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. Definition

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

3. Attractions

3.1. Portfolio Diversification

3.2. Professional management

3.3. Ability to invest small amounts

3.4. Service

3.5. Convenience

4. Drawbacks

4.1. Substantial Transaction Costs

4.2. Lower-than-Market Performance

5. How Mutual Funds are Organized

5.1. Management company runs the funds’ daily operations

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

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

5.4. Custodian physically safeguards the securities

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

6. The Management Company (6)

6.1. 1. Open-End Investment Companies

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

6.1.2. Fund can issue an unlimited number of shares

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

6.2. 2. Closed-End Investment Companies

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

6.2.2. Have a limited number of shares

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

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

6.2.5. Generally sell at premium or discount to NAV

6.3. 3.Exchange-Traded Funds(ETF)

6.3.1. Similar to index mutual funds

6.3.2. Trade like individual stocks on stock exchanges

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

6.3.4. Low management expenses

6.3.5. Low turnover

6.4. 4.Unit Investment trusts(UIT)

6.4.1. Fixed pool of securities, normally bonds

6.4.2. Not actively managed; securities in portfolio remain static

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

6.5. 5.Real Estate Investment Trusts(REIT)

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

6.5.2. Provide high dividends along with capital appreciation potential

6.6. 6.Hedge Funds

6.6.1. Private limited partnerships

6.6.2. Not regulated by mutual fund regulations

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

6.6.4. Only sold to “accredited investors”

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

7. Fees

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

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

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

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

7.5. 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

8. Other fees and costs

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

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

8.3. Taxes on mutual funds

9. Types of Mutual Funds (13)

9.1. 1. Growth Fund

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

9.2. 2. Aggressive Growth Fund

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

9.3. 3. Value Fund

9.3.1. seeks stocks that are undervalued in the market

9.4. 4. Equity-Income Fund

9.4.1. Emphasizes current income and capital preservation

9.5. 5. Balanced Fund

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

9.6. 6. Growth-and-Income Fund

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

9.7. 7. Bond Funds

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

9.8. 8. Money Market Funds

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

9.8.2. Considered a safe, convenient investment

9.9. 9. Index Funds

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

9.10. 10. Sector Funds

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

9.11. 11.Socially Responsible Funds

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

9.12. 12. Asset Allocation Funds

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

9.13. 13. International Funds

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

10. Selecting Mutual Funds

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

10.2. Mutual Fund Investor Services

10.2.1. Automatic Investment Plans

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

10.2.3. Systematic Withdrawal Plans

10.2.4. Conversion (Exchange) Privileges

10.2.5. Phone Switching

10.2.6. Easy Establishment of Retirement Plans

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

10.4. Compare range of services offered

11. Factors in Comparing Mutual Funds

11.1. Fund’s investment performance

11.2. Tax efficiency

11.3. Fee structure

11.4. How particular fund fits into your portfolio

11.5. Investment skills of fund managers

11.6. Load or No-Load funds

11.7. Closed-End or Open-End funds

12. Sources of Return from Mutual Funds

12.1. Dividend income

12.2. Capital gains distributions

12.3. Change in price/NAV

13. Calculating Return: Holding Period Return

13.1. 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)