Documente Academic
Documente Profesional
Documente Cultură
Spring 2002
Chapter 4: Mutual Funds and Other Investment Companies
Investment Companies
Unit Investment Trusts Managed Investment Companies
Open-end funds (Mutual Funds) Closed-end funds
Real Estate Investment Trusts (REITs) Exchange-Traded Funds (ETFs) Commingled Funds Hedge Funds
Equity UIT
Mutual Funds
Open-end funds
Invest by sending money directly to the fund New units are created as new money flows in Units retired as money flows out Go in and out at Net Asset Value (NAV)
Many Others
Growth
Firms with good revenue & earnings potential
Value
Profitable, Dividend-paying stocks Stocks with low P/E ratios
Balanced Funds
Invests in both equities and fixed income securities Proportion of stocks and bonds fairly stable over time Designed to be an investors entire portfolio Example: ARK Balanced Fund
Index Funds
Passive Management Goal is to match the performance of a benchmark index Low expenses Most Popular Benchmark: S&P 500 Index Example: Vanguard Index Funds
Specialized Funds
Focus on a particular sector or industry
Real Estate Technology Health Care Utilities Financial Services
Closed-end Funds
Do not create or redeem shares After initial offering, shares trade on secondary market To invest, buy shares on the exchange May trade above or below NAV
Above: Premium Below: Discount
Equity REITS
Buy investment property
Mortgage Trusts
Buy mortgage loans
Exchange-traded Funds
Like closed-end funds, they trade on an exchange Like index funds, they tend to be passively managed A variety of legal forms:
Unit Investment Trusts (SPDRs, HOLDRs) Open-end Mutual funds (iShares) Traditional mutual fund share class (Vipers)
Commingled Funds
Partnerships of investors that pool their funds Similar to open-end mutual fund Typically, small institutional investors
Most commonly pension plans Larger than typical individual investor Too small to warrant individual management
Hedge Funds
Limited partnership of investors
Accredited investors (high net worth) Restricted to 499 partners Cannot advertise Less regulated than mutual funds
Manager has freedom to follow a wider variety of investment strategies fewer reporting requirements
Front-end Load
This is a sales charge, or commission charged to enter a fund Paid as a percentage of investment Can be as large as 8.5% Rarely higher than 6.25% Often much lower, down to zero No Load Fund means no front-end load
Back-end Load
Also called:
Redemption Fee Contingent Deferred Sales Charge
This is a fee charged when you exit the fund Charged in percentage terms Some funds have no back-end load If they do, it often drops off gradually to zero the longer you hold the fund Discourages investors with short horizons
12b-1 charges
Managers can use up to 1% of the funds assets each year to pay for...
Advertising Annual reports and prospectuses Commissions paid to brokers
Because these fees come straight from the funds assets, they are hidden costs to the investor
Operating Expenses
Administrative Expenses Advisory fees paid to manager Should be less than 2% per year Again, this comes out of the funds assets. (You dont see them explicitly, but pay for them in the form of lower returns) Measured by expense ratio
Brokerage Commissions
If your broker does not have an arrangement with the mutual fund management company, they will charge you a commission to invest for you. But, you do not need to go through a broker at all. You can buy (and redeem) shares directly from the mutual fund.