HACE 3200 1nd Edition Lecture 26Outline of Last Lecture I. BondsII. Pass-through certificatesOutline of Current LectureI. Mutual FundsII. Types of Investment CompaniesIII. Investment TrustsCurrent Lecture- Chapter 15: Mutual Finds: An easy way to Diversifyo What is a mutual fund? Investment Company that pools money from investors to buy stocks, bonds, and other investments. Investors own a share of the fund proportionate to the amount of the investment.- Conceptso The money thus collected is then invested in capital market instruments such as stocks and other securitieso The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by themo Thus a Mutual Fund is a most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.- Why invest in Mutual Funds?o Benefit of the small investor- diversification and reduced risko Level the playing field between corporations and the individual investor.- Advantages of Mutual Fund Investingo Diversification- owning numerous securities reduces risko Professional management (one hopes)o Minimal transaction costsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.o Liquidity o Flexibility o Serviceo Avoidance of bad brokers- Disadvantages of Mutual Fund Investingo Lower-than-market performance 1989-1998 average annual returns- Actively managed stock funds, 15.6%- S &P 500 stock index, 19.2% Costs Risks- unsystematic risk Risk- systematic risk Capital gains taxes- Frequently used Termso Net asset value- Net asset value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation dateo Sale Price Is the price you pay when you invest in a scheme. Also called Offer price. It may include a sales loado Repurchase price Is the price at which a close-ended scheme repurchases its units and it may include a back-ended load. This is also called Bid priceo Redemption Price Is the price at which open-ended schemes repurchase their unit and close-ended schemes redeem their units on maturity. Such prices are NAVrelatedo Sales Load Is a change collected by a scheme when its sells the unit. Also called “front end” load. Schemes that do not charge a load are called “No load” schemeso Repurchase or “Back- end “ load Is a charge collected by a scheme when it buys back the units from the unit holderso To operate, Mutual Funds Pool money from investors with similar goals Invest in numerous securities Hire a management company to run the fund.- 4 types of Investment Companieso open-end investment companies or mutual fundso closed-end investment companieso unit investment trustso real estate investment trusts- Open-End Investment Companieso Have an unlimited number of shareso Buy and sell shares directly to investors without a secondary marketo Purchase and selling price is determined by the net asset value of the fund- Net Asset Value( NAV)o The dollar value of a share in a mutual fund NAV= total market value of all securities- liabilities/total shares of outstanding - Closed-end investment companieso Have a limited number of shareso Sell only the initial offering. Subsequent trades are done in a secondary market, similar to the common stock marketo Purchase and selling price is determined by supply and demand- Unit Investment Trustso Fixed pool of securities, normally municipal bondso Are passive investments that operate on a buy-and- hold strategyo Normally require $1,000 minimum investmento Long time horizon recommended- Real Estate Investment Trustso Have 3 types( equity, mortgage, hybrid)o Lack the liquidity of most mutual funds, but more liquidity than direct real estate investmentso Offer diversification independent of the stock market- Equity REITso Buy property directlyo Manage the propertyo Investors hope the real estate appreciates in value- Mortgage REITSo Buy mortgageso Investors only receive interest payments on the mortgageso Advantage: consistent income - Hybrid REITso Invest in both properties and mortgageso Investments result in both capital appreciation and interest income- The cost of Mutual Fundso Load funds- sales commissions charged to the investor when ourchasing fund shareso Back-end load funds- commissions charged to the investor when selling the shares; may be sliding scaleo No-load funds- no commission charged- Management Feeso Managing a fund costs money Advisor, custodian, transfer agent, underwriter, sales commissiono Find out finds “expense ratio” Compares the funds expenses to its assets .25-2.0%o 12 lb- 1 fees mutual fund charges share holders for marketing costs- 1. Money Market Mutual Fundso invest in short-term securities with maturities of less than 30 dayso work much like an interest bearing checking account with some limitationso considered practically risk freeo require 1000 investment- Money Market Fundso Offers the individual investor access to high- yielding money marjet instruments without having to pay 100,000 denominations Bank cds Treasury bills- 2. Stock Mutual Fundso growth funds small-company growth funds growth- and income funds sector funds index funds international fundso Growth Goal is capital appreciationo Maximum growth High specialties, seeking large profits from capital gains- Often buy stock of small unseasoned companies- High speculativeo Small company Invest in small companies that usually have sales of 100 million or lesso International Can invest in one region or area of the world Can invest in specific countryo Income Current income is main objective- Interest income- Dividend income- 3. Balanced Mutual Fundso try to balance objectives of long-term growth, income, and stability of the capitalinvestedo invest in common stock,, preferred stock, and bondso less volatile than stock funds- balanced fundso objective is to earn both capital gain and current income high-grade common stocks fixed income securities- 4. Asset Allocation Fundso are similar t balanced mutual funds in the mix of securitieso