Chapter 20

What do 12b-1 fees pay, and what is the maximum amount these fees can be?

12b-1 fees pay the mutual fund for marketing and advertising. They are limited to 1% of the fund's average net assets per year.

How are deferred loads usually structured?

A deferred load is a fee charged when money is withdrawn from a fund. They are usually 5% and fall by 1% each year the investment is left in the acct.

What is a load fund?

A load fund charges a fee for accepting investments. The fees may be at the beginning of the investment or may be charged when the funds are withdrawn

Distinguish between an open and closed end mutual fund.

An open end mutual fund is continuously issuing new shares as new funds are received. A closed end fund only issues shares once.

What distinguishes a hedge fund from other types of mutual funds?

Hedge funds typically require very large investments, do not allow withdrawals, and charge very high fees.

How does an index fund differ from an actively managed fund?

Index funds are not actively managed. They simply hold the stocks in the index. They usually have significantly lower fees than actively managed funds.

Discuss why a mutual fund family may find it beneficial to offer 50 or 60 different stock mutual funds.

Investors have different objectives, goals, and tastes in securities. Mutual funds attempt to offer a selection of funds to attract as many dollars as possible. Each different fund will have some attribute that separates it from others in the family.

What is meant by liquidity intermediation?

Liquidity intermediation is allowing investors to redeem their shares at any time, despite long-term holdings

What features of mutual funds and the investment environment have led to mutual funds' rapid growth in the last two decades?

Liquidity intermediation, denomination intermediation, ease of diversification, cost advantages, and the growth of defined contribution pension plans.

Considering the discussion of market efficiency from Chapter 6, discuss whether you should be willing to pay high fees to mutual fund investment managers.

You may be willing to pay fees for a mutual fund to provide liquidity intermediation, denomination intermediation, and lower the cost of diversification, but believers in an efficient market will not pay substantial fees for managers to select specific stocks.