Chapter 12 Mutual Funds and Exchange-Traded Funds

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Chapter 12 Mutual Funds and Exchange-Traded Funds by Mind Map: Chapter 12 Mutual Funds and Exchange-Traded Funds

1. Investor Uses of Mutual Funds

1.1. Accumulation of Wealth

1.2. Storehouse of Value

1.3. Speculation and Short-Term Trading

2. Other fees and costs

2.1. Management fee: compensation paid to professional managers who administer the fund’s investment portfolio

2.2. Administrative costs: the normal costs of doing business, such as trading expenses

2.3. Taxes on mutual funds

3. Types of Mutual Funds (13)

3.1. 1. Growth Fund

3.1.1. Primary goals are capital gains and long-term growth

3.2. 2. Aggressive Growth Fund

3.2.1. highly speculative mutual fund that seeks large profits from capital gains

3.3. 3. Value Fund

3.3.1. seeks stocks that are undervalued in the market

3.4. 4. Equity-Income Fund

3.4.1. Emphasizes current income and capital preservation

3.5. 5. Balanced Fund

3.5.1. Generates a balanced return of both current income and long-term capital gains

3.6. 6. Growth-and-Income Fund

3.6.1. Seeks both long-term growth and current income, with primary emphasis on capital gains

3.7. 7. Bond Funds

3.7.1. Invests in various kinds and grades of bonds, with income as primary objective

3.8. 8. Money Market Funds

3.8.1. Invest in short-term securities and trade at a constant net asset value of $1 per share

3.8.2. Considered a safe, convenient investment

3.9. 9. Index Funds

3.9.1. : Buys and holds a portfolio of stocks (or bonds) equivalent to those in a specific market index

3.10. 10. Sector Funds

3.10.1. Investments are restricted to a particular segment of the market

3.11. 11.Socially Responsible Funds

3.11.1. Funds that actively and directly incorporate ethics and morality into the investment decision

3.12. 12. Asset Allocation Funds

3.12.1. : Funds that spread investors’ money across stocks, bonds, and money market securities

3.13. 13. International Funds

3.13.1. Funds that do all or most of their investing in foreign securities

4. Selecting Mutual Funds

4.1. Determine if you want to use mutual funds in portfolio

4.2. Mutual Fund Investor Services

4.2.1. Automatic Investment Plans

4.2.2. Automatic Reinvestment of Interest, Dividends, and Capital Gains

4.2.3. Systematic Withdrawal Plans

4.2.4. Conversion (Exchange) Privileges

4.2.5. Phone Switching

4.2.6. Easy Establishment of Retirement Plans

4.3. Compare mutual fund’s investment objective to investor’s objective

4.4. Compare range of services offered

5. Factors in Comparing Mutual Funds

5.1. Fund’s investment performance

5.2. Tax efficiency

5.3. Fee structure

5.4. How particular fund fits into your portfolio

5.5. Investment skills of fund managers

5.6. Load or No-Load funds

5.7. Closed-End or Open-End funds

6. Calculating Return: Holding Period Return

6.1. HPR=[(no. of shares at end of period*Ending price)-(no. of shares at beginning * Initial price) ] / (no.of shares at beginning of period * Initial price)

7. Definition

7.1. Mutual Fund: an investment company that invests its shareholders’ money in a diversified portfolio of securities

8. Attractions

8.1. Portfolio Diversification

8.2. Professional management

8.3. Ability to invest small amounts

8.4. Service

8.5. Convenience

9. Drawbacks

9.1. Substantial Transaction Costs

9.2. Lower-than-Market Performance

10. How Mutual Funds are Organized

10.1. Management company runs the funds’ daily operations

10.2. Investment advisor buys and sells stocks or bonds and oversees the investment portfolio

10.3. Distributor sells the fund shares direct to the public through brokers

10.4. Custodian physically safeguards the securities

10.5. Transfer agent keeps track of purchases and redemption requests from shareholders

11. The Management Company (6)

11.1. 1. Open-End Investment Companies

11.1.1. Investors buy and sell shares directly without a secondary market

11.1.2. Fund can issue an unlimited number of shares

11.1.3. NAV= Value of all securities÷total shares outstanding

11.2. 2. Closed-End Investment Companies

11.2.1. Sell shares in the fund only at the initial offering

11.2.2. Have a limited number of shares

11.2.3. Doesn’t have to worry about cash inflow or outflows

11.2.4. Market price of the fund’s shares is determined by supply and demand and may not equal net asset value

11.2.5. Generally sell at premium or discount to NAV

11.3. 3.Exchange-Traded Funds(ETF)

11.3.1. Similar to index mutual funds

11.3.2. Trade like individual stocks on stock exchanges

11.3.3. Can buy and sell ETFs any time of the day

11.3.4. Low management expenses

11.3.5. Low turnover

11.4. 4.Unit Investment trusts(UIT)

11.4.1. Fixed pool of securities, normally bonds

11.4.2. Not actively managed; securities in portfolio remain static

11.4.3. Have shares that represent a proportionate share of the trust

11.5. 5.Real Estate Investment Trusts(REIT)

11.5.1. Closed-end investment company that invests in mortgages and various types of real estate investments

11.5.2. Provide high dividends along with capital appreciation potential

11.6. 6.Hedge Funds

11.6.1. Private limited partnerships

11.6.2. Not regulated by mutual fund regulations

11.6.3. General partner runs fund and takes 10-20% of profits; limited partners are investors

11.6.4. Only sold to “accredited investors”

11.6.5. Use arbitrage strategies, options, short sales and other complex strategies

12. Fees

12.1. Load Fund: a mutual fund that charges a commission when shares are bought

12.2. No-load Fund: a mutual fund that does not charge a commission when shares are bought

12.3. Low-load Fund: a mutual fund that charges a small commission (2% to 3%) when shares are bought

12.4. Back-end load: a commission charged on the sale of shares in a mutual fund

12.5. 12(b)-1 fee: fee charged by some mutual funds to cover management and other operating costs; amounts to as much as 1% of the average net assets

13. Sources of Return from Mutual Funds

13.1. Dividend income

13.2. Capital gains distributions

13.3. Change in price/NAV