FIN 331 Lecture Notes - Lecture 13: Mutual Fund, Portfolio Manager, Financial Adviser
11 Jan 2017
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Chapter 13: Investing in Mutual Funds, ETFs, and Real Estate
Mutual fund- a financial services organization that receives money from its shareholders
and invests those funds on their behalf in a diversified portfolio of securities *more people
invest in these than any other type of investment product
Exchange-traded fund (ETF)- an investment company whose shares trade on stock
exchanged; unlike mutual funds, ETF shares can be bought or sold (or sold short)
throughout the day. ETFs are usually structured as an index fund that’s set up to match the
performance of a certain market segment
Pooled diversification- a process whereby investors buy into a diversified portfolio of
securities for the collective benefit of individual investors
Why Invest in Mutual Funds or ETFS:
1. To achieve diversification in their investment holdings- allows investors to reduce
their exposure to risk sharply in several types of securities and companies
2. To obtain the services of professional money managers- avoids unnecessary risk
3. To generate an attractive rate of return on their investment capital
4. For the convenience that they offer- can be purchased from various sources
How Mutual Funds Are Organized and Run:
• Management company- runs the fund’s daily operations and can also serve as the
investment advisor (i.e. Fidelity, Vanguard, and T. Rowe Price)
• Investment advisor- buys and sells stocks or bonds and otherwise oversees the
portfolio
o Portfolio manager- who runs the portfolio and makes the buy and sell
decisions
o Securities analysts- who analyzes securities and looks for attractive
investment candidates
o Traders- who try to buy and sell blocks of securities at the best possible price
• Distributer- sells the fund shares, either directly to the public or through certain
authorized dealers
• Custodian- physically safeguard the securities and other assets of a fund, but
without taking an active role in the investment decisions
• Transfer agent- executes transactions, keeps track of purchase and redemption
requests from shareholders, and maintains other shareholder records
The fund’s assets can never be in the hands of the management company
Open-end investment company- a firm that can issue an unlimited number of shares that it
buys and sells at a price based on the current market value of the securities it owns; also
called a mutual fund *the dominant type of investment, accounts for 95%
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Net asset value (NAV)- the current market value of all the securities the fund owns, less any
liabilities, on a per-share basis *indicates the price at which an investor can sell shares or
the price that an investor would pay to buy no-load funds
Closed-end investment company- an investment company that issued a fixed number of
shares, which are themselves listed and traded like any other share of stock *trading is
done between investors in the open market
• They don’t have to worry about stock redemption or new money coming into the
fund
• They don’t have to worry about finding new investments for that money
• The prices of closed-end companies are determined not only by their NAVs, but also
by general supply-and-demand conditions in the market
• Generally trade at a discount or premium to their NAVs
ETF- is an investment company whose shares trade on one of the stock exchanges. Most all
ETFs are structured as index funds, set up to match the performance of a certain market
segment
• They are actually open-end mutual funds whose number of shares outstanding can
be sold like any other stock, and the ETF distributor can also create new shares or
redeem old shares
• Spiders- the biggest and oldest ETFs
• Qubes- the most actively traded ETF
• Diamonds- based on the DIJA
• Can be bought and sold at any time of day
• They offer all the advantages of any index fund: low costs, low portfolio turnover,
and low taxes
• Rarely distribute any capital gains to shareholders
• Most common track the S&P 500 or the NASDAQ- 100 index
• Provide exposure to commodities (i.e. gold or oil)
• Style ETFs- typically follow either certain market capitalization stocks or value or
growth stocks
• ETFs appreciate in value when the market falls, and vice versa
Load fund- a fund that charges a fee at time of purchase
Redemption fee- a commission fee when you sell your shares
Low-load fund- a fund that has a low purchase fee
Back-end load- a commission charged for redeeming fund shares *used to discourage
investors from trading in and out of the funds over short periods of time, 8.5% cap
No-load fund- a fund on which no transaction fees are charged
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find more resources at oneclass.com
12b-1 fee- an annual fee that’s supposed to be used to offset promotion and selling
expenses *also known as hidden loans, 1% cap
Multiple-class sales charge- the mutual fund will issue different classes of shares on the
same fund or portfolio of securities (i.e. Dreyfus, Merrill Lynch, MFS, Scudder, Putnam)
Management fee- a fee paid to the professional money managers who administer a mutual
fund’s portfolio *range from less than 0.5% to as much as 3 / 4 %, all funds have these fees
Exchange fee- a fee that is charged whenever an investor transfers money from one fund to
another within the same fund family and/or annual maintenance fee to help defer the costs
of providing service to low-balance accounts
Mutual funds are required by the SEC to disclose fully all their fees and expenses in a
standardized, easy to understand format (i.e. shareholder transaction, annual operating
expenses, and the total cost over time of buying, selling, and owning the fund)
Statement of Additional Information- contains detailed information on the fund’s
investment objectives, portfolio compensation, management, and past performance
Types of Funds:
• Growth funds- long term growth and capital gains are the primary goals of such
funds, so they invest principally in common stocks with above-average growth
potential *aggressive investors who want to build capital and has little interest in
current income
• Aggressive growth funds- are highly speculative investments that seek large profits
from capital gains; in many ways, they’re really an extension of the growth fund
concept
o Fairly small with average assets under management of less than $300 million
o Also known as capital appreciation funds, they often buy stocks of small,
unseasoned companies; stocks with relatively high price/earnings multiples;
and stocks whose prices are highly volatile
o Most volatile of all fund types
o When the markets are good, these funds do well; when the markets are bad,
they typically experience substantial losses
• Value funds- invest in stocks considered to be undervalued in the market
o Look for stocks that are fundamentally sound but have yet to be discovered,
and as such, remain undervalued by the market
o Look for stocks with relatively low P/E ratios, high dividend yields, and
moderate amounts of financial leverage
o Prefer undiscovered companies that offer potential for growth, rather than
those that are already experiencing rapid growth
o Uncover value (i.e. investment opportunities) before the rest of the market
does
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Chapter 13: investing in mutual funds, etfs, and real estate. Mutual fund- a financial services organization that receives money from its shareholders and invests those funds on their behalf in a diversified portfolio of securities *more people invest in these than any other type of investment product. Exchange-traded fund (etf)- an investment company whose shares trade on stock exchanged; unlike mutual funds, etf shares can be bought or sold (or sold short) throughout the day. Etfs are usually structured as an index fund that"s set up to match the performance of a certain market segment. Pooled diversification- a process whereby investors buy into a diversified portfolio of securities for the collective benefit of individual investors. How mutual funds are organized and run: management company- runs the fund"s daily operations and can also serve as the investment advisor (i. e. fidelity, vanguard, and t. rowe price) The fund"s assets can never be in the hands of the management company.
