Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Mutual Funds and Other Investment Companies


Published on

  • Be the first to comment

Mutual Funds and Other Investment Companies

  1. 1. Mutual Funds and Other Investment Companies CHAPTER 4
  2. 2. Types of Investment Companies <ul><li>Unit Investment Trusts </li></ul><ul><li>Managed Investment Companies </li></ul><ul><ul><li>Open-End (Mutual Funds) </li></ul></ul><ul><ul><li>Closed-End </li></ul></ul><ul><li>Other investment organizations </li></ul><ul><ul><li>REITs </li></ul></ul><ul><ul><li>Hedge Funds </li></ul></ul>
  3. 3. Services of Investment Companies <ul><li>Administration & record keeping </li></ul><ul><li>__________________________ </li></ul><ul><li>Professional management </li></ul><ul><li>Divisibility </li></ul><ul><li>Low transaction costs </li></ul>
  4. 4. Net Asset Value <ul><li>NAV is 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 equals: </li></ul><ul><li>Mkt Val of Assets - Liabilities </li></ul><ul><li> Shares Outstanding </li></ul>
  5. 5. Investment Companies <ul><li>Investment companies are exempt from _________________________________. </li></ul><ul><li>Investors pay income tax on income from investment companies. </li></ul><ul><li>Funds with high turnover result in high taxes (low tax efficiency). </li></ul><ul><li>Purchasing a mutual fund late in the year can result in taxes on earnings you did not receive. </li></ul>
  6. 6. Unit Investment Trusts <ul><li>A unit investment trust invests in a fixed pool of securities for a predetermined period of time. At the end of that time, assets are sold and investors receive NAV. </li></ul>
  7. 7. Open-End and Closed-End Funds: Key Differences <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: Price set in stock market, at premium or discount to NAV </li></ul>
  8. 8. Types of Investment Organizations <ul><li>REIT: ______________________________ </li></ul><ul><li>Equity REIT: invests in real estate </li></ul><ul><li>Mortgage REIT: invests in mortgages </li></ul>
  9. 9. Types of Investment Organizations <ul><li>Hedge Funds: little regulation </li></ul><ul><li>Limited to high net worth investors: </li></ul><ul><li>Net worth > $5 mil </li></ul><ul><li>Income > $200K </li></ul><ul><li>Annual fees are typically ______ of assets plus _______ of profit </li></ul>
  10. 10. Mutual Fund Types <ul><li>Mutual Funds can be classified by the assets held: </li></ul><ul><ul><li>Money Market </li></ul></ul><ul><ul><li>Fixed Income </li></ul></ul><ul><ul><li>Equity </li></ul></ul><ul><ul><li>Balance & Income </li></ul></ul><ul><ul><li>Index </li></ul></ul><ul><ul><li>Specialized Sector </li></ul></ul>
  11. 11. Investment Policies <ul><li>Index funds (including most Exchange Traded Funds, or ETFs) are not actively managed; they simply match an index </li></ul><ul><li>Actively managed funds attempt to increase returns by market timing (asset allocation funds) and/or security selection </li></ul>
  12. 12. Exchange Traded Funds <ul><li>ETFs are closed-end funds </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 fees </li></ul></ul><ul><li>Potential disadvantages </li></ul><ul><ul><li>Must pay brokerage commission </li></ul></ul><ul><ul><li>Price can differ from NAV </li></ul></ul>
  13. 13. Mutual Fund Types <ul><li>Equity fund by investment objective </li></ul><ul><ul><li>Aggressive growth </li></ul></ul><ul><ul><li>Growth </li></ul></ul><ul><ul><li>Growth & income </li></ul></ul><ul><ul><li>Equity income </li></ul></ul>
  14. 14. Table 4.1 Classification of U.S. Mutual Funds
  15. 15. How Funds Are Sold <ul><li>Directly marketed </li></ul><ul><li>Sales force distributed </li></ul><ul><li>Revenue sharing on sales force distributed funds </li></ul><ul><ul><li>Potential conflicts of interest </li></ul></ul><ul><li>Financial supermarkets (Schwab’s OneSource) </li></ul>
  16. 16. Potential Conflicts of Interest - Revenue Sharing <ul><li>Brokers put investors in funds that may not be the most appropriate </li></ul><ul><li>Mutual funds could direct trading to higher cost brokers </li></ul><ul><li>Revenue sharing is not illegal but should be disclosed to the investor </li></ul>
  17. 17. Costs of Investing in Mutual Funds <ul><li>Fee Structure </li></ul><ul><ul><li>Front-end load (up to 8.5%) </li></ul></ul><ul><ul><li>Back-end load (up to 6%) </li></ul></ul><ul><li>Operating expenses </li></ul><ul><li>12 b-1 charges (up to 1% of assets annually) </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>
  18. 18. Table 4.2 Impacts of Costs on Investment Performance
  19. 19. First Look at Mutual Fund Performance <ul><li>Evidence shows that average mutual fund performance is generally less than broad market performance </li></ul><ul><li>Evidence suggests that over certain horizons some persistence in positive performance </li></ul><ul><ul><li>Evidence is not conclusive </li></ul></ul><ul><ul><li>Some inconsistencies </li></ul></ul>
  20. 20. Figure 4.3 Percentage of Funds Below Wilshire 5000
  21. 21. Table 4.4 Consistency of Investment Results
  22. 22. Sources of Information on Mutual Funds <ul><li>Morningstar ( </li></ul><ul><li>Value Line Mutual Fund Survey </li></ul><ul><li>Wiesenberger’s Investment Companies </li></ul><ul><li>Yahoo ( </li></ul><ul><li>Investment Company Institute </li></ul><ul><li>Popular press (Business Week, Barron’s) </li></ul>
  23. 23. How to Pick a Mutual Fund <ul><li>In comparing mutual funds, look for: </li></ul><ul><ul><li>Matches your investment ________________ and _______________ tolerance </li></ul></ul><ul><ul><li>Good _____________________________ for several years </li></ul></ul><ul><ul><li>Same portfolio manager </li></ul></ul><ul><ul><li>No ______________ </li></ul></ul><ul><ul><li>Low ______________ (including 12b-1) </li></ul></ul><ul><ul><li>Tax efficiency (unless IRA or 401k) </li></ul></ul>