Chapter 4 Essay

1468 words - 6 pages

Chapter 4- Mutual Funds and Other Investment Companies

Why buy mutual fund: people are lazy if you are trading stocks you have to give basis data for transactions you make for takes but with a mutual fund they do it for you. Diversification

** an individual investor choosing a mutual fund should consider not only the fund’s stated investment policy and past performance, but also management fees and expenses.**


Investment Companies do the following tasks: WHY MUTUAL FUNDS??

• Administration & record keeping (people don’t want to do it themselves)

• Diversification & divisibility (diversified portfolio)

• Professional management

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Mutual fund: name for an open-end investment company

Each mutual fund has a specific investment policy

Investment Policies:

• Described in the prospectus (each fund has a specific policy described in prospectus)

• Management companies manage a family of mutual funds. Some management companies include:

' Fidelity

' Vanguard

' Putnam

' Dreyfus

• Each offers an array of open-end mutual funds with different investment policies

Types of Mutual Funds: Any market sector

• Money Market

• These funds invest in money market securities (C/P, BA, CDs)

• Maturity a little more than a month

• NAV is fixed

• Equity

• Invest in stock

• Income funds- shares with high dividend yields (capital gains)

• Growth funds- current income not capital gains (riskier)

• Specialized Sector

• A type of equity fund that is called a sector fund

• Concentrate on an industry

• Bond

• Invest in fixed-income sector

• Corporate bonds, treasury bonds, municipal bonds

• Balanced Funds

• Entire investment portfolio

• Hold both stocks and bonds

• Life-style funds are balanced funds in which the assets are aggressive to conservative

• Targeted-maturity funds become increasingly conservative as age increases

• Asset Allocation and Flexible

• Hold both stocks and bonds like balanced funds

• Market timing and not designed to be low-risk investments

• Indexed

• Tries to match the performance of a broad market index

• The fund buys shares in securities included in a particular index

• International

• Invest in securities of firms located outside the U.S.

How Funds Are Sold:

• Directly marketed or indirectly marketed

• Direct-sold through the mail, over the phone, and internet (by the underwriter)

• Half the fund sales today are distributed through a sales force

• Revenue sharing on sales force- company pays the brokerage for priority treatment when making recommendations

' Potential conflicts of interest

' It must be disclosed to the investor

• Financial supermarkets: more common for open trades

• Can sell shares in many different complexes and splits management fees with mutual fund company

• offer mutual funds

4.4 COSTS OF INVESTING IN MUTUAL FUNDS (downside of mutual funds)

Fee Structure: management fees and other expenses

• Fee Structure

' Front-end load- commission fee paid when you purchase the shares (to pay brokers who sell the funds) sales commission you pay to invest

' Back-end load- redemption fee incurred when you sell your shares (sales charge on the way out)...

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