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Lecture 4

BU473 Lecture Notes - Lecture 4: Investment Company, Mutual Fund, Financial Intermediary

Course Code
David Cimon

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BU-473 Lecture 4
Investment Companies
β€’ Investment companies are a form of financial intermediary
β€’ These companies pool funds from investors, and use these funds to buy an underlying basket of
o Depending on the fund type, these securities may be equities, bonds, derivatives, real
estate, or some mix of several asset types
β€’ Investment companies have a few important benefits for investors:
o Record keeping and administration
o Diversification and asset divisibility
o Professional management
o Lower transaction costs
β€’ NAV is the per-share value of investment companies
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π‘†β„Žπ‘Žπ‘Ÿπ‘’π‘  π‘‚π‘’π‘ π‘‘π‘Žπ‘›π‘‘π‘–π‘›π‘”
β€’ Closed vs. Open
o Open-Ended Funds: allow investors to create new shares or redeem old shares directly
from the fund itself, at end of day
o Closed-end funds don’t allow investors to create or redeem shares
β–ͺ Investors must trade with other investors
Companies similar to Investment Companies
β€’ Commingled Funds are trusts similar to open-ended mutual funds, but they issue units instead
of shares
β€’ REITs are similar to close-ended mutual funds
β€’ Hedge funds are private partnerships rather than trusts
Mutual Funds
β€’ Mutual funds are an investment vehicle that hold underlying assets and issue shares
β€’ Over 4.9 million households in Canada hold a form of a mutual fund
β€’ Mutual funds are managed by a fund management company
o Funds run by the same company are a family of funds
β€’ Investors usually buy and sell mutual funds from a broker
β€’ By 2017, there were ~$1.5 Trillion assets under mutual fund management in Canada
Mutual Fund Fees
β€’ Mutual Fund Fee Types:
o Management fees and operating expenses
β–ͺ 1-3% per year typically
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