Chapter 10 Investment Company Products
exchanges within a family of funds
incur no sales charge IRS considers a sale to have taken place and if a gain occurs, the customer is taxed. This tax liability can be significant, and shareholders should be aware of this potential conversion cost
standard and poor's depository receipts (SPDRs) aka spiders
index funds designed to track the performance of an underlying investment portfolio
tax free (tax-exempt) bond funds
invest in municipal bonds or notes that produce income exempt from federal income tax. Tax-free funds can invest in municipal bonds and tax-exempt money market instruments
index funds
invest in securities to mirror a market index, such as the S&P 500. An index fund buys and sells securities in a manner that mirrors the composition of the selected index. The fund's performance tracks the underlying index's performance. Turnover of securities in an index fund's portfolio is minimal. As a result, an index fund generally has lower management costs than other types of funds
balanced funds
invest in stocks for appreciation and bonds for income. In a balanced fund, different types of securities are purchased according to a formula that the manager may adjust to reflect market conditions. (EX: 60% stocks and 40% bonds... or 75/25)
growth funds
invest in stocks of companies whose businesses are growing rapidly. - tend to reinvest all or most of their profits for R&D rather than pay dividends; therefore growth funds are focused on generating capital gains rather than income
foreign stock funds
invest mostly in the securities of companies that have their principal business activities outside the US. long-term capital appreciation is their primary objective, although some funds also seek current income
duties of investment advisors or portfolio managers
invest the cash and securities in the fund's portfolio implement investment strategy identify the tax status of distributions made to shareholders manage the portfolio's day-to-day trading
intraday trading
investors do not have to wait until the end of a trading day to purchase or sell shares. shares trade throughout the day, making it easier for investors to react to market changes
face-amount certificate
is a contract between an investor and an issuer in which the issuer guarantees payment of a stated (of fixed) sum to the investor at some set date in the future. In return for the future payment, the investor agrees to pay the issuer a set amount of money either as a lump sum or in periodic installments
selling dividends
is a violation of FINRA rules
short-term gain
is identified, distributed, and taxed at ordinary income tax rates
Face-amount certificate companies (FACs)
issuers of face-amount certificate investments
role of the custodian
keep investment company's assets physically segregated at all times restrict access to the account to certain officers and employees of the investment company. -receives a fee for their service
specialized (sector) funds
many funds attempt to specialize in particular economic sectors or industries. Ex: gold funds, tech funds, low-grade (noninvestment) grade bonds.. Sector funds offer high appreciation potential but may also pose higher risks to the investor
reductions in sales charges
maximum permitted sales charge is reduced from 8.5% to 6.25% if an investment company does not offer certain features. To qualify for the maximum 8.5% sales charge, the investment company must offer: breakpoints - a scale of declining sales charges based on the amount invested rights of accumulation automatic re-investment of distributions at NAV.
average basis
may use this when redeeming fund shares. calculate average basis by dividing the total cost of all shares owned by the total number of shares
prospectus
must be distributed to an ivestor before or during any solicitation for sale. - it contains info on the fund's objective, investment policies, sales charges, management exspences, and services offered. - it also discloses 1-, 5-, and 10-year performance histories
SEC registration and public offering requirements
must identify: - the type of investment company it intends to be (close-end or open-end) - plans the company has to raise money by borrowing - the company's intention, if any, to concentrate its investments in a single industry - plans for investing in real estate or commodities - conditions under which investment policies may be changed by a vote of the shares - full name and address of each affiliated person - a description of the business experience of each officer and director during the preceding 5 years
12b-1 Asset based fees
mutual funds cannot act as distributors for their own fund shares except under Section 12b-1 of the investment company act of 1940. - this section permits a mutual fund to collect a fee for promoting, selling, or undertaking activity in connection with the distribution of its shares. The fee is determined annually as a flat dollar amount or as a percentage of the fund's average total NAV during the year and is charged quarterly. The fee is disclosed in the fund's prospectus. Requirements: -12b-1 fees can have different norms depending on share class. The max allowed under any share class condition is 1% of a fund's net assets. - the fee must reflect the anticipated level of distribution services
dividend distributions
mutual funds may pay dividends to each shareholder in the same way that corporations pay dividends to stockholders. Divs are paid from the mutual fund's net investment income
common stock
normally the growth component of any mutual fund that has growth as a primary or secondary objective. Bonds, preferred stock, and blue-chip stocks are typically used to provide the income component of any mutual fund that has income as a primary or secondary objective
special situation funds
offered by securities companies that may benefit from a change within the companies or in the economy. Takeover candidates, companies with patents pending, and turnaround situations are common investments for these funds
registration statement (2 parts)
part 1 (N1-A) the prospectus that must be furnished to every person whom the company offers the securities part 2 (SAI) ((statement of additional info)) the document containing info that need not be furnished to every purchaser but must be made available for public inspection
Factors to review when comparing mutual funds
performance cost taxation portfolio turnover services offered
advantages of exchange-traded funds
pricing and ease of trading margin operating costs tax efficiency
an investment compnay may not issue securities to the public UNLESS it has
private capitalization (seed money) of at least $100,00 of net assets - 100 investors - clearly defined investment objectives
US government and Agency Security Funds
purchase securities issued by the US treasury or an agency of the US gov't, such as a Ginnie Mae. Investors in these funds seek current income and maximum safety.
nonfixed UIT
purchases shares shares of an underlying mutual fund. Under the Act of 1940, the trustees of both fixed and non-fixed UITs must stand ready to redeem the units, thus providing liquidity to shareholders. - UITs can be structured to meet different investment objectives such as growth, income, balanced, or international diversification.
taxation of investment returns
qualified divs are taxed at a % as determined by the IRS tax code depending on the investor's ordinary income tax bracket. - long-term cap gains distributions are taxed at a percentage as determined by the IRS tax code depending on the investor's ordinary income tax bracket. - short-term cap gains distributions are taxed as ordinary income
portfolio turnover ratio
reflects the cost of buying and selling securites, including commissions or markups and markdowns
withdrawal plan disclosures
registered reps must: - never promise an investor a guaranteed rate of return - stress to the investor that it is possible to exhaust the account by overwithdrawing - state that during a down market it is possible that the account will be exhausted if the investor withdraws even a small amount - never use charts or tables unless the SEC specifically clears their use
purchasing mutual fund shares on margin
regulation T prohibits that mutual fund shares be purchased on margin. Margin is the use of money borrowed from a brokerage firm to buy securities. However, mutual fund shares may be used as collateral in a margin account if they have been held fully paid for more than 30 days.
mutual funds services offered
retirement account custodianship, investment plans, check-writing privileges, telephone transfers, conversion privileges, combination investment privileges, withdrawal plans, and others.
sales charges
rules prohibit members from assessing sales charges in excess of 8.5% of the POP on customer mutual fund purposes. Mutual funds may charge lower rates if they specify these rates in the prospectus. Typically, mutual fund sales loads today are substantially lower than the maximum allowed.
breakpoint sale
rules prohibit registered representatives from making or seeking higher commissions by selling investment company shares in a dollar amount just below the point at which the sales charge is reduced. This violation is known as a breakpoint sale
mutual fund cost
sales loads, management fees, and operating expenses reduce an investor's returns because they diminish the amount of money invested in a fund
mutual fund performance
securities law requires that each fund disclose the average annual total returns, for 1, 5, and 10 years or since inception. Performance must reflect full sales loads with no discounts. The manager's tract record in keeping with the fund's objectives as stated in the prospectus is important as well
pricing and ease of trading of exchange traded funds
since ETFs are traded on exchanges, they can be bought or sold anytime during the trading day at the price they are currently trading at as opposed to mutual funds which use forward pricing and are generally priced once at the end of the trading day
Statement of Additional Information (SAI)
some investors may wish to have additional info not found in the prospectus. This additional info is not necessarily needed to make an informed investment decision but may be useful. mutual funds and closed-end funds are REQUIRED to have an SAI available to investors upon request w/o charge
blank check or blind pool hedge fund
special purpose acquisition companies (SPACS) carry their own risks. blank-check companies are companies without business operations that raise money through IPOs in order to have their shares publicly traded for the sole purpose of seeking out a business or combination of businesses.
margin eligibility
spider index funds can be bought on margin, subject to the same terms that apply to common stock
short selling
spider index funds can be sold short at any time during trading hours
asset allocation funds
split investments between stocks for growth, bonds for income, and money market instruments or cash for stability. Fund advisers switch the percentage of holdings in each asset category according to the performance, or expected performance of that group
12b-1 termination
the 12b-1 plan may be terminated at any time by a majority vote of the non-interested directors or by a majority vote of outstanding shares
12b-1 approval
the 12b-1 plan must be approved initially and re-approved at least annually by a majority of the outstanding shares, the BOD, and those directors who are non-interested persons
redemption of fund shares may be suspended when:
the NYSE is closed other than for a customary weekend or holiday closing trading on the NYSE has been restricted the SEC has ordered the suspension of redemptions for the protection of the companies securities holders
unrealized capital gain or loss
the appreciation or depreciation of portfolio securities is an (unrealized cap gain or loss) if the fund does not sell the securities - therefore, shareholders experience no tax consequences. - when the fund sells the securities the gain or loss is REALIZED and affects shareholder taxes
offer price
the ask price; it is the NAV + the max sales charge applicable to the fund
fixed dollar withdrawal
the fund liquidates enough shares each period to send that sum. The amount of money liquidated may be more or less than the account earnings during the period
share identification
the investor keeps track of the cost of each share purchased and uses this information when deciding which shares to liquidate. He then liquidates the shares that provide the desired tax benefits
breakpoints
the schedule of quantity purchase discounts a mutual fund offers.
mutual fund portfolio turnover
the turnover rate reflects a fund's holding period. IF a fund has a turnover rate of 100%, it holds its securities on average for one year. Therefore, all gains are likely to be short-term and subject to maximum tax rate. turnover rate of 25% has an avg. holding period of 4 years, and gains are likely taxed at the long-term rate. - it is not uncommon for an agressive growth fund to reflect an annual turnover rate of 100% or more. -- 100% turnover rate means that the fund replaces its portfolio annually. If the fund achieves superior returns, the strategy is working; if not the strategy is subjecting investors to undue costs.
leveraged funds
there are no limits by rule or regulation as to the amount of leverage that could be applied to a portfolio. Currently, there are numerous 2X and 3X leverage funds available
closed-end investment company
to raise capital for its portfolio it conducts a common stock offering. - for the initial offering, the company registers a fixed number of shares with the SEC and offers them to the public for a limited time through underwriters. - the funds capitalization is fixed unless an additional public offering is made at some future time. Also issue bonds and preferred stock. close-end funds are referred to as publicly traded funds or exchange-traded funds
automatic reinvestment of distributions
typically customers may systematically reinvest dividends and capital gains at NAV and may use them to buy full and fractional shares only if: - shareholders who are not already participants in the reinvestment plans are given a separate opportunity to reinvest each dividend - the plan is described in the prospectus - the securities issuer bears no additional costs beyond those that it would have incurred in the normal payout of dividends - shareholders are notified of the availability of the dividend reinvestment plan at least once every year
fixed UIT
typically purchases a portfolio of bonds and terminates when the bonds in the portfolio mature
fund to underwriter to investor
underwriter acts as dealer and uses its own sales force to sell shares to the public. An investor gives an order for fund shares to the underwriter. To fill the order, the fund sells shares to the underwriter at the current NAV. The underwriter then adds the sales charge and sell s the shares to the investor at the POP. The sales charge is split among the various sales people
ex-dividend date (mutual funds)
unlike the ex-dividend date for other corporate securities, the ex-div date for mutual funds is set by the BOD. Normally, it is the day after the record date.
lifecycle funds
use a predetermined asset mix that is tailored to meet investment objectives based on various time horizons or target dates. - the target date is generally an investor's expected retirement date. - the objective is to strike an optimal balance between risk and return, as is appropriate for an investor, as they age and near retirement. The strategy assumes that the longer investors have before retirement, the more willing and able they will be to tolerate risk and endure price fluctuations - lifecycle funds are structured as funds of funds so that investing in 1 generally means that you are invested in a number of funds offered by the same fund family
money market funds
usually no-load, open-end mutual funds that serve as temporary holding tanks for investors who are most concerned with liquidity. no load- means investors pay no sales or liquidity fees. A fund manager invests the fund's capital in money market instruments that pay interest and have short maturities. - interest rates on these change often - NAV is set at $1 per share - both purchased and redeemed at their NAV
First In, First Out FIFO
when FIFO shares are sold, the cost of the shares held the longest is used to calculate the gain or loss. In a rising market, this method normally creates adverse tax consequences
fund share liquidations to the investor
when an investor sells mutual fund shares, he must establish his cost base (amount of money invested) to calculate the tax liability
dollar cost averageing
when one invests identical amounts at regular intervals. This allows the individual to purchase more shares when prices are low and fewer shares when prices are high. - in a fluctuating market and over time, the average cost per share is lower than the average price of the shares
75% must be invested in such way that:
within the 75%, no more than 5% of the fund's total assets are invested in the securities of any one issuer and within the 75%, the fund does not own more than 10% of the outstanding voting securities of one issuer. * because the remaining 25% of the fund's assets doesn't have to be diversified in the manner, a fund could have as much as 30% of its assets invested in one company (25% + 5%) and own more than 10% of a company and still call itself diversified
SEC also requires the fund to include in its prospectus or annual report the following:
- a discussion of those factors and strategies that materially affected its performance during its most recent completed fiscal year - a line graph comparing its performance to that of an appropriate broad-based securities market index - the name(s) and title(s) of the person(s) primarily responsible for the fund portfolio's day-to-day management
important considerations of breakpoints
- breakpoint rules vary across mutual fund families. There is no industry standardized breakpoint schedule - mutual funds that offer breakpoints must disclose their breakpoint schedule in the prospectus and how an account is valued for breakpoint purposes - purchases made by the same investor in various accounts may be aggregated to qualify for a breakpoint discount. Eligible accounts include traditional brokerage, accounts held directly with a fund company, 401(k), IRA, and 529 college savings - shares purchased in the same fund family, other than money market accounts, are eligible to be aggregated together to qualify for a breakpoint discount, including those held at separate B/Ds - a large, lump sum investment is one method to qualify for a breakpoint. Mutual funds offer additional incentives for an investor to continue to invest and qualify for breakpoints using a letter of intent or rights of accumulation
functions of a transfer agent
- issuing, redeeming, and canceling fund shares - handling name changes for the fund - sending customer confirmations and fund distributions - recording outstanding shares so distributions are properly made
restrictions on money market funds
- the front cover of every prospectus must prominently disclose that an investment in a money market fund is neither insured nor guaranteed by the US gov't and than an investor has no assurance the fund will be able to maintain a stable NAV. This statement must also appear in all literature used to market the fund - investments are limited to securities and remaining maturities of not more than 13 months, with the average portfolio maturity not exceeding 90 days - investments include t-bills, commercial paper, repurchase agreements, and banker's acceptances
Act of 1940 requires shareholders receive financial reports AT LEAST semiannually. One being the audited annual report. The reports must contain:
- the investment company's balance sheet - a valuation of all securities in the investment company's portfolio as the date of the balance sheet (portfolio list) - the investment company's income statement - a complete statement of all compensation paid to the BOD and the advisory board - a statement of the total dollar amount of securities published and sold during the period.
classes of shares
Class A - front end load that can be reduced or eliminated by breakpoints Class B - back-end load that declines over time combined with 12b-1 fees Class C - 12b-1 fees charged quarterly Class D - level load plus a redemption fee
margins of exchange traded funds
ETFs can be bought and sold on margin like other exchange-traded products. Mutual funds cannot be bought on margin nor can they be sold short.
tax efficiency of exchange traded funds
ETFs do not distribute capital gains annually like mutual funds. There are no tax consequences with ETFs until investors sell their shares. This may be the single greatest advantage associated with ETFs
operating costs of exchange traded funds
ETFs traditionally have operating costs and expenses that are lower than most mutual funds
accounting methods
FIFO, share identification, average basis
restrictions on operations
Mutual funds must specifically disclose the following activities in its prospectus: purchasing securities on margin selling securities short participating in joint investment or trading accounts or acting as distributor of its own securities, except through an underwriter.
Changes in NAV (daily)
NAV per share increases when portfolio securities increase in value or when the portfolio receives investment income NAV per share decreases when portfolio securities decrease in value or when portfolio income and gains are paid to shareholders NAV per share does not change when shares are sold or redeemed or when portfolio securities are bought or sold. in these circumstances, the fund exchanges securities for cash so that the NAV per share remains unchanged.
Continuous Public Offering Securities
SEC treats the sale of open-end investment company shares as a continuous public offering of shares, which means all sales must be accompanied by prospectus. The financial info (statements) in the prospectus must be dated not more the 16 months before the sale. - with closed-end funds, only the initial public offering of stock is sold with prospectus
Forward pricing
The price of purchase or redemption for mutual fund shares is determined at the next NAV calculation after an order is entered
commissions of exchange traded funds
The purchase or sale of ETFs is a commissionable transaction The commissions paid can erode the low expense advantage of ETFs. This would have the greatest impact when trading in and out of ETFs frequently or when investing small sums of money.
marketing mutual fund shares
a fund may use any number of methods to market its shares to the public. A discussion of some of the marketing methods various firms use are: - fund to underwriter to dealer to investor - fund to underwriter to investor - fund to investor
backdating the letter
a fund often permits a customer to sign a letter of intent as late as the 90th day after an initial purchase. The LOI may be backdated by up to 90 days to include prior purchases but may not cover more than 13 months in total
12b-1 misuse of no-load terminology
a fund with a deferred sales charge or an asset based 12b-1 fee of more than .25% of average net assets may not be described as a no-load fund
expense ratio
a fund's expense ratio compares the management fees and operating expenses, including any 12b-1 fees, with the fund's net assets. All mutual funds, both load and no load have expense ratios. The -expense ratio is calculated by = (dividing a fund's expenses by its average net assets)
redemption of fund shares
a mutual fund must redeem shares within seven calendar days of receiving a written request for redemption. The price at which the shares are redeemed is the NAV (calculated at least once per business day)
combination privilege
a mutual fund sponsor frequently offers more than one fund and refers to these multiple offerings as its family of funds. An investor seeking a reduced sales charge may be allowed to combine separate investments in two or more funds within the same family to reach a breakpoint
Letter of Intent (LOI)
a person who plans to invest more money with the same mutual fund company may immediately decrease the overall sales charges by signing a letter of intent. - LOI is a one-sided contract binding on the fund only. The customer must complete the investment to qualify for the reduced sales charges
cancelation of fund shares
a share is destroyed once a mutual fund share has been redeemed. Mutual fund shares may not be sold to their owners. An investor purchasing mutual fund shares receives new shares.
back end loads
aka contingent deferred load is charged at the time an investor redeems mutual fund shares. The sales load, a declining percentage charge reduced annually (e.g 8.5% the first yr, 7% the second, 6% the third etc.) is applied to the proceeds of any shares sold in that year. The back-end load is usually structured so that it drops to zero after an extended holding period. The sales load schedule is specified in a fund's prospectus
combination funds
aka growth and income fund. May attempt to combine the objectives of growth and current yield by diversifying its portfolio among companies showing long-term growth potential and companies paying high dividends
open end funds
all sales commissions and expenses are paid from the sales charges collected. sales expenses include commissions for the managing underwriter, dealers, brokers, and registered reps, as well as advertising and sales literature expense. Mutual fund distributors use 3 methods to collect the fees: front-end loads, back-end loads, and 12b-1 sales charges
rights of accumulation
allow an investor to qualify for reduced sales charges. The major differences are that rights of accumulation: - are available for subsequent investments and do not apply to initial transactions - allow the investor to use prior share appreciation to qualify for breakpoints - do not impose time limits
voluntary accumulation plan
allows a customer to deposit regular periodic investments on a voluntary basis. The plan is designed to help the customer form regular investment habits while still offering some flexibility. - require a minimum initial purchase and minimum additional purchase amounts
income funds
an income fund stresses current income over growth. The fund's objective may be accomplished by investing in the stocks of companies with long histories of dividend payments such as utility company stocks, blue-chip stocks and preferred stocks
unit investment trust (UITs)
an investment company organized under a trust indenture and identified by several characteristics: - do NOT have boards of directors employment advisers, or actively manage their own portfolios (or trade securities) - typically purchase other investment company shares or government and municipal bonds -issue redeemeable shares known as units or shares of beneficial interest in its portfolio of securities
fund to underwriter to dealer to investor
an investor gives an order for fund shares to a dealer. The dealer then places the order w/ the underwriter. To fill the order, the fund sells shares to the underwriter at the current NAV. The underwriter sells the shares to the dealer at the NAV + the underwriters concession (POP - the dealer's reallowance or discount). The dealer sells the shares to the investor at the full public offering price.
sales at the POP
any sale of fund shares to a customer must be made at the public offering price (POP). A customer is anyone who is not a member. The route the sale takes is not important--the nonmember customer must be charged the POP. - only a member acting as a dealer or an underwriter may purchase the funds shares at a discount from the issuer.
mutual fund's underwriter aka sponsor or distributor
appointed by the BOD and receives a fee for selling and marketing the fund shares to the public. - open-end investment co. sells its shares to the underwriter at the current NAV, but only as the underwriter needs the shares to fill customer orders. - a mutual fund MAY NOT act as its own distributor or underwriter. An exception exists for no-load and 12b-1 funds
Dual purpose funds
are closed-end funds that meet two objectives: 1. investors seeking income purchase shares and receive all the interest and dividends the fund's portfolio earns. 2. investors interested in capital gains purchase the gains shares and receive all gains on portfolio earnings. The two types of shares in a dual fund are listed separately in the financial pages of major newspapers
NAV
asset ( cash + current value of securities) - liabilities = fund's NAV
why investors use spiders
asset allocation following industry trends balancing a portfolio speculative trading hedging
inverse (reverse) funds
attempt to deliver returns that are opposite of the benchmark index they are tracking. EX: if the benchmark is down 2%, the fund's goal is to be up 2%.
funds of hedge funds
available for highly qualified and sophisticated (accredited) investors, there are registered mutual funds available to all investors that invest primarily in unregistered hedge funds known as funds of hedge funds - they can target and diversify among several hedge funds and, in this way, give non-accredited investors access to hedge funds. - recommendations of funds of hedge funds would need to include specific risks associated with hedge funds, and the transfer of those risks that occurs when mutual funds invest in hedge funds
custodian
bank or broker/dealer that performs the act of safekeeping of the companies cash or securities.
shareholder's right to vote
before any change can be made to a fund's published bylaws or objectives, shareholder approval is MANDATORY. in voting matters, it is majority of shares voted for or against a proposition that counts, not the majority of the people voting. Thus, one shareholder holding 51% of all the shares outstanding can determine a vote's outcome
holding company depository receipts (HOLDRS)
broker/dealer issued products that trade on an exchange, and like all exchange-traded products, are priced throughout the trading day. HOLDRS represent an investors ownership in the common stock or ADRs of specified companies in a particular industry HOLDRS allow an investor to own a group of stock as one asset or unbundle them to own each underlying security separately, at which time they could be traded individually. - gains can be deferred indefinitely - losses can be taken at any time
long-term gain
capital gains distributions are derived from realized gains. If the fund has held the securities for more than a year, the gain is a long-term capital gain
front end funds
charges included in a fund's POP. the charges are added to the NAV at the time an investor buys shares. Front-end loads are the most common way of paying for the distribution services a fund's underwriter provides
disadvantages of exchange-traded funds
commissions and over trading
management investment company
company in which actively manages a securities portfolio to achieve a stated investment objective. A management investment company is either closed-end or open-end. Initially both closed and open ended companies sell shares to the public; the difference between them lies in the of securities they market and where investors buy and sell shares.
registration with the SEC
company must register with the SEC as an investment company if: it is in the business of investing in, reinvesting in, owning, holding, or trading securities it has 40% or more of its assets invested in securities (gov't securities and securities of majority-owned subsidiaries are not used in calculating the 40% limitation)
diversified investment company
company qualifies as such if it meets the 75-5-10 test. 75% of total assets must be invested in securities issued by companies other than the investment company or affiliates. Cash on hand and cash equivalent investments (short-term gov't and money market securities) are counted as the 75% required investment in outside companies
exchanges within a family of funds
conversion previsions or exchange privileges within a mutual fund family allows an investor to convert an investment in one fund for an equal investment in another fund in the same family, often without incurring an additional sales charge. This exchange is considered a taxable event, and there may be tax consequences
fixed time withdrawal
customers liquidate their holdings over a fixed period. Most mutual funds require a customer's account to be worth a minimum amount of money before a withdrawal plan may begin. Additionally, most funds discourage continued investment once withdrawals start
NAV asset value per share
customers who buy mutual fund shares are charged with a POP. the pop equals the NAV per share + the sales charge. When a customer sells, the liquidation price is the current NAV.
what a company's BOD coordinates in terms of functions of mutual funds
define the type of fund(s) to offer (growth, income, or sector define the fund's objective approve and hire the transfer agent, custodian, and investment advisor
taxation of reinvested distributions
distributions are taxable to shareholder whether the distributions are received in cash or reinvested. The fund must disclose whether each distribution is from income or capital tax transactions. 1099 -- is sent to shareholder after the close of the year, details tax information related to distributions for the year.
calculating fund yield
divide the annual dividend paid from net investment income by the current offering price. yield quotations must disclose the: - general direction of the stock market for the period in question - fund's NAV at the beginning and end of the period - percentage change in the fund's price during the period.
closed end funds
do not have sales charges. An investor who pays a brokerage commission in an agency transaction or pays a markup or markdown in a principal transaction
open-end investment companies (mutual fund)
does not specify the exact number of shares it intends to issue; it registers an open offering with the SEC. With this registration type, the open-end investment company can raise an unlimited amount of investment capital by continuously issuing new shares. Conversely, when investors liquidate holdings in a mutual fund, the fund's capital shrinks because the fund redeems shares. The offering never closes because the number of shares the company can offer is unlimited. - person who wants to invest in the company buys shares directly from the company or its underwriters at the POP. a mutual fund's POP is the net asset value (NAV) per share + sales charge
hedge fund lock up provisions
during certain periods a customer may not make a withdrawal from the fund. length of lock-up period depends on what the investment strategy of the fund is and how long the portfolio manager anticipates it will take to implement the strategy and then see results of the implementation
fixed percentage or fixed share withdrawal
either a fixed number of shares or a fixed percentage of the account is liquidated each period
types of investment companies
face-amount certificate companies unit investment trusts management investment companies
hedge funds
funds that are aggressively managed portfolios of investments that use advance investment strategies
over trading of exchange traded funds
given the ability to trade in an d out of ETFs easily, the temptation to do so is possible. Excessive trading can eliminate the advantage associated with investing in a diversified portfolio and add to overall commissions being paid by the investor, further eroding any of the other advantages associated with ETFs
bond funds
have income as their main investment objective. Some funds invest solely in investment grade corporate bonds. Others, seeking enhanced safety, invest in gov't issues only. Still others pursue capital appreciation by investing in lower-rated bonds for higher yields.
strategies employed by hedge funds
highly leveraged portfolios the use of short positions utilizing derivative products such as options and futures currency speculation commodity speculation investing in politically unstable international markets
sales loads
historically, mutual funds have charged front-end loads of up to 8.5% of the money invested. This percentage compenstates the sales force. Many low-load funds charge between 2 and 5 %. Other funds may charge a back end load when funds are withdrawn. Some funds charge ongoing fees under section 12b-1 of the investment company act of 1940. These funds deduct annual fees to pay for marketing and distribution costs.
the conduit theory
if a mutual fund act as a conduit or pipeline, for the distribution of net investment income, the fund may qualify as a regulated investment company, subject to tax on the amount of investment income the fund retains Subchapter M requires a fund to distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed 10%. if the fund distributes 89%, it pays taxes on 100% of the net investment income
withholding tax
if an investor neglects or fails to include a SSN or Tax ID number when purchasing mutual fund shares, the fund must withhold a percentage of the distributions to the investor as a withholding tax.
fund to investor
if an open-end investment company distributes shares to the public directly--that is, without services of a distributor--and the fund offers its shares with no sales charge, the fund is called a NO-LOAD fund. the fund pays all sales expenses
valuing fund shares
if the amount received is greater than the cost base, the investor reports a taxable gain. If the amount received is less than the cost base, the investor reports a loss
net investment income
includes gross investment income--dividend and interest income from securities held in the portfolio minus operating expenses. (advertising and sales expenses are not included in a fund's operating expenses when calculating net investment income)
