Mutual Fund Types and Management Styles
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Questions and Answers

What primary risk do capital gains or losses in dividend funds primarily relate to?

  • Market risk (correct)
  • Policy risk
  • Liquidity risk
  • Management risk
  • Which type of fund is primarily subject to concentration risk due to its narrow investment focus?

  • Bond funds
  • Commodity funds
  • Specialty funds (correct)
  • Dividend funds
  • In terms of risk, how do dividend funds compare to bond and equity funds?

  • Less risky than equity funds but more risky than bond funds (correct)
  • More risky than equity funds but less risky than bond funds
  • Less risky than both bond and equity funds
  • Equally risky as bond funds
  • What is a key characteristic of commodity funds?

    <p>They must invest in physical commodities or derivatives linked to commodities.</p> Signup and view all the answers

    Which statement about preferred shareholders in a bankruptcy scenario is accurate?

    <p>They rank above common shareholders but below bondholders.</p> Signup and view all the answers

    What is a disadvantage of index mutual funds regarding long-term returns?

    <p>They return less than the market benchmark after fees.</p> Signup and view all the answers

    What is the first step an investor must take to redeem mutual fund units?

    <p>Contact the financial advisor to sell or redeem fund units.</p> Signup and view all the answers

    How are distributions from a mutual fund taxed upon redemption?

    <p>As both income and capital gains depending on the transaction.</p> Signup and view all the answers

    What happens during the valuation day of a mutual fund redemption?

    <p>The fund calculates the net asset value per share (NAVPS).</p> Signup and view all the answers

    In what scenario is a capital gain realized for mutual fund investors?

    <p>When the investor sells their fund shares on the open market.</p> Signup and view all the answers

    In the ratio withdrawal plan, what is the amount withdrawn in Year 3?

    <p>$9,448</p> Signup and view all the answers

    What is the expected value at the end of Year 5 in a ratio withdrawal plan if the initial amount is $100,000?

    <p>$86,763</p> Signup and view all the answers

    Which of the following statements is true concerning a fixed-dollar withdrawal plan?

    <p>It may deplete the principal if withdrawals exceed fund growth.</p> Signup and view all the answers

    What is the percentage growth assumed for the portfolio in the given examples?

    <p>8%</p> Signup and view all the answers

    How does the value at the beginning of Year 2 compare with that at the end of Year 1 in a ratio withdrawal plan?

    <p>It is lower.</p> Signup and view all the answers

    In the ratio withdrawal plan, what is the total withdrawal amount after Year 4?

    <p>$38,306</p> Signup and view all the answers

    What happens to the value of the portfolio if the fixed withdrawals are consistently greater than the portfolio's growth?

    <p>The portfolio value is reduced and may be depleted.</p> Signup and view all the answers

    What is the method used to determine the withdrawal amount in the ratio withdrawal plan?

    <p>A percentage of the remaining portfolio value.</p> Signup and view all the answers

    If an investor selects a fixed-dollar amount to withdraw monthly, which of the following is most likely true?

    <p>Withdrawals could exceed the rate of interest earned.</p> Signup and view all the answers

    Which of these scenarios can lead to a depletion of the investment principal?

    <p>Fixed withdrawals exceeding the portfolio growth.</p> Signup and view all the answers

    Study Notes

    Mutual Fund Types

    • Money Market Funds invest in short-term debt securities (e.g., treasury bills, commercial paper).
    • Fixed Income Funds invest in bonds, debentures, and other debt securities.
    • Balanced Funds hold both stocks and bonds, aiming for a mix of growth and stability.
    • Equity Funds invest primarily in stocks of companies.
    • Commodity Funds invest in physical commodities (e.g., gold, oil) or use derivatives to gain exposure to commodities.
    • Specialty Funds focus on a specific industry or region, like retail venture capital, alternative strategies, or specific sectors.

    Mutual Fund Management Styles

    • Passive Management tracks a market or benchmark index.
    • Active Management aims to outperform market benchmarks using active asset allocation and selection.

    Mutual Fund Redemption

    • Mutual fund units are redeemed at the fund's Net Asset Value Per Share (NAVPS).
    • Taxable income can be generated through distributions of interest, dividends, and capital gains realized by the fund.
    • Taxable capital gains are realized when the investor sells the fund.

    Mutual Fund Withdrawal Plans

    • Ratio Withdrawal Plan: A percentage of the fund's value is withdrawn each period.
    • Fixed-Dollar Withdrawal Plan: A specific dollar amount is withdrawn regularly.
    • Fixed-Period Withdrawal Plan: A fixed dollar amount is withdrawn over a predetermined period.
    • Life Expectancy-Adjusted Withdrawal Plan: Withdrawals are adjusted based on the investor's life expectancy.

    Mutual Fund Performance

    • Time-Weighted Rate of Return (TWRR) measures the actual return earned by the portfolio manager, independent of investor contributions and withdrawals.
    • Daily Valuation Method calculates daily incremental changes in fund value.
    • Modified Dietz Method approximates the daily valuation method by assuming a constant rate of return.
    • Performance Evaluation: Mutual fund performance is measured against relevant benchmarks like index tracking or peer group average returns.

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    Description

    Explore the various types of mutual funds including Money Market, Fixed Income, and Equity Funds. Understand different management styles such as Passive and Active Management, as well as the process of mutual fund redemption. This quiz will test your knowledge on these essential investment concepts.

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