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Mutual Funds and Investment Companies

Mutual Funds and Investment Companies. Services of Investment Companies Types of Investment Companies Types of Mutual Funds Cost of Mutual funds Return of Mutual Funds Exchange Traded Funds. Services of Investment Companies. Administration & record keeping Diversification & divisibility

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Mutual Funds and Investment Companies

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  1. Mutual Funds and Investment Companies • Services of Investment Companies • Types of Investment Companies • Types of Mutual Funds • Cost of Mutual funds • Return of Mutual Funds • Exchange Traded Funds

  2. Services of Investment Companies • Administration & record keeping • Diversification & divisibility • Professional management • Reduced transaction costs

  3. Net Asset Value • Used as a basis for valuation of investment company shares • Selling new shares • Redeeming existing shares NAV= Market Value of Assets - Liabilities Shares Outstanding

  4. Types of Investment Organizations • Unit Trusts • Managed Investment Companies • Open-End • Closed-End • Other investment organizations • Commingled funds • REITs • Hedge Funds

  5. Open-End and Closed-End Funds Shares Outstanding • Closed-end: no change unless new stock is offered • Open-end: changes when new shares are sold or old shares are redeemed Pricing • Open-end: Net Asset Value(NAV) • Closed-end: Premium or discount to NAV

  6. Investment Policies • Money Market • Equity • Specialized Sector • Bond • Balance & Income • Asset Allocation • Indexed • International

  7. Costs of Investing in Mutual Funds • Fee Structure • Front-end load • Back-end load • Operating expenses • 12 b-1 charges • distribution costs paid by the fund • Alternative to a load • Fees and performance

  8. Example • An open-end fund has a total asset of $120 million and a liability of $10 million. It has 10 million shares outstanding. What is its NAV? It is sold with a front-end load of 5%. What is its offering price?

  9. Fund Returns • Page 106 • A sophisticated example: Problem 4.16 on page 121

  10. Table 4.2 Impacts of Costs on Investment Performance

  11. Exchange Traded Funds • ETF allow investors to trade index portfolios like shares of stock • Examples - SPDRs and Webs • Potential advantages • Trade continuously • Lower taxes • Lower costs • Potential disadvantages

  12. First Look at Mutual Fund Performance • Average mutual fund performance is generally less than broad market performance • Over certain horizons there is persistence in positive performance • Evidence is not conclusive • Some inconsistencies

  13. Figure 4.3 Diversified Equity Funds versus Wilshire 5000 Index

  14. Sources of Information on Mutual Funds • Wiesenberger’s Investment Companies • Morningstar (www.morningstar.com) • Yahoo (biz.yahoo.com / funds) • Investment Company Institute (www.ici.org) • Popular press • Investment services

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