul><li>Price changes are driven by interest rates and market trends </li></ul></ul>Types of Mutual Funds
  13. 13. <ul><li>ranked from lowest risk/return to highest risk/return as follows: </li></ul><ul><li>Money market </li></ul><ul><li>Mortgage </li></ul><ul><li>Bond </li></ul><ul><li>Balanced </li></ul><ul><li>Dividend </li></ul><ul><li>Equity </li></ul><ul><li>Real estate </li></ul><ul><li>Specialty </li></ul><ul><li>http://finance.yahoo.com/funds </li></ul>Types of Mutual Funds
  14. 14. <ul><li>Money market mutual funds invest in a portfolio of money market securities </li></ul><ul><ul><li>Treasury bills </li></ul></ul><ul><ul><li>Commercial paper </li></ul></ul><ul><ul><li>Short-term government bonds </li></ul></ul><ul><ul><li>Low risk </li></ul></ul><ul><ul><li>Not insured by the federal government </li></ul></ul>Mutual Fund Categories
  15. 15. <ul><li>Equity, bond, and income funds invest in portfolios of securities consistent with the objectives of the particular fund </li></ul><ul><ul><li>Objectives set by the fund’s board </li></ul></ul><ul><ul><li>Disclosure of objectives to investors through a prospectus </li></ul></ul>Mutual Fund Categories
  16. 16. <ul><li>Most mutual fund assets are in equity funds rather than bond or income funds </li></ul><ul><li>Most equity funds are either: </li></ul><ul><ul><li>Value funds, which invest in undervalued stocks as determined by fundamental financial analysis </li></ul></ul><ul><ul><li>Growth funds, which invest in stocks of firms expected to show future rapid earnings growth </li></ul></ul>Equity Funds
  17. 17. <ul><li>Closed-End Funds </li></ul><ul><ul><li>NAV > market price, selling at a discount </li></ul></ul><ul><ul><li>NAV < market price, selling at a premium </li></ul></ul><ul><ul><li>If the value of the portfolio remains unchanged, an investor can gain or lose if the discount narrows or widens over time </li></ul></ul><ul><ul><li>Trade at premiums and discounts across time, and variance is great </li></ul></ul>Equity Funds
  18. 18. <ul><li>Units of these trusts hold shares of firms in market indices in proportion to their weights in the index </li></ul><ul><li>Differences from traditional mutual funds: http://finance.yahoo.com/etf </li></ul><ul><ul><li>Traded throughout the day on exchanges </li></ul></ul><ul><ul><li>Lower management fees (e.g., 0.08% to 0.25% versus 2.5% average for active equity funds versus 0.75% average for Index funds) </li></ul></ul><ul><ul><li>Lower portfolio turnover – reduces capital gains income and taxes payable </li></ul></ul><ul><ul><li>Permit short-selling </li></ul></ul><ul><ul><li>May be purchased on margin </li></ul></ul>Exchange-Traded Funds (ETFs)
  19. 19. <ul><li>I-60s </li></ul><ul><ul><li>Represent units in the S&P/TSX 60 Index </li></ul></ul><ul><ul><li>Trade on the TSX (ticker: XIU).; units are valued at 1/10 th the value of the S&P/TSX 60 Index; for example, if index is valued at 450, each unit is valued at $45 </li></ul></ul><ul><ul><li>Dividends are paid every quarter; MER is 0.17% </li></ul></ul><ul><li>DJ40s </li></ul><ul><ul><li>Represent units in the Dow Jones Canada Index Participation Fund, which hold stocks that mimic those of the Dow 40 Index; MER is 0.08% </li></ul></ul>Canadian-Based ETFs
  20. 20. <ul><li>TD S&P/TSX Index Fund </li></ul><ul><ul><li>The S&P/TSX Composite Index is the underlying index; MER is 0.25% </li></ul></ul><ul><ul><li>T here are now a growing number of small-cap, mid-cap, industry-based, style-based, and bond ETFs available </li></ul></ul><ul><li>T here are now a growing number of small-cap, mid-cap, industry-based, style-based, and bond ETFs available </li></ul>Canadian-Based ETFs
  21. 21. <ul><li>ETFs </li></ul><ul><ul><li>Trade all day on exchanges, can be bought on margin, and can be shorted </li></ul></ul><ul><ul><li>Currently passive in nature </li></ul></ul><ul><ul><li>Can be traded at discount or premiums. </li></ul></ul><ul><ul><li>Offer an important advantage over funds with regard to flexibility on taxes </li></ul></ul><ul><li>Mutual Funds </li></ul><ul><ul><li>Bought and sold at the end of the trading day when the NAV is calculated </li></ul></ul><ul><ul><li>Most are actively managed </li></ul></ul><ul><ul><li>Trade at NAV </li></ul></ul><ul><ul><li>Mutual fund mangers may have to sell shares to pay those who want to leave the fund, thereby generating capital gains </li></ul></ul>Differences between ETFs and Mutual Funds
  22. 22. <ul><li>Segregated funds </li></ul><ul><ul><li>Provide death benefits </li></ul></ul><ul><ul><li>Must guarantee a minimum percentage (75% is required, 100% is usually offered) of investor’s payments will be returned at fund maturity (or at death of owner) </li></ul></ul><ul><ul><li>Structured to prevent fund assets from being seized by creditors if investor declares bankruptcy </li></ul></ul><ul><ul><li>Upon owner’s death, assets may be transferred to beneficiaries without being subject to probate fees </li></ul></ul>Other Funds
  23. 23. <ul><li>Labour Sponsored Venture Capital Corporations (LSVCCs) </li></ul><ul><ul><li>No 10% maximum ownership restriction </li></ul></ul><ul><ul><li>Restrictions on transferability and redemption </li></ul></ul><ul><ul><li>Valuation may not be based exclusively on market prices </li></ul></ul><ul><ul><li>Tax advantages – federal & provincial tax credits offered </li></ul></ul>Other Funds
  24. 24. <ul><li>Reported on a regular basis (usually daily) in the popular press </li></ul><ul><li>Measured over a given time period as a percentage of initial investment </li></ul><ul><ul><li>Total returns include reinvested dividends and capital gains </li></ul></ul><ul><ul><li>Average annual return reflects the mean compound growth rate of investment over a given time period </li></ul></ul>Performance
  25. 25. <ul><li>Investors relate the performance to some benchmark to judge relative performance </li></ul><ul><li>An important issue is expenses: funds with low MERs provide better returns in the long run </li></ul><ul><li>Mutual fund ratings: best known rating system is provided by Morningstar </li></ul>Performance
  26. 26. <ul><li>Some mutual funds specialize in international securities </li></ul><ul><ul><li>Canadian investors can participate in emerging market economies </li></ul></ul><ul><ul><li>International diversification </li></ul></ul><ul><ul><li>International funds or global funds emphasize international stocks </li></ul></ul><ul><ul><li>Single-country funds concentrate assets </li></ul></ul><ul><ul><ul><li>Actively or passively managed </li></ul></ul></ul>International Funds
  27. 27. <ul><li>Mutual fund “supermarkets” </li></ul><ul><ul><li>Various mutual fund families can be purchased through a single source </li></ul></ul><ul><ul><li>Brokerage account may provide access </li></ul></ul><ul><ul><li>“ Supermarket” managers earn fee </li></ul></ul><ul><li>On-line investment services </li></ul><ul><ul><li>Internet used to provide mutual fund information and to make transactions </li></ul></ul>New Directions in Funds

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