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FIN 341, Chapters 4, 5, 6

Mutual Funds pooling fund of a large group of investors--is a form of financial intermediary
Defined contribution plans almost same as 401k plans; you decide where the funds go
Advantages of MFs 1. diversification 2. professional management 3. minimum initial investment
Disadvantages of MFs 1. risk 2. costs 3. taxes
Investment company a business that specializes in pooling funds from individual investors and investing them; all MFs are investment co.s but not all investment co.s are MFs
Open-end Funds can sell new shares to anyone that wants to buy, and redeem from anyone wanting to sell
Closed-end Funds the number of shares is fixed and never changes; have to buy them from another investor & have to sell them to another investor
Net Asset Value (total value of assets - liabilities)/number of outstanding shares; NAV of a MF will change every day bc the value of the assets held by the fund fluctuates
NAV and Open-end funds Shares in an open-end fund = NAV
NAV and Closed-end funds Share prices may or may not be = to NAV because shares are bought and sold in the stock markets
Creation of MFs Most mutual funds are created by investment advisory firms (say Fidelity Investments) or brokerage firms with investment advisory operations (say Merrill Lynch)
Taxation of Investment Companies investments are treated as "regulated investment companies" for tax purposes; doesn't pay tax on its investment income, fund shareholders pay taxes
Qualification as a regulated investment company 1. Hold almost all its assets as investments in stocks, bonds, and other securities 2. Use no more than 5% of its assets when acquiring a particular security 3. Pass through all realized investment income to fund shareholders
MF required documents must produce a prspectus to any investor wishing to purchase shares and an annual report to their shareholders
MF expenses and fees 1. sales charges (or loads) 2. 12b-1 fees 3. management fees 4. trading costs
Front-end load sales charge levied on purchases of shares in some mutual funds; usual 5%; expressed as a percentage of the offering price, not NAV; A-shares
load funds funds that charge loads
no-load funds funds that have no charges
offering price price paid in excess of the NAV when you purchase shares in a load fund
load difference between the offering price and the NAV; shares in no-load funds are sold at NAV
low-load funds funds with front-end loads 2-3%
back-end loads charges levied on redemptions called CDSC; B-shares
CDSC; Contigent deferred sales charges also called back-end load, sales charge levied when investors redeem shares
level loads investors pay an added fee, usually 1%, every year they're in the fund
12b-1 fees allows funds to spend up to 1% of fund assets annually to cover distribution and marketing costs;
"pure" no-load funds MFs with no front-end or back-end loads and no or min 12b-1
"no-so-pure" funds may have no loads but still charge hefty 12b-1 fees
management fees Hold almost all its assets as investments in stocks, bonds, and other securities; Use no more than 5% of its assets when acquiring a particular security Pass through all realized investment income to fund shareholders
Trading costs Not reported directly; Funds must report "turnover," which is related to the amount of trading; The higher the turnover, the more trading has occurred in the fund; The more trading, the higher the trading costs
turnover measures how much trading a fund does; the lesser of total purchases or sales during a year / ave daily assets
shareholder transaction expenses loads and deferred sales charges
fund operating expenses management and 12b-1 fees, legal, accounting, reporting costs, director fees
short-term funds money market mutual funds
money market mutual funds MMMFs mutual funds specializing in money market instruments; $1 NAV to make them resemble bank accounts; depending on type of securities MMMFs can be taxable or tax-exempt
"breaking the buck" NAV for a MMMF < $1
money market deposit accounts MMDAs like MMMFs but MMDA account is a bank deposit and offers FDIC
long-term funds invest in long-term securities; stock funds, bond funds, balances funds
Created by: kd252007