chapter 12 supplement c: mutual funds chapter 12 supplement c mutual funds
TRANSCRIPT
Chapter 12 Supplement C: Mutual Funds
Chapter 12 Supplement C
Mutual Funds
Chapter 12 Supplement C: Mutual Funds 2005 Kaplan Financial
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Introduction to Mutual Funds
Mutual funds are open-end investment companies that sell shares of stock to the public and use the proceeds to invest in a portfolio of securities on behalf of its shareholders
Mutual funds are actually a subcategory of what is referred to as regulated investment companies
Chapter 12 Supplement C: Mutual Funds 2005 Kaplan Financial
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Types of Investment Companies
Unit Investment Trust (UIT) Exchange Traded Funds (ETFs) Closed-end Investment Company Open-end Investment Company
(mutual funds)
Chapter 12 Supplement C: Mutual Funds 2005 Kaplan Financial
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Mutual Fund Fees
Loads or Sales Charges Front-end load Back-end load
Other Mutual Fund Fees 12b-1 fees Management fees Expense ratio
Chapter 12 Supplement C: Mutual Funds 2005 Kaplan Financial
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Mutual Fund Classification
Load vs. No-Load Funds Classes of Load Fund Shares
Class A shares Class B shares Class C shares
Chapter 12 Supplement C: Mutual Funds 2005 Kaplan Financial
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How Do Fund Expenses Impact Performance?
High quality performance funds may have high or low expense ratios
However, the higher the expenses of the mutual fund, the more the fund manager will have to overcome to achieve strong return performance
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Advantages of Mutual Funds Low initial investment Diversification Ease of access Professional management Tax efficiency of fees Liquidity Transaction cost efficiency Variety Services
Chapter 12 Supplement C: Mutual Funds 2005 Kaplan Financial
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Disadvantages of Mutual Funds
Performance Fees, Loads, and Expenses The abundance of choices Liquidity Execution Classification system
(misclassification) Built-in gains
Chapter 12 Supplement C: Mutual Funds 2005 Kaplan Financial
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Types and Objectives of Mutual Funds
Money Market Mutual Funds – provide investors the opportunity to earn competitive money market returns with the added benefits of ease of access and liquidity.
Fixed-Income Mutual Funds – diversify the investment portfolio and provide investors with current income.
Chapter 12 Supplement C: Mutual Funds 2005 Kaplan Financial
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Types and Objectives of Mutual Funds (cont.)
Equity Mutual Funds – provide investors easy, efficient access to common stock securities.
Hybrid or Balanced Funds – invest in a balanced fashion, such that a portion of the portfolio is invested in cash, fixed- income securities, and equity securities.
Chapter 12 Supplement C: Mutual Funds 2005 Kaplan Financial
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How Do Investment Advisers Select Mutual Funds?
Prospectus: Fund objective Investment policy/strategy Manager tenure Historical performance Portfolio turnover Fees and expenses Buying and selling shares Minimum initial investment Investor services
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How Do Investment Advisers Select Mutual Funds? (cont.)
MPT statistics and performance measures: Coefficient of determination (R2) Beta Jensen’s Alpha Sharpe ratio Treynor ratio
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MPT Statistics
R2 = % change in portfolio explained by changes in a market index
Beta = Indicates volatility of portfolio as compared to the market
= Rp- [Rf + B (Rm – Rf)]
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MPT Statistics (cont.)
Sp = Rp – Rf
p
Tp = Rp – Rf
Chapter 12 Supplement C: Mutual Funds 2005 Kaplan Financial
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Managing Mutual Fund Portfolios
Issues to look for: Changing asset size Style shift Manager changes Capital gain exposures