Learning Objective # 1 Describe the characteristics of mutual funds.

1. LO#1 Learning Objective # 1Describe the characteristics of mutual funds.

2. LO#1 Why Investors Purchase Mutual Funds • Professional management • Who is the fund’s manager? • Managers can change so investors must be careful • Diversification • Investors funds are pooled and used to purchase a variety of investments. • Funds own stock in hundreds of different companies • Buys from different asset classes (stocks, bonds & other securities • Investment Company • A firm that, for a management fee, invests the pooled finds of small investors in securities appropriate to its stated investment objectives

3. LO#1 Characteristics of Mutual Funds • Closed-end Mutual Funds • A fund of finite size • Shares are issued by an investment company only when the fund is originally set up • After all original shares are sold you can only purchase shares from another investor • Open-end Mutual Funds • Shares are issued and redeemed by the investment company at the request of investors. • Investors can buy and sell shares at the net asset value.

4. LO#1 Characteristics of Mutual Funds Net Asset Value • The current market value of the securities contained in the mutual funds portfolio minus the mutual funds liabilities divided by the number of shares outstanding • Calculated at the close of trading each day (Value of the fund’s portfolio – Liabilities) Number of shares outstanding

5. LO#1 Characteristics of Mutual Funds • Index Fund • An affordable way for investors to invest in a diversified basket of securities; constructed to track the components of a market index such as the S&P 500 or the S&P/TSX Composite • Exchange Traded Funds (ETF’s) • An affordable way for investors to invest in a diversified basket of securities; provides the diversification of an index fund with the flexibility of a stock • Short Sell • The practice of selling a borrowed stock in the hope of covering the sale by buying it at a lower price later

6. LO#1 Characteristics of Mutual Funds • Load Fund • A mutual fund in which investors pay a commission (as high as 8.5%) every time they purchase or sell shares • Contingent Deferred Sales Load – pay upon withdrawal of funds • No-Load fund • No sales charge • Front-end load • A sales fee charged with each purchase; reduces the funds actually invested. Most fund companies have lowered the maximum front-end load on their funds to around 6 % • Back-end load • Also referred to as a contingent deferred sales load. One to six percent of withdrawals on sliding scale decreasing with time held, then zero if selling after a set number of years.

7. LO#1 Management Fees & Other Charges • Expense Ratio • Expressed as a fixed percentage of the fund’s total value, called the Management Expense Ratio (MER). Ranges from 0.25 percent (rare) to 4 percent, to cover investment company’s costs. Fee is up to 0.5 percent higher for back-end load funds. • Special Fees • Annual RRSP, RRIF, RESP trustee fee • Account set up fee • Short term trading fee • Processing fee • Service fees