Questions and Answers
What are mutual funds?
Where and when did fund investments begin?
In Europe in the late 1700s.
Who introduced the Vanguard 500 Index Fund in 1976?
John Bogle.
Almost _____ people own mutual funds in the U.S.
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The U.S. mutual fund industry has ________________ in total assets.
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What are major reasons investors purchase mutual funds?
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How does diversification in mutual funds provide safety?
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Almost all mutual funds in the U.S. are close-end funds.
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Approximately _______ (___%) of all mutual funds are close-end funds.
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What is a close-end fund?
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What determines the prices of ETF and close-end fund shares?
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What are exchange-traded funds?
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What are some different types of exchange-traded funds?
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What is the net asset value?
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What is the average load charge for mutual funds?
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What is a no-load fund?
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What is the purpose of managing fees in a mutual fund?
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What is an aggressive growth fund?
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What are income dividends?
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Study Notes
Mutual Funds Overview
- Mutual funds pool money from many shareholders to invest in securities like stocks, bonds, and money market instruments.
- Originated in Europe during the late 1700s and gained popularity in the U.S. before the Great Depression in 1929.
Key Figures
- John Bogle introduced the Vanguard 500 Index Fund in 1976, providing a low-cost investment option with diversification benefits.
- Approximately 99.5 million people in the U.S. own mutual funds, with 56 million households holding them, representing a total asset of $17.7 trillion.
Benefits of Mutual Funds
- Major reasons for investment include professional management and diversification, offering safety through the offsetting of losses by gains across investments in the fund.
- Particularly advantageous for beginning investors as it simplifies access to a diversified portfolio of stocks and bonds.
Fund Types and Structures
- Close-end funds account for approximately 500 (4%) of all mutual funds; shares are only available when the fund is created.
- In close-end funds, shares can only be bought from other investors after the original shares are sold.
- Exchange-traded funds (ETFs) and close-end fund prices are influenced by market supply, demand, and the underlying securities’ value.
Exchange-Traded Funds (ETFs)
- ETFs mimic specific indices, providing low-management costs due to passive management styles.
- Advantages include no minimum investment, lower fees, and the ability to trade shares during market hours.
- Different types of ETFs include mid-cap, small-cap, fixed-income, sector, and international funds.
Open-End and Load Funds
- Open-end funds represent 79% (approximately 9,600) of mutual funds, where shares are issued and redeemed by the investment company.
- Investors can buy and sell shares at the net asset value (NAV) calculated daily at trading's close.
- Load funds charge a commission, known as a sales charge, which can be as high as 8.5%, while no-load funds do not charge such fees.
Fee Structures
- Management fees range between 0.5% and 1%, while 12b-1 fees, imposed for marketing and shareholder services, cannot exceed 1% of assets annually.
- Fund expenses, including management fees, are detailed in the prospectus and contribute to the overall expense ratio.
- Redemption fees are a percentage of total redemption proceeds, while contingent deferred sales loads are charged upon withdrawal based on how long the fund has been owned.
Investment Strategies and Fund Objectives
- Mutual funds typically aim for long-term principal growth and reasonable current income.
- Types of funds include aggressive growth funds, equity income funds, global stock funds, and socially responsible funds targeting ethical investments.
- Bond funds differ by focusing on high-yield, long-term, municipal, and world bonds.
Important Considerations
- When selecting funds, consider your age, retirement timeline, and risk tolerance.
- The performance of funds should be assessed to determine whether managed funds outperform index funds like the Standard & Poor’s 500.
Dividends and Capital Gains
- Income dividends represent earnings distributed to shareholders, while capital gain distributions stem from the sale of securities within the fund.
- Most funds typically distribute these payments annually; however, ETFs may distribute income dividends more frequently without year-end capital gains.
Miscellaneous
- A family of funds is managed by one investment company, facilitating potentially lower transaction costs within the same fund family.
- Reinvestment plans allow for automatic reinvestment of dividends and capital gains into additional fund shares, potentially enhancing investment growth.
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Description
Test your knowledge of mutual funds with these flashcards covering key definitions and historical context. This quiz will delve into the origins of fund investments and the significance of mutual funds in the U.S. financial landscape.
