Fundamentals of Investing - Chapter 12: Mutual funds and exchange-traded Funds

Actively managed fund

A fund that attempts to "beat the market" by selecting stocks or other securities that will earn abnormally high returns

Automatic Investment Plan

A mutual fund service that allows shareholders to automatically send fixed amounts of money from their paychecks or bank accounts into the fund.

Automatic Reinvestment Plan

A mutual fund service that enables shareholders to automatically buy additional shares in the fund through the reinvestment of dividends and capital gains income.

Socially Responsible Funds

A mutual fund that actively and directly incorporates ethics and morality into the investment decision.

Asset Allocation Funds

A mutual fund that spreads investors' money across stocks , bonds, money, market securities, and possibly other asset classes.

Balanced Funds

A mutual fund whose objective is to generate a balanced return of both current income and long-term capital appreciation

Growth Fund

A mutual fund whose primary goal is capital appreciation

Fire sale

A sale that occurs when a mutual fund experiences withdrawals by investors and must quickly sell illiquid securities to raise cash to meet withdrawal requests

Real Estate Investment Trust (REIT)

A type of closed-end investment company that sells shares to investors and invests the proceeds in various types of real estate and real estate mortgages.They come in 3 types: equity REIT's, mortgage REITs, and hybrid REITS

Fund Families

Different kinds of mutual funds offered by a single investment management company.

Discuss the types of funds avaialvle and the variety of investment objectives these funds seek to fulfill

Each fund has an established investment objective that determines its investment policy and indentifies it as a certain type of fund. Some popular types of funds are growth, aggressive-growth, value, equity-income, balanced, growth-and-income, asset allocation, index, bond, money, sector, socially responsible, and international funds. The different categories of funds have different risk-return characteristics.

Conversion (exchange) privileges

Feature of a mutual fund that allows shareholders to move money from one fund to another, within the same family of funds.

Pooled diversification

Investors buy into a diversified portfolio of securities for the collective benefit of individual investors

Describe the investor uses of mutual funds along with the variables to consider when assessing and slecting funds for investment purposes

Investors can use mutual funds to accumualte wealth, as a storehouse of value, or as a vehicle for specualtion and short-term trading. Fund selection generally starts by assessing the investors needs and wants. The next step is to consider what the funds have to offer with regard to investment objectives, risk exposure, and investor services. The investor then narrows the alternatives by aligning his or her needs with the types of funds available, and from this short list of funds, applies the final selection tests: fund performance and cost

Hedge Funds

Lightly regulated investment funds that have fewer restrictions than mutual funds pertaining to investment choices.

Discuss the investor services offered by mutual funds and how these services can fit into an investment program

Mutual dfunds also offer special services, such as automatic investment and reinvestment plans, systematic withdrawal programs, low-cost conversion and phone-switching priviledges, and retirement programs

Describe the basic features of mutual funds and note what they have to offer as investments

Mutual fund shares represent ownership in diversified, professionally managed portfolio of securities. Many investors who lack the time, know-how, or commitment to manage their own money turn to mutual funds. Mutual funds shareholders benefit from a level of diversification and investment performance they might otherwise find difficult to achieve. They also can invest with a limited amount of capital and can obtain investor services not available elsewhere.

Distinguish between open-and closed-end funds, ETF's, and other types of professionally managed investment companies, and discuss the various types of fund loads, fees, and charges

Open-end funds have no limit on the number of shares they may issue. Close-end funds have a fixed number of shares they may issue. Closed-end funds have a fixed number of shares outstanding and trade in the secondary markets like shares of common stock. Exchange-traded funds (ETFs) possess characteristics of both open-end and closed-end funds. Other types of investment companies are unit investment trusts, hedge funds (private, unregulated investment vehicles available to institurtional and high-net worth individuals), REITs (which invest in various types of real estate), and variable annuities. Mutual fund investors face an arrary of loads, fees, and charges, including fron-end loads, back-end loads, annual 12(b)-1 charges , and annual management fees. Some of these costs are one-time charges (e.g. front-end loads). Others are paid annually (e.g. 12(b)-1 and management fees). Investors should understand fund costs, which can drag down fund performance and returns.

Identify the sources of return and compute the rate of return earned on a mutual fund investment

The payoff from investing in a mutual fund includes dividend income, distribution of realized capital gains, growth in capital (unrealized capital gains), and for closed-end funds - the change in premium or discount. Various measures of return recognize these elements and provide simple yet efefctive ways of gauging the annual rate of return from a mutual fund. Risk is also important to mutual fund investors. A funds extensive diversification may protect investors from business and financial risks, but considerable market risk still remains becuase most funds tend to perform much like the market, or liek that segment of the market in which they specialize.

Net Asset Value (NAV)

The underlying value of a share of stock in a particular mutual fund

Unrealized capital Gain

a capital gain made only on paper that is not realized until the funds holdings are sold

Expense Ratio

a charge, expressed as a percentage of assets managed by the fund, that fund investors pay each year

Back-end load

a commission charged on the sale of shares in a mutual fund

Mutual Fund

a company that raises money from sale of its shares and invests in and professionally manages a diversified portfolio of sercurities

Systematic withdrawal plan

a mutual fund service that enables shareholders to automatically receive a predetermined amount of money every month or quarter

Index Funds

a mutual fund that buys and holds a portfolio of stock (or bonds) equivalent to those in a specific market index

Low-load funds

a mutual fund that charges a small commission when shares are bought

International Funds

a mutual fund that does all or most of its investing in foreign securities

No-load fund

a mutual fund that does not charge a commission when shares are bought

Equity-income funds

a mutual fund that emphasizes current income and capital preservation and invests primarily in high-yielding common stock.

Target Date Funds

a mutual fund that follows an asset allocation plan tied to a specific target date, usually decreasing the asset allocation to equities and increasing the allocation to bonds as the target date approaches

Value Fund

a mutual fund that invests in stock that are deemed to be undervalued in the market; value stocks often exhibit low P/E multiples, high dividend yields and promising futures

Bond Funds

a mutual fund that invests in various kinds and grades of bonds, with interest income as the primary objective

Open-end funds

a mutual fund that issues new shares to investors each time that they send money to the fund. There is no limit to the number of new shares that can be issued and hence, no limit to the amount of money that people can invest in the fund.

Sector Fund

a mutual fund that restricts its investments to a particular segment of the market

Growth-and-income funds

a mutual fund that seeks both long-term growth and current income, with primary emphasis on capital gaints

Closed-end funds

a mutual fund with a fixed number of shares that are issued by an investment company when the fund is first organized

Redemption Fee

charge that investors pay if they sell shares in the fund only a short time after buying them

Aggressive-growth Funds

highly speculative mutual fund that seek large profits from capital gains

Dividend Income

income derived from the dividends and interest earned on the security holdings of a mutual fund

Load fund

mutual fund that charges a commission when shares are bought; aka front-end load fund

Money Market mutual funds (money funds)

mutual funds that invest solely in short-term investments

Capital Gains Distributions

payments made to mutual fund shareholders that come from the profits that a fund makes from the sale of its securities

Passively Managed fund

relies on the natural returns of the underlying index and doesn't tinker with the established system