Types of Investment Companies

Face Amount Certificate Company

Unit Investment Trust (UIT)

Management Company

Face Amount Certificate Company

 Rare

Issues debt certificates at set amount of interest

Purchased by installment or lump sum

Redeemed on specific date or at certain rate

Unit Investment Trust

(UIT)

Represents undivided interest in a portfolio

Fixed for life of trust

Supervised, NOT managed

SC included in offering price

Buy and Hold, Not traded

Open Ended Management Company

(Mutual Funds)

Continuous primary offerings

Prospectus required prior to sale/offer

Ready to redeem, old share destroyed, new created

NO secondary market

Pay POP, redeem at NAV

Undivided interest in portfoio

Closed Ended Management Company

One time public offering

Common/Preferred/Bonds

No new shares/No redeeming shares

Can sell on the open market

Market price depends on supply/demand

Diversified

75% assets invested

No more than 5% in any one company

No more than 10% voting stock of any company

Must meet thest at time of investment, changes later do not affect status

Growth Funds

Capital appreciation

Volatile

Vulnerable to market risk

Higher return potential

Long term

Aggresive Funds

Usually small company or IPO

Very volatile

Long term

Equity Funds

Current income

High dividends

Stable

Growth & Income Funds

Capital appreciation and Income

Less capital than growth

Less dividend than equity

Bond Funds

Only bonds

Current income & Preservation of capital

Credit risk, call risk, reinvestment risk, interest risk

Investment payments passed through monthly, quarterly, semiannually.

Index Funds

Mirrors composition of benchmark, stock or index

Passively managed

Lower fees

Balanced Fund

Bonds, preffered and common stock

Varies with the market

Less volatility

Asset Allocation Fund

Money market instrument

Common stock and bonds

% of one area can drop to 0 if needs be

Specialized or Sector Funds

 Concetration on specific industry or type of stock

Riskier than diversified

International Fund

Specialized in foreign stock

Riskier than domestic

Potential for higher returns

Most volatile is Emerging Markets

Money Market Fund

Short term debt (less than 1 year)

Liquidity and safety

Withdraw at any time

Dividends declared daily, paid monthly

Exchange Traded Funds

 (ETF's)

Basket of securities traded on exchange

Usually represents an index

Price determined by supply/demand, low expenses

Can be purchased on margin/sold short

Market timing strategy, trades freq on trends

Advantages of Investment Companies

Diversification: reduces risk

Professional management

Liquidity

Mutual funds make investing easy, low commisions

More benefits to small investors

Mutual Fund Structure

Shareholders           Mutual Fund             BOD

                                      l

                          -Service Providers-

                                l             l

Investment      Custodian     Transfer    Underwriter

  Advisor                              Agent

            Expense ratio                               SC

Mutual Fund

Board of Directors

Elected by Shareholders

Independent directors must be in majority

Select and oversee advisor, underwriter, transfer agent and custodian

 Sets policies for dividends and capital gain distribution

Mutual Fund

Shareholder Rights

Voting rights:

-Diversified/Nondiversified switch

-Change investment objectives or concentration

-Borrow money or make loans

-Underwriting other securities

-Buy/selling real estate

-Change business to non investment company

-Right to a Semi-annual Financial Report

Mutual Fund

Investment Advisor

Manages portfolio

Management fee usually larges expense of fund

Fees cannot be based on performance

Cannot purchase on margin, joint acct or sell short

Mutual Fund

Custodian Bank

Responsible for fund levels,safeguarding cash and securities

Collects dividend/interest payments

Does NOT guarantee against loss

May also act as a transfer agent

Mutual Fund

Transfer Agent

Recordkeeper:

 Customer level records

Provides customer service

Issues new/cancels old shares

Distributes capital gains/dividends

Mails documents(statements/annual report)

Mutual Fund

Distrubution of Shares

Sponsor (principle underwriter)-Purchases at NAV from fund, sells at full price to public. Must have a contract with the investment company.

Dealers- purchase from sponsor at a discount, sells to public at full price.  CANNOT buy for inventory. Must be NASD member and have contract with the sponsor.

Front End Load Fund

Sales charge collected up front

NAV + SC = POP

NAV = total net assets/# outstanding

computed once daily

Settlement same day/ Class A shares

Back End Load

B class shares

NAV up front, SC charged when redeemed

SC decreased longer shares owned

If decreases to 0 = CDSC (contingent deferred SC)

FIFO based fees

Class C shares

Annual 12b-1 fee spread out

Level load NAV/POP

Based on 1% of assets

Back end fee added if held under 12-18 months

No Load Funds

Open ended investment sold to the public at NAV

Breakpoints

Funds must be quoted at max SC

Breakpoints for Front End must be in Prospectus

Total deposited determines breakpoint

NAV/100-Breakpoint = Offering Price

Breakpoints

Letter of Intent

States intention to deposit certain amount

Lasts 13 months

Can be backdated 90 days

Not binding to investor

Rights of Accumulation

Shareholders recieve cumulative rights

Discount if purchasing more shares

8.5% Maximum SC

Funds may ONLY charge the max if they offer:

 Breakpoints

Rights of Accumulation

Redeeming Mutual Fund Shares

Redeemed @ NAV

Redeemed through dealer or transfer agent

Funds must be sent in 7 days

Redemption fees retained in portfolio

Mutual Fund

Families

Complexes

Many funds, one company

Investors get breakpoint within all

Diversification, can switch funds

Mututal Fund

Withdrawl Plans

Option of monthly or quarterly withdrawls

May withdraw lump sum or periodic payments

Fixed share, fixed dollar or flexible amounts

Dividends and capital gains reinvested

Dollar Cost Averaging

-Method of investing

-Invest fixed amount at regular intervals

-Buys more shares when price is low, less when high

-Cost per share is lower

-Ability to continue investment when price is low

-Does NOT protect against steadily declining markets

-Appropriate for Long Term investors

Reinvestment of Dividends

All funds do this automatically

Prospectus must state reinvestment info

Capital gains reinvested at NAV

Benefits of compunding

Most funds will waive SC

Taxation of Mutual Fund Distributions

Investment income vs. Capital gains

Conduit/Pass thru basis          From sales/redeem

Pass 90%, Comp. not taxed    Increase=apprecation

Taxable to investor                Long vs Short term

Tax based on security            Short OI, Long 15%

                                          Reinvestment+Cost

                                                               Basis

Real Estate Investment Trusts

(REIT's)

-Equity REIT-Assest, income from rent, capital gains from sale

-Mortgage REIT- borrows from bank, lends to building developers. Pass thru interest.

-75% real property, value fluctuates with prop.value

-Not taxed if 90% pass thru, losses not pass thru

-Publicly traded

-Long term, high dividend yields