TMC Business



CHAPTER 8 Investment Products and Markets: Mutual fund (investment company)Corporation that uses it’s capital to purchase investment vehicles instead of plant and equipment.Suitability (who are they best for?)Best return ; minimizing risksLimited amount of moneyHow do you make money?Dividends or interest from within portfolioCapital gains from within the portfolioCapital gains from the shares of the portfolioMUTUAL FUND BASICSWhat is the difference between an open-end and a closed-end mutual fund?Open ClosedUnlimited shares Limited sharesAlways primary market trade on an exchangeReflects the value of the portfolio supply and demand also impact valueWhat are the three primary advantages of a mutual fund?DiversificationProfessional money mgtliquidityTYPES OF MUTUAL FUNDS (objectives)Aggressive Growth GrowthInternational/GlobalInternational should only have investments outside the USGlobal could include US investmentsGrowth and IncomeFixed IncomeBalanced/Equity IncomeSpecialty/Sector Asset AllocationMoney MarketIndexLoads CommissionsFront-end - pay up frontRedemption – pay to redeemContingent deferred sales charges – pay a decreasing commission if sell within a certain period of time (CDSC)FEES AND EXPENSESManagement Fees and Operating Expenses12b-1 FeesTrustee FeesExpense RatioRatio of expenses to NAVHigher the ratio, better the manager must perform to generate a desired return.The more expensive it is to own the investmentHigher returns could offset higher expenses (or not)Mutual Fund Basics The PeopleInvestment AdvisorDay to day investment decisionsMoney managerCustodian / Transfer AgentBookkeeperSafekeeping securities and cashAnalysis of Mutual FundsThree basic areas1) first you select funds that match investment objectives.2) next rank funds by statistical performance measuresThis can be done manually or via softwareMorningstar has a filter that can assistThe premium filter allows ranking by different statistics3) non-statistical measuresReally not a ranking toolMost mutual funds either by law or necessity provide the same servicesThat is not to say that customer service quality is the same!!ProspectusREADING MUTUAL FUND PROSPECTUSINVESTMENT OBJECTIVES AND POLICIESRISK FACTORSINVESTMENT RESTRICTIONSPAST PERFORMANCEFUND INFORMATIONCOSTS AND FEESMISCELLANEOUS INFORMATIONA document provided by mutual fund that describes in some detail the characteristics of this mutual fund.The components are mandated by lawA mutual fund is always a primary market transaction; unlike stocksThis requires a prospectus be provided at or before the sale of any mutual fund.A prospectus has a life of 13 months56134041656000Classes of SharesWhat is meant by share class?No distinction between portfoliosMarketing of the loads and expensesClass A sharesFront load; lower fees; no redemption loadClass BCDSC condition al deferred sales chargeNo front load; only a redemption load if sold within a certain time frame; higher initial fees higher than “A” but then they are lowered after timeClass CNo load; usually higher feesThese fees never reduceMisc other classesInstitutional shares have a variety of combinations of fees and loads342899205105How to choose between Class A and BClass A shares have a front loadthey also have a declining load schedule as investment increasesClass B shares are CDSC; but have higher initial expensesAs holding period increases, potential redemption load decreasesEventually become Class AIf have large sum or will be investing over time, Class A may be more expensiveIf do not have a large sum to invest, the choice is really about when to pay the load. (up front or over time)Not a clear choice all the time. Regulation has dictated how and when some classes can be marketed.00How to choose between Class A and BClass A shares have a front loadthey also have a declining load schedule as investment increasesClass B shares are CDSC; but have higher initial expensesAs holding period increases, potential redemption load decreasesEventually become Class AIf have large sum or will be investing over time, Class A may be more expensiveIf do not have a large sum to invest, the choice is really about when to pay the load. (up front or over time)Not a clear choice all the time. Regulation has dictated how and when some classes can be marketed.1123950-165735005721351466850068262518478500Mutual Funds Restrictionsa list of restricted investment vehicles and strategies will be listed in the prospectus.Potential listNo margin or short salesNo underwriting except their own sharesNo investment in commoditiesNo private placementNo controlling interestNo more 5% value of total assetsNo more 10% voting stockNo borrowing except for emergencies and only from a bank.Diversified Investment Companies The 5% and 10% rule actual applies to 75% of the mutual funds cashThe remaining 25% of cash can be invested in any security or company.768355397500PricesNAV (Net Asset Value)Equivalent of share priceRepresents the current value of one share of the investment portfolioPOP (public offering price)Incorporates the loadNAV = $12 with a 5.75% loadWhat is the POP of a mutual fund with a NAV of 37.25, and a 4.5% front load?Who gets the extra 1.755?Break Point Qualification6159507556500How can you “beat” break points?Large Sum purchaseLetter of intent Can back date 90 days Have 13 months to break the point Not a contractual arrangementAccumulated fundsRedemption of sharesHow do you “sell” the sharesIn the stock market shares are sold back through the brokerage. They are purchased by another investor.With mutual funds the process is different. The mutual fund company by law must “redeem” the shares within 7 days of a request. It is the mutual fund that buys the shares from the old shareholder.Remember these shares are retired and never sold to another investor.ServicesReinvestment PrivilegeCurrent income and capital gains are automatically reinvested (buy more shares)No load chargedYou must request distribution in cash if you want it.Conversion PrivilegeCan move share between same fund family funds at no load.Taxable though unless in a retirement accountSystematic Withdrawals (investments)Can request to have funds automatically deposited to or withdrawn from an account MUTUAL FUND RATING SERVICESMORNINGSTARIndustry’s best resource for comprehensive, unbiased and accurate mutual fund informationLIPPERLeading global mutual fund information company analyzing fund companies and financial intermediariesSTANDARD & POOR’SLeading global provider for mutual fund information and analysisTHOMAS FINANCIALGlobal provider of data, analysis, and information tools TRADITIONAL INDEX FUNDSIndex funds hold shares in all the companies that make up an index like S&P 500NOT true. They rarely hold the shares of all. They attempt to create a “clone”ADVANTAGESFewer Capital GainsKeeping Pace with Selected IndexPainless StrategyLower Cost PITFALLS OF INDEX FUNDSDownside RiskSkewed Weighting SystemsDo they actually copy the index?Divergence Between Index FundsHow can different index funds have different returns?Narrow FocusLose the Value Added by Money ManagersIncreased Volatility ................
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