Chapter 12 : Mutual Funds and Exchange-Traded Funds

1. Definition

1.1. Mutual fund is an investment company that invest its shareholders money in a diversified portfolio of securities

2. Other Fees

2.1. Management fees-compensation paid to professional manager.(fee charged annually on average net asset)

2.2. Adminstrative costs-normal costs of doing business

3. Sources@Return from MF

3.1. Dividend income

3.2. Capital gains distributors

3.3. Change in price(unrealized capital gain)

4. Attractions

4.1. portfolio diversification(invest in numerous securities to reduce the risk)

4.2. professional management

4.3. ability to invest small amounts

4.4. Convenience (easy to sell and buy)

5. Select MF?

5.1. 1. Determine to use mutual fund in portfolio

5.2. 2. Compare mutual fund investment objective to investor objective

5.3. 3. Compare range of service offered

6. Fees

6.1. Load Fund (charge commission when share bought)

6.2. No load fund (does not charge commission when share bought)

6.3. Low-load Fund (charge small commission when share bought)

6.4. Back-end-load (charge on sale of share)

6.5. 12(b)-1 fee (fee charge to cover management and other costs)

7. Factors In Comparing MF

7.1. Investment performance

7.2. Tax efficiency

7.3. Fee structure

7.4. How particular fund fits into your portfolio

7.5. Investment skills of fund managers

7.6. Load or No load funds

7.7. Closed-End or Open-End funds

8. Types of MF - 13

8.1. 1. Growth Fund

8.2. 2. Aggressive Growth Fund

8.3. 3. Value Fund

8.4. 4. Equity-income Fund

8.5. 5. Balanced Fund

8.6. 6. Growth-and-Income Fund

8.7. 7. Bond Fund

8.8. 8. Money Market Fund

8.9. 9. Index Fund

8.10. 10. Sector Fund

8.11. 11. Socially Responsible Fund

8.12. 12. Asset Allocation Fund

8.13. 13. International Fund

9. Calculate the return

9.1. Holding period return = (Number of Share at end of period x ending price) - (Number of share at beginning x initial price) / (Number of share at beginning of period x initial price)

10. Drawbacks

10.1. Substantial Transaction costs. Exp : management fee and commission fee on load funds

10.2. Lower-than-Market Performance. (difficult to consistently beating the market)

11. MF Investor Services

11.1. Automatic Investment Plans

11.2. Automatic Reinvestment of Interest, Dividends and Capital Gain.

11.3. Systematic Withdrawal Plans

11.4. Conversion (Exchange Privileges)

11.5. Phone Swithching

11.6. Easy Establishment of Retirement Plans

12. How MF are organized

12.1. 1. management company run the fund daily operations

12.2. 2. Investment advisor buys and sells stock/bonds and oversee investment portfolio

12.3. 3. Distributor sell the fund shares direct to public or through broker

12.4. 4. Safeguard the securities

12.5. 5. Keep track of purchase and redemption requests from shareholders

13. Investor uses of MF

13.1. Accumulation of Wealth

13.2. Storehouse of Value

13.3. Speculation and Short-Term Trading

14. The management company(6)

14.1. 1. Open-End Investment Companies

14.2. 2. Closed-End Investment Companies

14.3. 3. Exchange-Traded Funds

14.4. 4. Unit Investment Trusts

14.5. 5. Real Estate Investment Trust

14.6. 6. Hedge Funds