Personal Investment Management
ADMS 3531 Fall 2011 – Professor Dale Domian
Lecture 11 – Mutual Funds – Nov 29
Chapter 5 Outline
Investment companies and fund types.
Mutual fund operations.
Mutual fund costs and fees.
Mutual fund performance.
Closedend funds, exchange traded funds, and hedge funds.
Registered retirement savings plans.
The buy and sell decisions for the resulting pool are then made by a fund manager, who is
compensated for the service provided.
Like commercial banks and life insurance companies, mutual funds are a form of
An investment company is business that specializes in pooling funds from individual
investors and making investments.
A closedend fund is an investment company with a fixed number of shares that are
bought and sold by investors, only in the open market.
An openend fund is an investment company that stands ready to buy and sell shares in it
to investors, at any time.
Investment Companies and Fund Types
Net asset value (NAV) is the value of the assets held by a mutual fund, divided by the
number of shares.
Shares in an openend fund are worth their NAV, because the fund stands ready to redeem
their shares at any time. In contrast, share value of closedend funds may differ from their
NAV. Mutual Fund Operations Organization
A mutual fund is simply a corporation. It is owned by shareholders, who elect a board of
Most mutual funds are created by investment advisory firms (say Fidelity Investments),
or brokerage firms with investment advisory operations. Investment advisory firms earn
fees for managing mutual funds.
Mutual Fund Operations
Mutual funds are required by law to supply a prospectus to any investor who wishes to
Mutual funds must also provide an annual report to their shareholders.
Mutual Fund Costs and Fees
Sales chargers or ‘loads’
o Frontend loads are charges levied on purchases.
o Backend loads are charges levied on redemptions.
o Usually range from 0.25% to 1% of the funds total assets each year.
o Are usually based on fund size and/or performance.
o Not reported directly.
o Funds must report ‘turnover,’ which is related to the amount of trading.
o The higher the turnover, the more trading has occurred in the fund.
o The more trading, the higher the trading costs.
Mutual funds are required to report expenses in a fairly standardized way in their
o Shareholder transaction expenses – loads and deferred sales charges.
After all, many good noload funds exist.
But, you may want a fund run by a particular manager. All such funds are load funds.
Or, you may want a specialized type of fund.
o Perhaps one that specialized in Italian companies.
o Loads and fees for specialized funds tend to be higher, because there is little
competition among them.
ShortTerm Funds, I
Shortterm funds are collectively known as money market mutual funds. Money market mutual funds (MMMFs) are mutual funds specializing in money market
o MMMFs maintain a $1.00 net asset value to make them resemble bank accounts.
ShortTerm Funds, II
Most banks offer what are called ‘money market’ deposit accounts, or MMDAs, which
are much like MMMFs.
The distinction is that a bank money market account is a bank deposit and offers CDIC
There are many different types of longterm funds, i.e., funds that invest in longterm
Historically, mutual funds were classified as stock funds, bond funds, or income funds.
Nowadays, the investment objective of the fund is the major determinant of the fund type.
Some stock funds trade off capital appreciation and dividend income.
o Capital appreciation.