Mutual Funds And Other Investment Companies PDF

Chapter Mutual Funds and Other 4 Investment Companies Bodie, Kane, and Marcus Essentials of Investments 12th Edition  4.1 Investment Companies Investment companies Financial intermediaries that invest the funds of individu...

Chapter Mutual Funds and Other 4 Investment Companies Bodie, Kane, and Marcus Essentials of Investments 12th Edition  4.1 Investment Companies Investment companies Financial intermediaries that invest the funds of individual investors in securities or other assets Net asset value (NAV) Assets minus liabilities per share Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 2  4.1 Investment Companies Functions Record keeping and administration Diversification and divisibility Professional management Lower transaction costs Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 3  4.2 Types of Investment Companies Unit Investment Trusts Money pooled from many investors is invested in portfolio fixed for life of fund Managed Investment Companies A professional investment firm that manages a portfolio for an annual fee Load: Sales commission Open-end or Closed-end fund Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 4  4.2 Types of Investment Companies: Open vs. Closed Open-end fund A fund that issues or redeems its shares at net asset value. Closed-end fund Share may not be redeemed Are traded at prices that can differ from net asset value Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 5  4.2 Types of Investment Companies: Open vs. Closed Commingled Funds Partnership of investors pooling fund For trusts/larger retirement accounts Professional management for a fee Real Estate Investment Trusts (REITS) Similar to closed-end funds Invests in real estate/real estate loans Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 6  4.2 Types of Investment Companies: Open vs. Closed Hedge Funds Private investment pools Exempt from SEC regulation Can be speculative in nature Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 7  4.3 Mutual Funds: Investment Policies Investment Policy Characteristics Money Market Mutual Fund Commercial Paper, Repurchase Agreements, CDs (MMMF) Equity Funds Stocks, Some fixed-income or other securities Equity Sector Funds Stocks concentrated in a particular industry Bond Funds Specialize in fixed-income (bond) sector Global Funds World wide securities, including the U.S.A. International Funds World wide securities, excluding the U.S.A. International Regional Funds Foreign securities concentrated in certain regions Emerging Markets Funds Securities from developing nations Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 8  4.3 Mutual Funds: Investment Policies Continued Investment Policy Characteristics Balanced Fund: Hold both equities and fixed-income securities Hold both equities and fixed-income securities Life Cycle Fund: Static Allocation stable proportions Life Cycle Fund: Targeted- Targeted maturity funds become more Maturity conservative as investor ages Hold both equities and fixed-income Asset Allocation/Flexible Funds securities—proportion varies according to market forecast (market timing) Try to match performance of broad market Index Funds index; Buy shares in proportion to security’s representation in index Mutual funds that primarily invest in other Fund of Funds mutual funds Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 9  Table 4.1 U.S. Mutual Funds by Investment Classification Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 10  4.4 Costs of Investing in Mutual Funds: Fee Structure Fee Structure Definition Operating Expenses Costs incurred by mutual fund in operating portfolio Front-end Load Commission or sales charge paid when purchasing shares Back-end load “Exit” fee incurred when shares are sold Annual fees charged by mutual fund to pay for 12b-1 charges marketing/distribution costs Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 11  4.4 Costs of Investing in Mutual Funds Fees, Loads, and Performance Gross performance of load funds is statistically identical to gross performance of no-load funds Funds with high expenses tend to be poorer performers 12b-1 charges should be added to expense ratios Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 12  4.4 Costs of Investing in Mutual Funds HERE NAV and Effective Load Cost to initially purchase one share of load fund = NAV + Front-end load (%) (if any) Stated loads typically range from 0 to 8.5% Load is designed to offset marketing expenses Goes to broker who sells fund to investor Effective load greater than stated load Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 13  4.4 Costs of Investing in Mutual Funds Fees and Mutual Fund Returns Soft dollars: Value of research services brokerage house provides “free of charge” in exchange for business Rate of Return: NAV1 − NAV0 + Income + Capital gains distribution Rate of return = NAV0 Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 14  4.5 Taxation of Mutual Fund Income General Tax Rules Fund not taxed if diversified and income distributed Investor taxed on capital gain and dividend distributions Turnover: Ratio of trading activity to assets of portfolio (Turnover affects investor’s tax liability) Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 15  4.5 Taxation of Mutual Fund Income Implications of Fund Turnover Fund pays commission costs on portfolio purchases and sales—charged against NAV Turnover rate measured as annual total asset value bought or sold in a year divided by average total asset value Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 16  4.6 Exchange-Traded Funds Exchange-traded funds (ETFs) Offshoots of mutual funds that allow investors to trade entire portfolios Much like shares of stock Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 17  Figure 4.2 Assets in ETFs Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 18  Figure 4.3 Investment Company Assets under Management Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 19  4.7 Mutual Fund Investment Performance: Figure 4.4 Average MF performance < broad market performance Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 20 Table 4.3 Consistency of Investment Results Evidence suggests some persistence in positive performance over certain horizons Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 21  4.8 Information on Mutual Funds Sources of Information on Mutual Funds Morningstar (www.morningstar.com) Fund prospectus Yahoo! The Wall Street Journal Investment Company Institute (www.ici.org) American Institute of Individual Investors Brokers Copyright © 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. 22