Investment Co. Chap 5
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MeredithK79 on July 28, 2010
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Terms | Definitions |
|---|---|
 Mutual Fund Advantages | -investment decisions made by pro. Ease of diversification. Ability to liquidate a portion of investment without losing diversification. Simplified tax info. Simplified record keeping. Ease of purchase and redemption of securities. Automatic reinvestment of capital gains and income distributions at NAV. Safekeeping of portfolio securities, ease of account inquiry |
| Undivided INterest Concept | your $50 owns a piece of all the ingredients in the portfolio, just as the rich guys $1M does. Just as diversified |
| Mutual funds can diversify by | Industries Types of investment instruments Variety of securities issuers Geographic areas |
| INvestment company Act of 1940 | Diversified company - management company which meets the following requirements: @ least 75 per centum of the value of its total assets is represented by cash and cash items. Govt securities, securities of other investment companies, and other securities for the purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 per centum of the value of the total assets of such mgmt co. and to not more than 10 per centum of the outstanding voting securities of such issuer |
| Diversified | no more than 5% of it's assets are in any one company, and they don't own more than 10% of any one companies outstanding shares |
| Equity Fund | Primary focus is to invest in equity securities. |
| Price to earnings ratio | compares how high the stock prices is to the earnings per share. Pay high PE - growth investor If seeking income, don't want growth funds. Low PE - looking for value Value funds buy stocks in established companies that are currently out of favor. or seek to purchase stocks trading below their estimated intrinsic value. Like stocks trading cheaper than should be. Share price depressed, dividends keep getting paid, value stocks have high dividend yields, therefor considered more conservative than growthfunds |
| Growth and Income Fund | Buys up stocks in companies expected to grow their profits and also pay dependable, respectable dividend income. Lower volatility than growth funds |
| Highest to lowest volatility | Growth Growth & Income Equity income funds |
| Equity Income Fund | buy equities that provide fairly dependable income. Receiving dividends tends to reduce the volatility of an investment so equity income funds are lower risk than equity growth funds. |
| growth and income fund | buys stocks in companies expected to grow their profits and also pay dependable, respectable dividend income. Lower volatility than growth funds. |
| Buy index funds because: | no sales charges and very low expenses. Management fees low since no trading |
| Fund of Funds | Hedge funds are only open to institutions and to individuals called accredited investors. |
| Accredited Investor | over $1M in net worth and makes > $200,000 a year. if married, assets jointly count toward the $1M figure and annual income needs to be >$300,000 |
| Hedge Funds | use high risk strategies including short selling, currency bets, risky options plays, |
| Typical Hedge fund arrangement | limited number of investors form a private investment partnership. typically charges 2% of assets as management fee and extracts the first 20% of all capital gains. Usually keep investment for 1 year. Goes for "absolute positive investment performance" - usually 8% |
| Fund of hedge funds | non-accredited investor can invest in. high expenses not redeem investment |
| Hedge Fund Testable Points | Open to sophisticated, accredited high net worth investors illiquid - not sold at least for one year employ riskier, more diverse strategies Charge high management fees, usually 20% of all gains non-accredited can buy mutual funds that invest in hedge funds |
| Principal-Protected Funds | focus on protecting investors principal. can be expensive, might limit upside investor can make suitable for very conservative investor who needs lump sum at a fixed point in the future. Lock up period 5-10 years, no redemption and all dividends / capital gains must be reinvested. guaranteed principal begins after lock up period |
| Comparison of Mutual Funds | not all funds have sales charge, all have expenses. |
| Expense Ratios | important factors when determining investment into a particular fund. How well does fund perform - total return |
| Total Return | capital appreciation goes up, mutual fund pay out dividends, at end of year took more profits than loss. Distribute capital gains check to shareholders. Total return takes all three things and compares it to where the fund started. If fund started with a NAV of $10 and finished the year with $11, it's $1 of cap appreciation. If fund paid 50 cents per share and a $1 cap gains distribution, add $1.50 to the $1 for total $2.50. Compare $2.50 to $10, total return 25% |
| Figure for one year return | Life of fund or since inception |
| Prospectus will show results after taxes figured in | Your actual after-tax returns depend on your individual tax situation and likely will differ form the results shown below. In addition, after-tax returns may not be relevant if you hold your fund shares through a tax-deferred arrangement, such as 401K plan, IRA, of 529 savings |
| Sales charges and expenses | 5.5% not common for small investments. max is 8.5% sales charge. anything over 5.75% is impolite. So 5.5% goes to distributors and other 94.5% goes into mutual fund for investment purposes. |
| Sales charge as a percentage = | (POP(public offering price) - NAV) / POP |
| A- SHARES | sales charge a front-end load when the investor acquires them. A=acquire |
| B- Shares | shares charge a back-end load when the investor sells them. B - back end investor pays the NAV but will leave a percentage behind when sells. percentage usually declines in second year, and after several years (6 to 8) back end load goes away completely. Effectively B shares are converted to A shares. B shares assoc. with "contingent deferred sales charges" |
| Contingent deferred sales charges | Sales charge is deferred until the investor sells, and then amount of the load is contingent upon with the investor sells. for a test question on the proceeds of a B shared redemption, just take the NAV and deduct the appropriate percentage from the investors proceeds. If the NAV is $10 the investor receives the $10 minus the percentage the fund keeps on the back end. So if she sells 100 shares and there is a 2% back end charge, she gets $1000 minus $20, or $980 out the door. |
| Distribution expenses covereded only by sales charges, unless fund has 12b1 fee. | 12b1 also covers distribution costs. Go to sales persons like yourself. No-load funds can still charge a 12b1 fee as long as it doesn't exceed.25% of funds assets. Every quarter when take money out to cover expenses, no load funds can also take an amount not to exceed 25 basis points. Money market funds have to be "no load" but that also means they can charge 121b1 fees up to .25% |
| C- shares | Dont charge an upfront load but do carry a 1% 12b1 fee. (much higher than .25% allowed for "no load" fund). Some C shares charge a contingent deferred sales charge if the investor sells in less than 1 year or 1.5 years, just to keep things simple. |
| Which shares to buy? | -long term investor with $50,000+ to invest: A-shares -Intermediate term investor with small amt to invest: B-shares -short term investor: C-shares |
| Significant Difference between A shares, and B&C | has to do with 12b1 fee. fund also charges management fee to cover the cost of hiring a portfolio manager. same for everybody and would have separate line item. Mutual fund cant bury fees under 12b1. |
| Sales charges and 12b1 fees cover | distribution costs. |
| Management fee | covers portfolio manegemt |
| Expense ratio for fund | add management fee, 12b1 fee, and other expenses fee. |
| If investor purchase B share | pays NAV. only if/when sells would make fund take sales charge from her. |
| If investor purchases A shares | pays more than NAV. extra she pays is sales charge. when add sales charge to the NAV, get public offering price. |
| POP equal (formula) | NAV plus Sales charge |
| Sales Charge equals (formula) | POP - NAV |
| Mutual funds use what pricing to figure out NAV? | forward pricing. Take check for $10,000 at 11am, wont know how many shares i'll end up buying. Fund will refigure NAV when trading closes that day, then put $10,000 into the fund at the NAV they come up with then. Same for seller. seller redeems shares to the fund at 1pm, wont know exact dollar amt of check until NAV determined after 4pm. |
| NAV | nothing more than the value of one slice of the portfolio pie. Asset of portfolio would be the value of securities plus any cash they've generated minus any liabilities. |
| NAV example | $10M assets, $550K liabilities, NAV $9.4M at 1M shares NAV per share is $9.45. sellers will receive $9.45/share when redeem A shares today, but pay a POP higher than if buying. Buyers of B shares will pay $9.45 but those redeeming/selling will receive $9.45/share minus whatever percentage they leave behind to the contingent deferred sales charge. |
| Value of mutual fund share (formula) | Net assets of the fund / shares. if fund takes some of that cash and pays it out as dividend, or cap gains distribution, reduce the net assets of fund without reducing number of shares. |
| NAV per share is reduced by amount of dividend when? | whenever mutual fund distributes a dividend or capital gain |
| On ex-dividend date for mutual fund, the NAV | drops by the amount of the dividend or capital gain distributed to the shareholders. |
| NAV is sometimes referred to as.... | bid price. price investor receives when selling. Answer on exam could be: redemption are executed at the next calculated bid (NAV) price. |
| Breakpoints | The point where the fund gives you a break. lower sales charge, investors buy more shares. |
| Letter of Intent | If don't have all the money at once, say invest $100,000 over next 13 months. Send in $5000, get lower sales charge as if all sent at once. If we can provide rest, end up with higher sales charge. Can be backdated 90 days. About the only people that don't qualify for breakpoints are investment clubs. |
| Rights of Accumulation | when investor trying to reach breakpoint, new money and account accumulation are counted the same way. If has 42,000 appreciated and has 9,000 additional to invest, and 50,000 is breakpoint to get 4% sales charge. Nothing to do with letter of intent.. Basically you can save money on future purchases based on value of account. |
| Combination Privilege | So if individual invests $20K in an Income Fund and $30K in the Growth Fund, considered $50K investment in the family of funds. |
| Conversion/exchange privilege | Allows investors to sell shares of the L&H Growth Fund, in order to buy shares of the L&H Income fund at the NAV, rather than the higher Public Offering Price. (POP) |
| Buying and selling Mutual Fund Shares | No load fun is purchased at the NAV, but every quarter 12b1 fees are deducted from the fund's assets to cover the cost of the distribution. If fund has a "load" you can pay for it upfront by buying an A-share and then save on expenses going forward. You can also knock down your front-end sales charge by purchasing in quantity either all at once or through a Letter of Intent (LOI). If buy B shares you avoid the font-end sales charge, but you have two other concerns to keep in mind |
| Buying and selling mutual fund shares | 1) you'll leave a percentage on the table if you sell the first several years 2) The fund will take a much higher 12b1 fee on your behalf every quarter, driving up expenses. If only hold fund for 2 or 3 years, C shares probably make sense. Pay no front-end or back-end sales charg and even through the 121b fee of 1% is a bit annoying, it's only being charged for 2 to 3 years. |
| Purchasing shares | Contact registered rep Mailing in payment to fund customer service dept Telephoning the fund company purchasing online wiring the money from bank account |
| Purchasing shares | decide on dividends and capital gains in check form or in form or more shares. Automatically invest then no tax advantages, but is a big advantage in reinvest in NAV, avoiding sales charges. |
| Selling Shares | Open-end mutual fund shares not traded with other investors. Want to sell L&H Growth, sell back to L&H. "redemption or redeeming" shares. You receive NAV per share it it's an A share, and the NAV minus the back-end sales charge if it's a B-share. |
| Put in redemption order | By contacting your registered rep by writing to the fund company by telephoning or faxing the fund company by going through the fund companys website |
| Signature guarantee | on any redemption. Official stamp that officers of a bank can put on the required paperwork. Requirement when stock is transferred or sold. Required if: -over $75K -made payable to someone other than the registered shareholder -sent to an address other than the address of record, or an address that has been changed within the last ten days Mutual funds must redeem shares promptly - within 7 days! |
| Systematic Withdrawl plan | Dollar cost averaging - avoids buying all shares at an inconveniently high price. Dollar-cost-average on the way out. must have a min account value of $5K. Payments are first from dividends, and then capital gains. If div and cap gains dont cover the amt th investor wants to withdrawl then the fund starts redemming it's shares |
| Fixed-dollar periodic payments | investor wants to receive a fixed dollar payment periodically, can get fixed dollar periodic payments. |
| Fixed-percentage periodic payments | prefer to receive 2% of her account value each month or maybe 5% each quarter. |
| Fixed-shared periodic payments | investor can have fund redeem/liquidate, say, 10 shares per month and send a check. How large check? whatever 10 shares are worth that month. |
| Fixed Time | INvestor wants account liquidated/withdrawn over, say three years, she'll give the fund an exact date, and they'll figure out how much to redeem each month in order to exhaust the account by that date. |
| Board of Directors | Oversees operation of fund or family of funds. Responsibility: Establish investment policy select and oversee the investment adviser, transfer agent, custodian establish dividend and capital gains policy approve 12b-1 plans Manages the company, not the portfolio |
| Investment Advisor | manage funds investments, shareholders and board vote to hire/retain, paid a percentage of funds assets |
| Custodian | keeps assets in safe place, custodian bank. reeives the dividends and interest payments made by stocks and bonds in portfolio. |
| Transfer Agent | distributes income to investors. acts as CSR for fund and often sends out semi annual and annual reports. |
| Underwriter/Distributor/Wholesaler | bear the cost of distributing the fund up front and get compensated by the sales charge that they earn themselves or split with broker/dealer. Prepare sales literature for the fund, since they are the ones who will be selling the shares. If distribute themselves can cover 12b1 fee. Can be no load if not 12b1 fee not exceed .25% of assets |
| Distribution of mutual fund shares | Fund/to underwriter/ to dealer / to investor Fund/ to underwriter / to investor Fund / to investor |
| Shareholder Voting (mutual funds) | Changes in investment policy and objectives Approval of investment adviser contract approval of changes in fees election of board members ratification of independant auditors |
| Closed-End Funds | do an IPO with a fixed number of shares. trade at discount to NAV or at premium. if fund shares selling below NAV, have to be closed-end fund shares. NAV with BID and POP with ASK. No fractions of shares. "round lot" |
| ETF | Exchange traded funds. Fund that trades on an exchange. Close-end fund, typically an index fund. Do as well as an index? Can track that indext with an ETF. To track you can buy the "spider" SPDR or Standard and Poors Depository Receipt. Can buy and sell as often as they'd like. |
| Cost Comparison | are closed-end ETF cheaper than open-end index fund versions? $500 investment with Vanguard, yes. Low expense ration, S&P500 index fund largest in America. No sales charge and expenses .18%. ETF has expense ratio of .11%, but since ETF verison (spider) is a stock, pay commission to buy it. Small amounts of money - open end mutual Large amounts - ETF might be cheaper assuming paying low commission |
| Diversification | ETFs offer diversification. For small amount of money can own a little piece of say 500 different stocks. Easy to implement asset allocation strategies with ETFs. Can track all different index's |
| Taxation | Some advantages with ETF's. Can turn into "creation units" rather than actually selling anything. If aren't redeemable for cash, exchange for underlying security - creation unit. Another tax advantage is same as open-end index fund variety-virtually no selling of shares within portfolio, few capital gains distributions. |
| Main testable Summary | Closed-end funds. Trade like shares of stock, intra day. Investors pay a comission rather than sales charge. Shares can be bought on margin, sold short. ETF's have low expense ratios. ETF's are convenient for investors seeking diversification/asset allocation. ETF's are very low-cost when purchased in larger quantities, Indexes include small-cap, mid-cap, large-cap, growth, value, S&P 500, Down Jones, NASDAQ, fixed income. Offer certain tax advantages. |
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