Mutual Funds: Types of Investments

• This unit focuses on types of investments and is designed for dealing representatives who advise clients on mutual funds.
• Lessons cover investment types, features, risks, and their fit within mutual funds.

Overview of Unit 5: Types of Investments

• The unit is divided into five main lessons that explore different types of investments:
• Building Blocks of Mutual Funds
• Fixed Income Securities
• Bonds
• Equities (Stocks)
• Derivatives (Options & Futures)
• Each lesson explains characteristics, risks, and associated returns and also how they're used in mutual funds.

Building Blocks of Mutual Funds

• Mutual funds pool money from investors to invest in diversified securities portfolios like stocks and bonds
• They're managed by professionals to meet specific investment goals.
• Investment objectives focuses on:
• Safety of Principal: Protecting the initial investment
• Income: Regular returns from bonds/dividend stocks.
• Growth: Long-term capital appreciation, often via stocks.

Fixed Income Securities

• They are debt instruments where investors loan money to governments or corporations.
• In exchange investors receive regular interest payments and return of principal at maturity.
• Examples include treasury bills, bonds, banker's acceptances, and commercial papers.
• Key features include:
• Term-to-Maturity: Time until loan repayment
• Par Value: Amount repaid at maturity (e.g., $1,000)
• Coupon Rate: Interest rate paid to investors
• Types of money market securities:
• Treasury Bills (T-bills): Short-term, government-backed, very safe.
• Provincial & Municipal Papers: Issued by local governments, similar to T-bills.
• Bankers' Acceptances (BAs): Short-term corporate loans backed by a bank.
• Commercial Papers (CPs): Short-term corporate loans, riskier than BAs.

Bonds

• They are long-term debt securities (over 1 year) issued by governments or corporations.
• Investors receive interest payments (coupons), and the principal is repaid upon maturity.
• Bond prices fluctuate with interest rates, moving inversely.
• Types of bonds:
• Coupon Bonds: Pay regular interest until maturity
• Zero-Coupon Bonds: Sold at a discount, pay full value at maturity
• Convertible Bonds: Can be converted into company shares
• Callable Bonds: Issuer can repay early
• Retractable Bonds: Can be sold back to the issuer before maturity

Equities (Stocks)

• Equities are ownership in a company.
• Investors can profit if the stock price increases
• Companies issue common and preferred shares.
• Common shares:
  • Give investors voting rights and dividends
  • Prices can fluctuate based on company performance
• Preferred Shares:
  • Have fixed dividend payments
  • Less risk than common shares
  • Includes no voting rights

Derivatives (Options & Futures)

• Derivatives are financial contracts that derive value from assets (stocks, bonds, commodities, currencies).
• Used for hedging (reducing risk) or speculation (betting on price changes).
• Types include
• Options: Right (not obligation) to buy/sell asset at set price
• Call Option: Right to buy stock
• Put Option: Right to sell stock.
• Futures Contracts: Legal obligation to buy/sell commodity at a set price.
• Commonly used by farmers, oil producers, and currency traders.
• Forward Contracts: Similar to futures, customized between parties.

Key Takeaways from Unit 5

• Mutual Funds: Aim to achieve specific goals
• Fixed Income Securities: Loans to entities with regular interest
• Bonds: Debt securities featuring coupons and convertibility
• Equities: Ownership in companies, common and preferred shares
• Derivatives: Financial contracts for hedging or speculation