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Mutual Funds and Investment Companies: A Comprehensive Overview

This comprehensive guide provides a detailed overview of mutual funds and investment companies, covering topics such as the investment process, types of investment organizations, pricing, investment policies, sources of information, investor constraints, and investment policy considerations. It also explores the unique needs and objectives of different types of investors, from individuals to pension funds, insurance companies, and banks.

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Mutual Funds and Investment Companies: A Comprehensive Overview

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  1. Chapters4 & 5 Mutual Funds and Other Investment Companies Investors and the Investment Process

  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 Calculation 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

  5. Open-End and Closed-End Funds: Key Differences 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 • Fixed Income • Equity • Balance & Income • Asset Allocation • Indexed • Specialized Sector

  7. Sources of Information on Mutual Funds • Wiesenberger’s Investment Companies • Morningstar • Investment Company Institute • Popular press • Investment services

  8. Overview of the Investment Process • Specify objectives • Identify constraints • Formulate an investment policy • Monitor performance • Reevaluate and modify portfolio as determined from monitoring

  9. Specifying Objectives: Individual Investors Balance risk and return Life Cycle is critical to the process of determining the risk/return trade-off Younger investors - willing to bear more risk for higher returns Older investors - willing to accept lower returns for lower risk

  10. Specifying Objectives: Personal Trusts and Mutual Funds • Personal Trusts • Determined by the individual for whom the funds are being managed • Mutual Funds • Varies with type of fund • Detailed in the prospectus

  11. Specifying Objectives: Pension Funds and Endowments • Pension Funds • Defined contribution - shifted to the individual • Defined benefit - depends on average time to retirement of individuals • Endowment Funds • Gifts to nonprofits are invested • Funds from the endowment used by the nonprofit

  12. Specifying Objectives: Insurance Companies • Life Companies • Investments are hedged against potential claims of policy holders • Non-Life Companies • Invest premiums not paid back to policyholders for loss • Hedge against potential claims

  13. Specify Objectives: Banks • Sources of funds: deposits and borrowed funds • Investment of funds: predominately in loans and fixed income securities • Active in the securitized loan and asset markets • Not active in equity except in the Trust Function

  14. Investor Constraints Liquidity - speed and ease with which as asset can be converted into cash Investment Horizon - the planned liquidation date Regulations - specific regulations that may apply to the investor Prudent Man Rule Mutual Fund Diversification Charitable contribution limits

  15. Investor Constraints Tax Considerations - special considerations related to tax position of the investor Unique Needs- special considerations related to the underlying investors Diversification requirements related to employment

  16. Investment Policy: Asset Allocation Decision Individual - depends on life cycle Younger Higher equity 75% Lower safe assets 25% Older Lower equity 40% Higher safe assets 60% Institutional - depends on objectives Example - an all stock mutual fund would want nearly 100% in stock Sector or Region allocations

  17. Investment Policy: Active or Passive Active Trying to secure better than average performance Must balance returns and costs Passive Trying to get average returns rather than do better than the market Mix of Passive and Active

  18. Taxes and Investment Strategy Shelter Options • Deferral of taxes on capital gains • Tax Deferred Retirement Plan • IRA • 401(k) • Taxes are paid on the income from retirement and not on returns from investment

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