Shared Flashcard Set


FINU304 Investment Ch. 4
Mutual Funds and other investment companies
Undergraduate 4

Additional Business Flashcards




front-end load

- commission or sales charge paid when you purchase shares
- reduce the amount of money invested

walk in w/ 1000 on a front-end load the mutual fund pockets 50 and invests 950

back-end load

- exit fee incurred when you sell shares
- about 5-6% for first year and reduces by 1% each year funds are left invested

a little better than the fornt end bc it can decrease over time

they r investor specific

u only pay once

Operating Expenses

- Costs incurred by the mutual fund while operating the portfolio (administrative and advisory fees)
- Ranges from 0.2% - 2% of assets managed and deducted periodically from the assets of the fund

- managers r ussualy paid based on size

- MFs never gaurentee return that is preformance related like in a hedge fund

- more anaylist higher expense


12 b-1 charges

mutual fund fees


- distribution costs paid by the fund
- Alternative to a load, but deducted from assets in the fund

- pays for marketing expenses


Mutual Fund Fees are...

Mutual Fund loads are...


... non investor specific

... investor specific (only incur once)

Liabilies in the NAV equation are
pertianing to Fees not loads
The rate of return of a mutual fund is the NAV at the end of the period minus NAV at the start of the period plus income and capital gains distributions, as a fraction of NAV at the start of the period
Rate of return = NAV(1) – NAV(0) + Income and Capital Gains

Ignores loads paid to purchase the fund
Affected by fund’s operating expenses and 12b-1 fees since these charges are periodically deducted from the fund’s assets
è Rate of return of the fund equals the gross portfolio return minus the total expense ratio
if you are a long term investor....
u would rather have a higher front end load
mutual fund advantages

diversified portfolio

economies of scale of pooled money

highly liquid

pro management

reduced transaction costs

admin and record keeping


disadvantages of mutual funds



  • Poor performance
  • Costs such as loads, 12b-1 fees, and operating expenses
  • don't normally beat the market
  • riskiness (depends on holdings)
  • taxes
Closed-end Funds
  • With mutual funds, investors buy shares at NAV and redeem shares at NAV. In contrast, closed-end funds sell a fixed number of shares initially, but after that they do not issue new shares or redeem shares
  • Instead, closed-end funds are traded on exchanges. Thus, if you want to sell your shares, you must trade your shares on the market
  • Market prices can and often do differ from NAV
  • - Why is this puzzling?

closed-end funds

  • Ex. A closed-end fund’s NAV is $48 at the beginning of the year and
  • $60 at the end of the year. At the beginning of the year it is trading at a 5% premium and at the end it is trading at a 6% discount. The fund has no distributions. What was the return to an investor who bought it at the beginning and sold it at the end of the year?

P0= (48 * 1.05) = 50.4
P1= (60*(1-.06) = 56.4
56.4-50.4 / 50.4 = 11.9%
Open-End and Closed-
End Funds: Key Differences

  • Shares Outstanding
  • Closed-end: generally fixed; only changes if new stock is offered
  • Open-end: changes each day because investors are continually purchasing new shares and redeeming shares they no longer want to hold
  • - How can the amount of purchases and redemptions by investors affect a fund’s holdings and return?
    • if they have allot of redemtions they may have to sell securities inorder to pay those people
    • fund must keep cash on hand
  • Pricing
    • Open-end: Always priced at net asset value (NAV)
    • Closed-end: Can trade at a premium or discount to NAV
Exchange Traded Funds
  • Allows investors to trade index portfolios like they trade stock. For example, a SPDR is an ETF holding a portfolio matching the S&P 500
  • Like closed-end funds because they trade on the market; like open-end funds because they issue and redeem shares at NAV
  • Currently account for 2/3 of AMEX trading volume
  • Can trade at a small discount or premium to NAV
advantages and disadvantages of ETFs
  • Advantages
  •     - trade continuously, unlike mutual funds that quote NAV only once per day and thus can be traded only once per day by an investor
  •     - lower taxes than mutual funds because most trading occurs between shareholders and thus does not cause the fund to sell securities
  • Disadvantages
  •     - investors have to pay a bid-ask spread
  •     - must be purchased from a broker for a fee
Do you think managers of actively managed funds can repeatedly beat the market? Do you think some of them get repeatedly beaten by the market?
Why do you think people invest in mutual funds, given that on average they underperform?

diversification, low risk, pro management


buying a big index mutual fund is a good choice, low cost, low risk, low activity, great for a passive investor 

Hedge Funds
  • lightly regulated
  • try to pick up on price discrepencies
  • rely heavily on leverage
  • limited to very wealthly investors
  • time and money requirements
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