Chapter 14: Investing in Mutual Funds Flashcards Preview

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Flashcards in Chapter 14: Investing in Mutual Funds Deck (50)
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1

Pooled investment fund:

an investment vehicle that pools together money from many investors and invests that money in a variety of securities

2

Marketability:

refers to the ease with which an investor can convert an investment into cash

3

Equity mutual funds:

funds that sell units, or shares, to individuals and use this money to invest in stocks

4

Bond mutual funds:

funds that sell units, or shares, to individuals and use this money to invest in bonds

5

Balanced mutual funds:

funds that sell units, or shares, to individuals and use this money to invest in a combination of stocks and bonds

6

Money market mutual funds:

funds that sell units, or shares, to individuals and use this money to invest in cash and investments that can be converted to cash quickly

7

Advantages of Investing in Mutual Funds

-Provide professional money management
-Simplify the process of record keeping
-You only have to evaluate the performance of the mutual fund relative to your goals
-Mutual funds are available everywhere

8

Disadvantages of Investing in Mutual Funds

-Management fees and other costs vary substantially among funds
-Investor has no control over the investments that are -purchased and/or sold within the mutual fund
-Fund is invested in a group of poorly performing investments
-Liquidity can be very low

9

Net Asset Value per Share

Net asset value (NAV): the market value of the securities that a mutual fund has purchased minus any liabilities and fees owed
(Any liabilities, such as expenses owed to the mutual fund’s managers, are subtracted to determine the NAV
)

10

Net asset value per share (NAVPS):

calculated by dividing the NAV by the number of shares in the fund

Interest or dividends earned by the fund are added to the market value of the assets
Fund expenses and any dividends distributed to the fund’s shareholder’s are deducted

11

Open-End Funds



funds that sell shares directly to investors and will redeem those shares whenever investors wish to “cash” in


funds that sell shares directly to investors and will redeem those shares whenever investors wish to “cash” in

12

Closed-End Funds

funds that issue shares to investors but do not redeem those shares; instead, the fund’s shares are traded on a stock exchange

Market price per share is determined by the demand for shares versus the supply of shares that are being sold
Price per share can differ from the fund’s NAVPS

13

Premium:

the amount by which a closed-end fund’s unit price in the secondary market is above the fund’s NAVPS

14

Discount:

the amount by which a closed-end fund’s unit price in the secondary market is below the fund’s NAVPS

15

No-load mutual funds:

: funds that sell directly to investors and do not charge a fee

16

Front-end load mutual fund:

mutual funds that charge a fee at the time of purchase, which is paid to stockbrokers or other financial service advisers who execute transactions for investors

17

Back-end load mutual funds:

mutual funds that charge a fee if shares are redeemed within a set period of time

18

Declining redemption schedule:

a fee schedule where the back-end load charge reduces with each year an investor holds the fund

19

Management Expense Ratio (MER)

the annual expenses incurred by a fund on a percentage basis, calculated as annual expenses of the fund divided by the net asset value of the fund; the result of this calculation is then divided by the number of units outstanding

The higher the expense ratio, the lower the return for a given level of portfolio performance

20

Reported Components of MERs

--Management expenses: investment research, portfolio management, marketing costs, and profit
--Dealer/adviser compensation: fees paid to advisers and salespeople
--Administrative costs: transaction processing, client reporting, and audit and legal fees

21

Types of Equity Mutual Funds

Growth Funds
Small Capitalization (Small-Cap) Funds
Mid-Size Capitalization (Mid-Cap) Funds:
Dividend Funds
Balanced Growth and Income Funds:
Sector Funds
Index Funds:
International Equity Funds
Ethical Funds

22

Growth Funds

Focus on stocks that have potential for above-average growth

23

Small Capitalization (Small-Cap) Funds

Focus on firms that tend to have more potential for growth relative to larger firms

24

Mid-Size Capitalization (Mid-Cap) Funds:

Focus on firms that are more established than small-cap firms

25

Dividend Funds

Focus on firms that pay a high level of dividends
Have less potential for high capital gains and exhibit less risk

26

Balanced Growth and Income Funds:

Contain both growth stocks and stocks that pay high dividends

27

Sector Funds

mutual funds that focus on stocks in a specific industry or sector, such as technology stocks
More risky, as they are less diversified

28

Index Funds:

mutual funds that attempt to mirror the movements of an existing equity index
-May not contain every stock in the index
-Fewer expenses than a typical mutual fund
-Do not incur expenses for researching various stocks
-Very low transaction costs

29

Tracking error:

refers to how closely an index fund mirrors the movements of the existing index it is benchmarked against

30

International Equity Funds

Focus on firms that are based outside Canada
Attractive to investors who want to invest in a specific country
Expenses associated with managing an international equity fund are higher
“Global mutual funds” invest in stocks of both foreign firms and Canadian firms