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Questions and Answers
Which type of fund focuses on specific sectors of the economy such as biotechnology or energy?
Which type of fund focuses on specific sectors of the economy such as biotechnology or energy?
What is the primary distinction that bond funds can be categorized by?
What is the primary distinction that bond funds can be categorized by?
What is the purpose of a Target Date Fund?
What is the purpose of a Target Date Fund?
Which of the following is a characteristic of blended or hybrid funds?
Which of the following is a characteristic of blended or hybrid funds?
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In a mutual fund 'style' box, what categories are used to represent a fund's investment focus?
In a mutual fund 'style' box, what categories are used to represent a fund's investment focus?
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Which type of fund is designed to provide income through investments primarily in fixed-income securities?
Which type of fund is designed to provide income through investments primarily in fixed-income securities?
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Which type of fund primarily invests in companies based on their size classification?
Which type of fund primarily invests in companies based on their size classification?
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What do emerging markets refer to in the context of mutual funds?
What do emerging markets refer to in the context of mutual funds?
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What distinguishes an open-end fund from a closed-end fund?
What distinguishes an open-end fund from a closed-end fund?
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Which of the following statements about mutual fund costs is accurate?
Which of the following statements about mutual fund costs is accurate?
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What is net asset value (NAV) in relation to mutual funds?
What is net asset value (NAV) in relation to mutual funds?
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How does taxation apply to mutual fund distributions?
How does taxation apply to mutual fund distributions?
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Which entity typically creates most mutual funds?
Which entity typically creates most mutual funds?
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What happens if an open-end fund grows too large?
What happens if an open-end fund grows too large?
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What is the primary role of shareholders in a mutual fund?
What is the primary role of shareholders in a mutual fund?
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What is true about a regulated investment company regarding taxes?
What is true about a regulated investment company regarding taxes?
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What is the main purpose of money market mutual funds (MMMFs)?
What is the main purpose of money market mutual funds (MMMFs)?
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What does it mean when a money market mutual fund 'breaks the buck'?
What does it mean when a money market mutual fund 'breaks the buck'?
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Why do tax-exempt money market funds have lower yields?
Why do tax-exempt money market funds have lower yields?
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What is a key difference between money market deposit accounts (MMDAs) and money market mutual funds (MMMFs)?
What is a key difference between money market deposit accounts (MMDAs) and money market mutual funds (MMMFs)?
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As of early 2019, what percentage of money market mutual fund assets were in taxable funds?
As of early 2019, what percentage of money market mutual fund assets were in taxable funds?
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What type of funds have historically been classified as stock funds, bond funds, or balanced funds?
What type of funds have historically been classified as stock funds, bond funds, or balanced funds?
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What is a 'triple-tax-free' fund?
What is a 'triple-tax-free' fund?
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How are municipal securities treated for tax purposes?
How are municipal securities treated for tax purposes?
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What is the primary reason the Bear 3X Fund (SPXL) did not achieve its expected gain over two years?
What is the primary reason the Bear 3X Fund (SPXL) did not achieve its expected gain over two years?
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How do geometric returns compare to arithmetic returns in the context of leveraged ETFs?
How do geometric returns compare to arithmetic returns in the context of leveraged ETFs?
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What risk do investors face when holding Exchange Traded Notes (ETNs)?
What risk do investors face when holding Exchange Traded Notes (ETNs)?
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Which statement best describes the flexibility of hedge fund managers compared to mutual fund managers?
Which statement best describes the flexibility of hedge fund managers compared to mutual fund managers?
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What distinguishes hedge funds from mutual funds in terms of investor requirements?
What distinguishes hedge funds from mutual funds in terms of investor requirements?
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What is the significant effect of volatility on leveraged funds' returns?
What is the significant effect of volatility on leveraged funds' returns?
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In an example where the S&P 500 has daily returns of 1%, -2%, 2%, 1%, and 3%, what is the arithmetic average return?
In an example where the S&P 500 has daily returns of 1%, -2%, 2%, 1%, and 3%, what is the arithmetic average return?
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What benefit do ETNs provide to investors compared to futures contracts?
What benefit do ETNs provide to investors compared to futures contracts?
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What is one of the primary goals of managers of a pure short hedge fund?
What is one of the primary goals of managers of a pure short hedge fund?
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What characteristic is expected for hedge funds utilizing leverage?
What characteristic is expected for hedge funds utilizing leverage?
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Which strategy do managers employ to increase their fund's exposure to predicted market movements?
Which strategy do managers employ to increase their fund's exposure to predicted market movements?
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What is a drawback of investing in a 'Fund of Funds'?
What is a drawback of investing in a 'Fund of Funds'?
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What might cause a hedge fund manager to use short selling?
What might cause a hedge fund manager to use short selling?
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Which of the following types of funds are designed for long-term investments?
Which of the following types of funds are designed for long-term investments?
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What is the primary investment approach employed by macro fund managers?
What is the primary investment approach employed by macro fund managers?
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What type of fund aims to provide exposure to multiple hedge funds?
What type of fund aims to provide exposure to multiple hedge funds?
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How does the Wall Street Journal classify general purpose funds?
How does the Wall Street Journal classify general purpose funds?
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What is a characteristic of growth stocks?
What is a characteristic of growth stocks?
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Which of the following statements is true regarding mutual fund performance data?
Which of the following statements is true regarding mutual fund performance data?
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What happens when a mutual fund chooses to close?
What happens when a mutual fund chooses to close?
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What might prompt a mutual fund to close to new investors?
What might prompt a mutual fund to close to new investors?
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Which of the following is characteristic of a closed-end fund?
Which of the following is characteristic of a closed-end fund?
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What is a significant caution regarding historical performance of mutual funds?
What is a significant caution regarding historical performance of mutual funds?
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What tool does Morningstar provide for evaluating mutual fund performance?
What tool does Morningstar provide for evaluating mutual fund performance?
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Study Notes
Chapter 4: Mutual Funds and Other Investment Companies
- Mutual funds are a way to pool investor funds for investment
- In 1980, 5 million Americans owned mutual funds
- By 2019, an estimated 99.5 million Americans in 56 million households owned mutual funds.
- In 2018, investors withdrew $191 billion from mutual funds.
- Mutual fund assets totaled $18 trillion by the end of 2018
- Mutual funds act as financial intermediaries like commercial banks and life insurance companies
- The buy and sell decisions for a pool of investor funds are made by a fund manager
- Mutual funds offer diversification, reducing risk
- Professional money managers handle security selection in mutual funds
- Minimum initial purchase amounts in mutual funds can range from 2,500to2,500 to 2,500to250, with subsequent purchases sometimes as low as $50.
- Mutual fund values may decrease, losing value from initial investment
- No government or private agency guarantees mutual fund value
- Investing in mutual funds involves fees and expenses
- Taxes are paid on mutual fund distributions (dividends and capital gains), and profits from sale of mutual fund shares
- Investment companies pool investor funds for investments.
- Open-end funds can buy or sell shares at any time
- Closed-end funds have a fixed number of shares and trading only occurs on open market.
- Types of mutual funds include money market funds, long-term funds, stock funds, bond funds, and blended funds.
- Net Asset Value (NAV) is the value of a mutual fund's assets divided by the number of shares.
- Open-end fund shares are worth their NAV.
- Closed-end fund share prices can differ from their NAV.
- Mutual funds are corporations owned by shareholders electing a board of directors.
- Investment advisory firms often create and manage mutual funds
- SEC "regulated investment companies" do not pay taxes on investment income
- Qualified investment companies hold majority assets in securities like stocks and bonds.
- Limit asset allocation to a single security to no more than 5%
- Distributors of realized investment income are fund shareholders
- Mutual funds are required to provide a prospectus to investors wishing to buy shares.
- Mutual funds provide annual reports to their shareholders.
- Sales charges, or loads, are levied on purchases (front-end loads) and redemptions (back-end loads).
- 12b-1 fees allow funds to spend up to 1% of assets annually on distribution and marketing, though .25% is most common.
- Management fees typically range from .25% to 1.50% of assets
- Trading costs are reported as "turnover," reflecting trading activity; high turnover signifies higher costs.
- Shareholder transaction expenses include loads, deferred sales charges.
Investment Companies and Fund Types
- Investment companies pool funds from individual investors
- Open-end funds can buy/sell shares at any time
- Closed-end funds trade in the open market with fixed shares
- Fund types include money market, long-term, stock, bond, and blended funds
- NAV is the value of assets divided by shares
Mutual Funds: Operations and Creation
- Mutual funds are corporations.
- Ownership is by shareholders who elect a board of directors
- Investment advisory firms and brokerage firms with investment advice operations create and manage mutual funds
Mutual Fund Costs and Fees
- Sales charges or loads and 12b1 fees cover distribution and marketing costs
- Annual management fees typically range from .25% to 1.50% of assets
- Trading costs reported as turnover.
Short-term Funds
- Short-term funds (money market funds) specialize in money market instruments.
- Aim to provide low risk, highly liquid investments
- Net asset value (NAV) maintained at $1.00
- Not all money market funds are suitable
- FDIC insurance is an option for money market deposit accounts
Long-Term Funds
- Many fund types exist, classified historically as stock, bond, or balanced. Today, investment objectives are the major differentiating factor
- Common classifications based on asset allocation (stock funds, bond funds, blended funds)
Stock Funds
- Stock funds can seek out capital appreciation or dividends
- Categories by company size (small-cap, mid-cap, large-cap)
- Sector or thematic (biotechnology, internet, energy) funds
- Index funds reflect market indices (i.e., S&P 500)
Bond Funds
- Bond funds can be classified by maturity, credit quality, taxability, and issuing country.
- Different types of underlying bonds include short-term, intermediate-term, general, high-yield, mortgage, world, insured, and single-state municipal.
Stock and Bond Funds (Blended)
- Some funds mix stocks and bonds in various combinations, based on investment objectives and expected returns
- Target-date funds shift portfolio allocations based on a target retirement date
Mutual Fund Objectives: Recent Developments
- Mutual fund style boxes place funds in a visual grid arrangement based on size (large, medium, small) and style (value, blend, growth).
- Recent trends in classifying objectives based on actual holdings (e.g., Wall Street Journal categorizes by market capitalization and growth/value stock investments)
Mutual Fund Performance
- Mutual fund performance is closely watched by several organizations
- Financial publications provide data on a regular basis
- Sources like the Wall Street Journal provide timely print reports, and online resources like morningstar.com offer further information
Closed-End Funds
- Closed-end funds have a fixed number of shares, traded on exchanges.
- There are approximately 600 closed-end funds listed on US exchanges and 8,000 open-end funds.
- Closed-end funds frequently trade a discount compared to their NAV.
- Reasons for a firm's choice to close a fund include the expectation that the income stream exceeds the fund's investment potential
Exchange Traded Funds (ETFs)
- ETFs are essentially index funds that trade like closed-end funds (without discount phenomenon).
- They offer specialized indexes and are a frequently used instrument.
- Well-known examples like SPDR (mimics the S&P 500) and Diamond (mimics the Dow Jones) are examples
- Trading occurs on major stock exchanges.
Leveraged ETFs
- Leveraged ETFs are designed to provide returns in multiples of underlying indexes
- Leverage works both ways; losses/gains are amplified
- Performance results over longer periods often deviate from expectations
Hedge Funds
- Hedge funds are pools of money from investors.
- Unlike mutual funds, they are not required to maintain specific diversification or liquidity levels.
- They give managers significant freedom in investment strategy
- Investors should be accredited or qualified investors for investment considerations
- Hedge fund fee structures commonly include a 2/20 model
- Managers of the hedge fund incur hurdles to prevent manipulation, with "high water mark" being a common example
Chapter Review
- Summarizes key concepts for exam preparation.
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Description
Dive into the essential concepts of mutual funds in this quiz. Learn about their role as financial intermediaries, the growth of ownership among Americans, and the importance of diversification in investment. Test your knowledge on mutual fund structures, management, and investment risks.
