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FIN 501 (31)
Chapter 5

CFIN501- Chapter 5- Mutual Funds.docx

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Ryerson University
FIN 501
Edward Blinder

CFIN501 Chapter 5 Mutual FundsAdvantages and drawbacks of mutual fund investingAdvantagesDiversificationinvesting in a portfolio or basket of securitiesoReduce risk but doesnt eliminateProfessional managementmanager makes the decision of when to add or remove particular securitiesoInvestor does not have to make crucial decisionsMinimum initial investmentDrawbacksRiskvalue of mutual fund could fall and be worth less than your initial investmentoNo government or private agency guarantees value of mutual fundoSpreading investment over many securitieslimit chances for large returns if one increases dramatically in valueCostentails fees and expenses that do not usually accrue when purchasing individual securities directlyInvesting companies and fund typesInvestment companybusiness that specializes in pooling fund from individual investors and investing themAll mutual funds are investment companiesOpenend VS Closedend fundsDifferenceoInvest in mutual fundbuying shares in the fundoShares are bought and sold depends on which type of fund you are consideringOpenend fundinvestment company that stands ready to buy and sell shares at any timeoBuyfund simply issues them and then invests the money receivedoSellfund sells some if its assets and uses the cash to redeem the sharesoNumber of shares outstanding fluctuates through timeClosedend fundinvestment company with fixed number of shares that are bought and sold only in the open stock marketoBuymust buy from another investoroSellsell them to another investorKey differenceclosed end fund itself does not buy or sell sharesoClosed endlisted on stock exchange where shares are bought anf sold in the same wayoOpen end more popular among individual investorsMutual funs actually refers only to an open end investment companyNet Asset ValueNet asset valuevalue of assets less liabilities held by a mutual fund divided by the number of shares outstanding Abbreviated NAVChange every dayvalue of assets held by the fund fluctuatesPrice you will receive for shares you sell Fund stands ready to redeem shares at any timeshares in openend funds are always worth their net asset valueShares of closed end funds are bought and sold in the stock marketsshare prices at any point in time may or may not be equal to their net asset valueMutual fund operationsMutual Fund Organization and CreationCorporationowned by shareholdersShareholders elect board of directorsresponsible for hiring a manger to oversee the funds operationsAlthough belong to a larger family of fundsEvery fund is a spate company owned by its shareholdersCreated by banks or by investments advisory firmsbusiness that specialize in managing mutual fundsInvestment advisory firms also called mutual funds such firms additional operations such as discount fund companies and other financial servicesCanadadifferent mutual funds are offered by banks insurance companies and investment advisory firmsInvestment advisory firms create mutual fundsthey wish to mange them to earn fees1
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