Personal Finance- Chapter 15- Investing through Mutual Funds

Profile prospectus (fund profile)

Publication that describes the mutual fund, its investment objectives, and how it tries to achieve its objective in lay terms rather than the legal language used in a regular prospectus

robo advisors

internet based companies that dispense low cost customized, computer generated financial advice. usually have portfolio of 8-12 funds, fees are .25-1%/year; some have access to advisors; usually put in long term investments and adjust for age and goals. Betterment is a big one

​Compute the net asset value for a share of a mutual fund with the following characteristics: ​ Market value of assets: $6,257,562,000 Market value of liabilities: $123,800,000 Number of shares outstanding: 134,430,000

it is NOT: $46.55

Most mutual funds are

managed funds

An extra benefit of a defined-contribution retirement plan is that most employers offer full or partial__ to employees accounts.

matching contributions

Mutual funds that invest in lesser-known companies with a market capitalization of $2-$10 billion that expected to grow rapidly are called__ funds.

mid-cap

Numerous job-related expenses can potentially be deducted from federal income taxes as__ expenses.

miscellaneous

__invest in highly liquid, relatively safe securities with very short maturities

money market funds

A group of mutual funds managed by the same investment company is called a

mutual fund family

A(n)__ is a closed-end investment company that makes a one-time public offering of only a specific, fixed number of units of investments in bonds.

unit investment trust

A(n)__buys and holds an unmanaged fixed portfolio of fixed-maturity securities such as municipal bonds.

unit investment trust

A(n)__is a closed-end investment company that makes a one-time public offering of only a specific, fixed number of units of investment in bonds.

unit investment trust

A federal tax reform proposal that would implement a national sales tax to replace all or a portion of the federal income tax is called the

value-added tax

A donation of old toys and clothes to the Salvation Army valued at $500 will save a single taxpayer in the 33 percent marginal tax bracket

$165 if he or she has other itemized deductions of at least $6.200

The Amalgamated Fund has assets with a market value of $25 million dollars, liabilities of $1 million dollars and 10 million shares outstanding. Its net asset value is

$2.40

​Compute the net asset value for a share of a mutual fund with the following characteristics: ​ Market value of assets: $177,000,000 Market value of liabilities: $12,000,000 Number of shares outstanding: 7,250,000

$26.07

The Fishers did very well on their investment choice. They earned $280 in dividend income from their stock investment this year. Later in the same year when they sold the stock, they realized a long-term capital gain of $2,984. How much of this dividend and capital gain income will they have to pay taxes on?

$3,264

​Compute the net asset value for a share of a mutual fund with the following characteristics: ​ Market value of assets: $6,257,562,000 Market value of liabilities: $123,800,000 Number of shares outstanding: 134,430,000

$46.55

Sylvia owns 100 shares of Maxima Growth mutual fund. IN December she received a check for $50, payment of ordinary income dividend distributions and capital gains distributions. Sylvia also noticed in her daily newspaper listings that Maxima Growth is now worth $2 per share more than what she purchased it for at the beginning of the year. How much will Sylvia's holdings in Maxima Growth add to her taxable income for the year assuming she decides not to sell the fund this year?

$50

Anne and Jose Romero are in the 28 percent marginal federal tax bracket. Two years ago they purchased 100 shares of ABC stock for $28 per share, paying commissions of $75. Last week they sold this stock for $35 per share and paid commissions of $50. How much is their taxable capital gain on this investment?

$575

Approximately__ percent of all households invest in mutual funds.

50

Dave Scott's total income is $52,000, but his taxable income is only $39,625. Therefore, his tax liability is $5, 763. Dave's average tax rate is approximately__ percent.

11.1

Depending on their level of income, low-and moderate-income taxpayers can claim a maximum nonrefundable__ retirement savings contribution credit.

$1,000

Taxpayers with taxable incomes up to__ can use the IRS tax tables

$100,000

Jeff is trying to decide whether to sell his baseball card collection. He has been offered a price that would give him a profit of $2,500 by a dealer who has agreed to pay Jeff this price now or in January of next year. This year Jeff is in the 28 percent marginal tax bracket, but next year Jeff expects to be in the 15 percent marginal tax bracket. Therefore, the estimated income tax liability on this $2,500 income would be__this year and__ next year.

$700; $375

Joe and Marcia, a married couple with three young children, have a gross income of $120,000, adjustments of $6,700, and itemized deductions totaling $16,900. If personal exemptions for the year are $3,700 each and the standard deduction is $11,600 for married couples, what is Joe and Maria's taxable income if they file jointly?

$77,900

Advantages of Investing in Mutual Funds

* Diversification * Convenience * Liquidity * Low Transaction Costs * Uncomplicated Investment Choices * Easy of Buying and Selling * Check Writing and Electronic Transfers * Automatic reinvestment of Dividend * Income and Capital Gains * Online support * Automatic Investment Programs (invest directly from your checking account monthly) * Easy way to setup retirement plans * Beneficiary Designation * Easy Withdraw options (if you want to receive monthly income).

Tax Consequences of Mutual Fund Investing

* have to pay taxes on dividend income, capital gain distributions, and realized gains on sales of MFs. 1. Regular Investment Account * owe taxes on dividend income * own taxes on funds capital gains in year receive or reinvest * owe taxes when sell shares and have capital gains * KEY: buy into funds after they record their dividend and capital gains distributions. Tax deferral strategy 2. Tax-Exempt Muni Bond Fund * interest "exempt" from federal income taxes 3. Retirement Accounts (401K or IRA) * taxes deferred until funds are withdrawn

Quick Numbers on Mutual Fund Investing

- 45% of people own MF; 90% own directly or thru 40-1K - 2/3 purchased first MF thru employer sponsored 401K - 3/4 of MFs owned by married, partners, and 50% are college graduates - Avg expense ratio=1.33%; 401K plan participants only pay .54% -9/10 $$ in MF are in no-load funds - 13% of MF in 401K have front/or back end loads - 7/10 MFs underperformed S&P 500 - 1/2 of millenials get investment advice online - 2/3 hold more than 1/2 of assets in MFs

A person who is claimed as a dependent on someone else's tax return can claim__ exemption(s) and at least a__ standard deduction on his or her own tax return.

0; $6,200

What are Growth Objective Funds

1. Aggressive Growth Funds (maximum capital gains funds) 2. Growth Funds 3. Growth and Income Funds 4. Value Funds - Large, Mid and Small Cap Funds - Microcap Funds - Sector Funds - Regional Funds - Precious Metal and Gold Funds - Global Funds - International Funds - Emerging Market Funds

Good Habits

1. Diversify by investing in mutual funds 2. Invest in funds that reinvest automatically 3. Invest in NO LOAD funds or ETFs 4. Use a free online fund-screening tool 5. Manage your fund portfolio for free online

Expense ratio, Turnover Rate and Basis Point

1. Expense Ratio: Expense per dollar of assets under management KEY: invest in funds with below average expense ratio and no distribution fees higher expense ratio = lower return lower expense ratio = higher return Bond Mutual Fund Avg=0.57% 2. Turnover Rate: measure of mutual fund's trading activity, and connected to expense ratio. 3. Basis Points: one hundredth of one percent. Applied to average management fees. Index equity fund=11 basis points, active managed equity fund=86 basis points.

What are Growth and Income Objective Funds

1. Growth and Income Funds 2.. Equity-Income Funds 3. Socially Responsible Funds 4. Balanced or Hybrid Funds 5. Asset Allocation Funds 6. Target-date Retirement Funds

What are Income Objective Mutual Funds

1. Money Market Funds 2. Tax Exempt Money Market Funds 3. Bond Funds (fixed income funds) - short term, intermediate or long-term corporate bond funds - short term, intermediate or long-term US govt bond funds - Mortgage backed funds - Junk bond funds - Municipal Bond Funds - Single-State Municipal Funds - World Bond funds

Types of Federally Recognized Investment Companies?

1. Open-End Mutual Funds 2. Closed-End Mutual Funds. 3. Real Estate Investment Trusts (REIT) 4. Unit Investment Trusts

There are approximately__ mutual fund families in the United States.

400

Front-end load

A sales charge paid when an individuals buys an investment, reducing the amount available to purchase fund shares; stated commission or % of amt. invested - Typically CLASS A Shares, these fees are not invested.

Back-end load (contingent deferred sales charge)

A sales commission that is imposed only when shares are sold; often charges are on a sliding scale, with the fee dropping 1 percentage point per year that the investor stays in the fund * these are typically Class B Shares, contingent fees upon sale or automatic conversion to Class C which as 12B-1 fee and redemption charge.

Exchange privilege

Allowance for mutual fund shareholders to easily swap shares on a dollar-for-dollar basis for shares in another mutual fund within a mutual fund family. Also called switching, conversion, or transfer privilege

Beneficiary designation

Allowance of fund holder to name one or more beneficiaries so that the proceeds bypass probate proceedings if the original shareholder dies

Limited management account

An account at an investment firm whereby, for a fee, they sell and buy your mutual fund assets, usually quarterly, on your behalf to automatically rebalance your portfolio back to your specific standards

12b-1 fees (distribution fees)

Annual fees that some "no-load" fund companies deduct from a fund's assets to compensate salespeople and pay other expenses - A "perpetual" sales load because assessed on initial investment as well as reinvested dividends, every year. - Class C Shares usually have these; they have higher expense ratios

Index mutual funds (or index funds)

Are those funds whose investment objective is to achieve the same return as a particular market index by buying and holding all or a representative selection of securities in it

Money market funds

Are those that invest in highly liquid, relatively safe securities with very short securities, always less than one yar

Withdrawal options (systematic withdrawal plans)

Arrangements with a mutual fund company for shareholders who want to receive income on a regular basis from their mutual fund investments

Target-date retirement funds (life-cycle funds)

Asset allocation funds that offer investors premixed portfolios of stocks, bonds, and cash that investors of a certain age and risk tolerance might prefer, and they are often named for the year one plans to retire

Trailing commission

Compensation paid to salespeople for months or years in the future

When interest rates rise, bond funds _ in value?

DROP. The return on the bond is less than interest rate you could earn in market. Ex: 7 year bond, interest increases 1% yearly, bond value drops 7%.

Capital gain distributions

Distributions representing the net gains (capital gains minus capital losses) that a fund realizes when it sells securities that were held in the fund's portfolio

Ordinary income dividend distributions

Distributions that occur when the fund pays out dividends from the stock and interest from the bonds it hold in its portfolio; these are passed onto the investor quarterly

"Spiders" are a type of

ETF

Tax-exempt money market funds

Funds that limit their investments to tax-exempt municipal securities with maturities of 60 days or less

Growth funds

Funds that seek long-term capital appreciation by investing in common stocks of companies with higher-than-average revenue and earnings growth, often the larger and well-established firms

Invest. only ___ money aggressively

FUN. Fun money is sum of investment ,money that you can afford to lose without doing serious damage to your total portfolio. Keep in separate account from long term investments. Don't keep investing to recover losses. Don't invest too much aggressively.

Bond funds (fixed-income funds)

Fixed-income funds that aim to earn current income higher than a money market fund without incurring undue risk by investing in a portfolio of bonds and other low-risk investments that pay high dividends and offer capital appreciation

Which of the following is not a deductible medical expense?

Funeral expenses

Low-load funds

Funds carrying sales charges of perhaps 1-3%; sold by brokers, via mail, and sometimes through mutual fund retailers located in shopping centers

Value funds

Funds specializing in stocks that are fundamentally sound whose prices appear to be low (low P/E ratios) based on the logic that such stocks are currently out of favor and undervalued by the market

No-load funds

Funds that allow investors to purchase shares directly at the net asset value (NAV) with NO SALES CHARGE. * These might be Class C Shares; they have higher expense ratios

Growth and income funds

Funds that invest in companies that have a high likelihood of both dividend income and price appreciation; less risk-oriented than aggressive growth funds or growth funds

Aggressive growth funds (maximum capital gains funds)

Funds that invest in speculative stocks with volatile price swings, seeking the greatest long-term capital appreciation possible. Also known as maximum capital gains funds and capital appreciation funds

Balanced funds

Funds that keep a set mix of stocks and bonds, often 60 percent stocks and 40 percent bonds, in order to earn a well-balanced return of income and long-term capital gains

Periodic, systematic investment in mutual funds is very much like__ when buying stocks.

ITS NOT: exchange trading

The price of mutual fund share excluding any transaction cost is its

ITS NOT: net income

Mutual fund dividend income

Income paid to investors out of profits earned by the mutual fund from its investments * Dividend Distributions (ordinary income) * Capital Gains Distribuitons (taxes on "net" gains; capital gains - capital losses).

Mutual fund

Investment company that pools funds by selling shares to investors and makes diversified investments to achieve financial 3 Objectives: income, growth, or both

Mutual fund family

Investment management company that offers a number of different funds to the investing public; each with its own investment objectives or philosophies of investing; 1300+ of these

Asset allocation funds

Investments in a mix of assets (usually stocks, bonds, and cash equivalents and sometimes international assets, gold and real estate); they buy and sell regularly to reduce risk while trying to outperform the market

Open-end mutual fund

Investments that issues redeemable shares that investors purchase directly from the fund (or through a broker for the fund) and can sell directly too; 90% of all funds

Automatic reinvestment

Investor's option to choose to automatically reinvest any interest dividends, and capital gains payments to purchase additional fund shares NOTE: 40% of returns on S&P 500 over past 80 years has come from automatic reinvesting of dividends, interest or capital gains payments.

__funds invest in high-yield, high-risk corporate bonds.

Junk bond

Stable-value fund

Mutual fund that offers attractive returns and liquidity without market risk to defined contribution plan participants (and some 529 tuition savings plans) because they have contracts with banks and insurance companies designed to permit redemption of shares at book value regardless of market prices

Load funds

Mutual funds that always charge a "load" or sales charge upon purchase; the load is the commission used to compensate brokers

Sales Loads and Types

Sales Load: sales charge that can be paid at: 1. time of purchase (front-ed loads) 2. when shares are redeemed (back-end loads) 3. over time (level loads). 4. No Loads

Net asset value (NAV)

Per-share value of a mutual fund RATIO=market value of assets - market value of liabilities / number of shares EX: 10 million shares outstanding, Portfolio worth is $100 million, liabilities are $5 million NAV= $100M - $5M / 10M shares = $9.50 per share

Fund screener (fund-screening tool)

Permits investors to screen all of the mutual funds in the market to gauge performance

Mutual fund ask (or offer) price

Price at which an investor can purchase a mutual fund's shares; current NAV per share plus sales charges

Standardized expense table

SEC- required information that describes and illustrates mutual fund charges in an identical manner so that investors can accurately compare the effects of all of a fund's fees and other expenses relative to other funds

7 Steps to Invest in Mutual Funds

See Fig 15-4, pg. 475 1. Review Your Investment Policy 2. Review Your Investment Goals 3. Eliminate funds inappropriate for your investment goals 4. Choose low load or no load funds 5. Determine if investment advice is needed 6. Screen and Compare Funds that meet your investment criteria 7. Monitor your mutual fun philosophy

Mutual fund bid price

Shareholders receive this amount per share when they redeem their shares, which is the same dollar amount as the NAV (net asset value)

Redemption charge (exit fee)

Similar to a deferred load but often much lower; used to reduce excessive trading of fund shares * Class C shares have these; they also have higher expense ratios

Which is not one of the major objectives of mutual funds?

Social responsibility

Stated commission

The sales charge as a percentage of the amount invested - 8.5% is max allowed by SEC; stated commission often is greater than this amount. EX: $10,000 invested, 8.5% commission, $850, but its really 850/10,000-850=9.3%

Redeems

When an investor sells mutual fund shares

Exchange Traded Fund (EFT)

a cross between a stock and mutual fund; hold a basket of stocks, bonds, currencies, and commodities - just like mutual funds but they trade like stocks. Prices are set by market forces; traded on stock exchange. Attractive for beginner investors because of low cost, low fees, good tax program and stock like features. If you want to make "infrequent" transactions and want low fees this is for you.

The strategy of shifting the payment dates of deductible items is called

accelerate deductions

Qualifying contributions to personal retirement accounts are subtracted as

adjustments to income

Which is not a typical investment found in a bond fund

aggressive growth stocks

Which is not a typical investment found in a bond fund?

aggressive growth stocks

Adjustments to gross income

all of these (can be taken even if one takes the standard deduction, help one qualify for other deductions, are subtracted from gross income)

Mutual fund investors must pay federal income taxes on

all of these (capital gain distributions, capital gains from selling their shares, ordinary income dividend distributions)

__ can be used to provide mutual fund information.

all of these (financial magazines such as Money and Forbes, mutual fund prospectuses, Morningstar Mutual Funds)

You are legally required to include which of the following in gross income?

all of these (lottery winnings, illegal income, alimony received)

Common measures of risk for mutual funds include

all of these (standard deviation, the fund's Sharpe ratio, and beta)

A switching privileges on mutual funds allows shareholders to exchange shares of one mutual fund for shares of

any mutual fund in the same family of funds

A switching privileges on mutual funds allows shareholders to exchanged shares of one mutual fund for shares of

any mutual fund in the same family of funds

Open-end mutual funds

are sold at their current net asset value

A mutual fund that invests in a mix of assets (usually stocks, bonds, and cash equivalents and sometimes international assets, gold, and real estate), and they buy and sell regularly to reduce risk while trying to outperform the market is a(n)

asset allocation fund

A mutual fund's__ can allow investors to have amounts as low as $25 per month transferred from their bank account to purchase shares.

automatic investment program

Compounding is attained in mutual fund investing through

automatic reinvestment of dividends

A mutual fund that emphasizes well-balanced return of income and long-term capital gains is a__ fund.

balanced

You can make sure that your mutual fund account passes to your desired heir by completing a__ when you open your account.

beneficiary desgination

Advantages of bond funds over individual bonds include all of the following except

bond funds earn higher rates of return

Which is not a method for taking your funds out of a mutual fund?

borrowing against your fund account

Realized net capital gains that a mutual fund pays out to its investors called__distributions.

capital gains

Which of the following person is (are) practicing tax avoidance?

employee who deducts qualifying job-related expenses

Which of the following allows you to easily move funds from one mutual fund to another managed by the same investment company?

exchange privilege

Which of the following is (are) a unique advantage(s) of investing in a family of funds?

exchange privileges

Which of the following types of investment companies operates much like an index fund?

exchange-traded fund

Which of the following taxes is progressive?

federal income taxes

Which of the following is not defined as part of gross income?

gifts and inheritances

A mutual fund that provides the investor with some income and a good chance for long-term price appreciation has a__ objective.

growth and income

Of the following types of stock funds,__ funds tend to be least risky.

growth and income

A(n)__ guarantees the owner a fixed or floating interest rate for predetermined period of time with full return of the initial amount invested.

guaranteed investment contract (GIC)

The type of mutual fund that is unmanaged is called a(n)__ fund.

index

It's best to invest in __ or __.

no-load mutual funds or exchange traded funds (ETFs). There are 373 no-load funds (avg fee .76%), 1400 ETFs (avg fee .36%) to invest in. Vanguard is a big name. Why are higher cost funds bad? 1. Fees Kill Long Term Returns 2. Low or Zero fees are critical to investment success 3. Compounding fees will kill account balance EX: Over the long-term, if 1% fee that increases at 4% a year will devour 1/3 of eventual return. 1% is less than average set of fees too.

The collection of securities and other investments owned by a mutual fund is called a(n)

portfolio

Retirement investments can easily be made with

pretax income

A tax that requires a higher-income person to pay a higher percentage of his or her income in taxes is called a__ tax.

progressive

A REIT is a type of closed-end mutual fund that focuses on

real estate

If you want to avoid paying capital gains for taxes for the whole year on mutual fund shares purchased partway into the year, you would want to buy the shares after the

record date

Your first task in selecting a mutual fund is to

review your investment policy

A common stock fund that invests in only one industry such as construction companies is called a(n)__ fund.

sector

There are now__ marginal tax rates for federal income taxes

seven

Which type of fund would be most likely to invest in guaranteed investment contracts?

stable-value fund

If you want to receive periodic, regular income from your mutual fund account you would set up a

systematic withdrawal plan

___ funds offer investors premixed portfolios of stocks, bonds, and cash that investors of a certain age and risk tolerance might prefer.

target-date retirement

Open-end mutual fund shares have good liquidity because

the fund company will buy back the shares whenever requested

Net asset value increases when

the value of the underlying securities increases