Exam I Money and the Financial Systems: Ch4
Foreign Funds
Global funds have foreign stock plus US stock, while international funds have only foreign stock.
various mutual funds: money market, balanced, sector, and growth
Money Market Funds: Growth Funds: Growth With Income Funds Balanced Fund Index funds Bond funds Sector Funds Foreign Funds Specialty funds Target Retirement funds or lifetime funds
closed-end versus open-end investment funds
Open-end fund more important. Open and closed refers to the manner in which shares are distributed and redeemed. Closed end fund has fixed number of shares, and purchasers and sellers of shares must trade with eachother. You can not buy the shares directly from the fund because of the limitation on shares outstanding. The fund does not stand ready to buy the shares back from you. open end fund is the oposite. open end stands ready at all times to sell you new shares or buy back your old shares. Closed end shares trade on security exchanges or over the counter just as any other stock might but they are listed under a separate heading.Transaction with open ended funds are made a t net asset value. 95% of investment funds in the US are open ended.
Sector Funds
invest in specific sectors of the economy. areas such as energy, medical technology, computer technology, leisure, and defense. positively correlated, offers investors less diversification potential.diversification across sector but not in the market.
characteristics of mutual funds
-Great way to invest in broad-based, diversified, portfolio of assets. -Defined Contribution Plans increasing the need for workers to understand how and where to invest retirement funds. -43% of all households have mutual funds -Pool of money invested in the common stock of large, stable companies with the objective of capital appreciation and moderate divident income -funds not so invested are to be placed in short term T-Bills to earn interest. -Ownership Interest Represented by shares, professional management, stated investment objectives, and a diversified portfolio of assets.
calculation of net asset value
=(total Market value of securities-liabilities)/shares outstanding
advantages and disadvantages of mutual funds
Diversification: Variety of industries so that the economy does not affect all the companies equally. Highest correlation is +1.00 which would mean the return of two assets would go up and go down together +100% of the time. If the correlation in -1.00 the returns on two assets would do the opposite. If one went up 10% the other would go down 10%.Easy to find assets with a correlation of less than +1.00 that helps to diversify a a portfolio and reduce risk.portfolio should contain at least 20 stocks.100 shares called a round lot. Professional Management. select a manager with great care. dont be swayed by last years results. use no load commission funds. Time saving, law of competitive advantage is true. Performance, do not outperform the market. efficient means for diversified portfolio. potential returns to the investor are emphasized without detailing risk often, so pay attention. expenses: sales commission, management fees, and other costs. Selection problem: investor has as much of a problem in selecting a mutual fund as a stock.closed vs open load vs no load.
Bond funds
Income Oriented investors, represents contractual obligation on the part of the issuer to the bondholder, normally offer a certain return. returns from bonds historically lower than those from stocks. Corporate, government, and municipal.Some corporate bonds funds are particularly targeted at low rated high yielding bond funds called junk bonds or high yield bond funds.municipal bond funds buy tax exempt securities., Interest income to shareholders free of federal tax.
Money Market Funds
Invest in short term securities, US treasury bills, euro dollar deposits, commercial paper, jumbo bank certificates of deposit, and repurchase agreements. Usually no load. Yields closely match short term market interest rates.
reliable sources of information about mutual funds: Forbes magazine, Lipper Investment Services, and Morningstar
Lipper Mutual Fund performance indexes are perhaps the most widely known measure of a mutual funds performance. Data are published weekly monthly quarterly and annually.
Target Retirement funds or lifetime funds
mutual funds that automatically adjust the risk profile of the fund as the investor gets older. an investor can take on more risk when he is young than when he is older.shifts focus from heavy emphasis on common stock to heavy emphasis on fixed income securities.
Index funds
mutual funds that replicate the market, open ended unlike ETF's. reduce transaction costsand attempt to outperform the market. 39% of all inexed mutual fund assets were invested in the S&P 500.
Growth Funds
pursuit of capital appreciation.invest primarily in common stocks. agressive vs stable and predictable.Aggressive funds concentrate on speculative issues.emerging small companies, and "hot" sectors frequently use financial leverage to magnifyreturns. Regular generally invest in common stocks of more stable funds, longterm.
strategy of dollar-cost averaging
Liquidity and convenience inherent in mutual funds lend themselves best to financial planning activities. The most important of these is the gradual accumulation of capital assets. regual, lump sum fund share purchases on an "out of sight out of mind" basis. investors concede they can not outsmart the market. avoid the common practice of buying high and selling low. The investor buys a fixed dollars worth of a given security at regular intervals regardless of the securitys price or the current market outlook.The only time investors lose money is if the eventual price falls below the average cost.
Balanced Funds
combine investments in common stock and bonds and often preferred stock. They try to provideincome plus some capital appreciation. convertable securities in funds usually signals balanced funds.
responsibility of fund owner for the payment of taxes on net gains and losses incurred by the mutual fund
Selling of securities by a mutual fund manager results in capital losses/gains. After netting losses against gains, mutual funds distribute net capital gains to shareholders annually. Fund that distributes at least 90% of its net investment income and capital gains is not subject, as an entity, to federal income tax. Its simply acting as a "conduit" At the end of every calendar year each fund sharholder receives a Form 1099 DIV which notifies the shareholder of the amount and tax status of his or her distributions. When the investor actually sells the shares (redeems) shares in a mutual fund, the investor must consider the cost basis, the selling price, and any gain or loss and appropriately report the tax consequence on his or her tax form. When you manage your own portfolio, you control when you pay capital gains tax. Can wait untill the gain is long term and taxed at a lower rate.The initial purchase of a common stock sets the cost basis.
differences between a load and no-load fund
A load mutual fund charges you for the shares/units purchased plus an initial sales fee. This charge is typically anywhere from 4% to 8% of the amount you are investing or it can be a flat fee depending on the mutual fund provider. This is added to your purchase as a sales fee. For example, if you invested $1,000 into a 5% load mutual fund, you would actually be investing only $950 with the remaining $50 going to the company as a commission. There are a couple different types of load funds out there. Back-end loads mean the fee is charged when you redeem the mutual fund. A front-end load is the opposite of a back-end load and means the fee is charged up front. A no-load fund simply means that you can buy and redeem the mutual fund units/shares at any time without a commission or sales charge.
definition and uses of an index fund
An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.
definition and calculation of net asset value
Application example. equal to the current value of the securities owned by the fund minus any liabilities divided by the number of shares outstanding. NAV is computed at the end of each day for a fund. Many closed end funds trade at a discount below NAV because they have a poor record of performance, heavily invested in an unpopular industry, or are thinly traded (illiquid).
yields on money market funds closely related to short-term interest rates
Money market mutual funds offer a convenient parking place for cash reserves when an investor is not quite ready to make an investment or is anticipating a near-term cash outlay for a non-investment purpose. Money market mutual funds offer ultimate safety and liquidity. This means that investors will have an expected sum of cash at the very moment that they need it. To benefit their clients, brokerage firms regularly use money market mutual funds to provide cash management services. Putting a client's dormant cash into money market mutual funds will earn the client an extra percentage point (or two) in annual returns above those earned by other possible investments.
Growth Funds with income
Pay steady dividends. Attractive to investors interested in capital growth potential with a base of dividend or interest income. Less risky and volatile.
definition and use of a load (front-end versus back-end)
Table 4-4 Load funds selling agreements with stockbrokers financial planners etc. there is a commission associated with the purchase of the funds shares. Low load ower percentage back load essentially and exit fee. No load funds do not charge commission sold directly by the investment company.Fee they charge to manage the assets makes them money, .75-1%. No statistical difference between performance of load and no load funds. Not as easy to know if it is a load or no load fund.
importance of the mutual fund prospectus
contains information deemed essential by the SEC in providing "Full disclosure" to potential investors regarding the funds investment objectives and policies, risks, management and expenses. How shares can be purchased and redeemed, sales a redemtion charges (if any). Other documents available upon request include the statement of additional information and the funds annual and quarterly reports. Investment Objectives and policies: found in beginning describes basic objectives. Portfolio or investment holdings: lists the securities held by the fund as of the date indicated. required to publish prospectus every 14 months. Management fees and expenses: management reimbursement and the funds housekeeping expenses annual fees expressed as a percentage of the average daily net assets during the year .5% money market to 2.5% for sector. Expense appear on one page in table format.SEC 12B-1 allow mutual funds to use fund assets for marketing expense, controversial. Turnover rate: audited data on turnover rate. per share income and capital changes, easy so investors can understand data is required.
Specialty Funds
dont fit into any other categories,
definition and advantages of exchange-traded funds (ETFs)
either a mutual fund or a unit investment trust. designed to imitate the performance of specific index, such as the standard and poors 500 index. SEC allows ETF's (as of 2008) to be actively managed exchange-traded funds. ETFS in commodities regualted by SEC Etfs in commodity futures monitored by the commodity futures trading commission.90% of ETF's are index funds.assets are marked to market continuously and you can trade them all day long almost exactly at the net asset value of the stocks in the index.Because ETF's immitate the an index, there are no real research costs and therefore the expense ratios are usually lower than for mutual funds.One extra expense for ETF is fee payed to the creator of the fund. Every ETF that uses a standard and poors index pay S&P a fee for managing the construction of the index.