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Reference Guide

Permachart - Marketing Reference Guide: Net Asset Value, Mutual Fund, U.S. Securities And Exchange Commission

4 pages1737 viewsFall 2015

Department
Biology
Course Code
BIOL2721
Professor
All
Chapter
Permachart

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WHAT IS A MUTUAL FUND?
l e a r n r e f e r e n c e r e v i e w
w w w . p e r m a c h a r t s . c o m
Mutual funds are open-end or closed-end investment companies
that manage pools of other people’s money
• Money is pooled to create more buying power; pooled money is
invested in a diversified portfolio of securities in accordance with
the investment objectives expressed by the mutual fund
• Number of funds managed by firms ranges from one to more than
100
• Mutual funds enable individuals to become part-owners of the fund
through the purchase of shares (or fractional shares)
• The value of each share is represented by Net Asset Value (NAV),
which tends to change daily
• NAV = market value of all cash and securities ÷ number of shares
outstanding
• Ownership in the mutual fund also entitles owners to a pro rata
portion of the income produced by the securities and assets (98%
of realized capital gains or earned income must be distributed to
shareholders)
• The prospectus describes the goal(s), risk, fees, portfolio holdings,
minimum investment, and other operational characteristics of the
fund; it must be obtained by investors before shares can be purchased
Type of Fund Total Assets ($billions)
Stock 890
Bond 710
Taxable money market 515
Tax-exempt money market 115
• Mutual funds can be traced back to 19th century English and
Scottish investment trusts
• The first modern mutual fund company, Massachusetts Investment
Trust, was formed in Boston in 1924 (now State Street Research)
• Currently, more than 5000 individual mutual fund portfolios
representing over $2.2 trillion are registered with the Securities
Exchange Commission
• Over 950 new funds were created in 1997
HISTORY
FUNCTIONS
PURCHASING & REDEEMING
• Shares are purchased through a broker or other agent at a
price above the NAV
• Shares are then redeemed through a broker at a price that is
below the NAV
• Most loads range from 3% - 8.5% of NAV
INDIRECT METHOD
• Shares are purchased directly from the fund by the investor
at the NAV
• Shares are redeemed directly to the fund at the NAV
DIRECT METHOD
• Most mutual funds have a full-time staff of security analysts
and portfolio managers to select and monitor the
investments to maximize returns
PROFESSIONAL MANAGEMENT
• Pooling money allows investors to obtain indirect ownership
in a broader, less risky portfolio of securities than if they
attempted to directly form one with their own limited
resources
DIVERSIFICATION
Most allow the purchase and redemption of fractional
shares
DIVISIBILITY
• Provide periodic reports describing shareholder and fund
transactions
• Collect dividends and interest
• Automatically reinvest dividends in more shares
• Issue annual statements summarizing dividends and capital
gains distributions for tax purposes
ADMINISTRATION
Since mutual funds buy and sell large quantities of
securities, the result is substantial savings on brokerage
commissions
TRANSACTION COSTS
TYPES OF FUNDS
• Most common in that they continually issue and redeem shares at
their NAV (plus applicable sales load)
• Number of outstanding shares in the fund increases and decreases
as investors buy or redeem their shares
• Sometimes closed to new investors when their asset size grows to
such a large level where fund management becomes ineffective
• When a fund is closed, a similar fund is often created for new investors
OPEN-END
• A publicly-traded company (fund) listed on an exchange or traded
over-the-counter; raises money only once at the time of the
offering, where the number of outstanding shares is fixed
• Does not issue additional shares or redeem shares at NAV
Price differs from NAV and fluctuates due to investor demand and
changes in the value of the securities in the portfolio
• Typically sells at a discount to NAV
• Many funds specialize in the securities of a particular country (for
example, Germany, India, Mexico)
CLOSED-END
The load Difference between the price and the
(commission) NAV on both sides of the
transaction
Front-end loads Charge an initial commission on the
purchase only
Back-end (deferred) Charge the commission on the
load funds redemption or exit The back-end
load is usually reduced by 1% for
each year the investor holds the
fund
No-load funds Do not charge either buying or selling
commissions
Mutual Funds
Mutual Funds
© 1998-2008 Mindsource Technologies Inc.
MUTUAL FUNDS • A-846-X 1
TM
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