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Chapter 4

Mutual Funds and Other Investment Companies. Chapter 4. Services of Investment Companies. Administration & record keeping Diversification & divisibility Professional management Reduced transaction costs. Net Asset Value. Used as a basis for valuation of investment company shares.

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Chapter 4

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  1. Mutual Funds and Other Investment Companies Chapter 4

  2. Services of Investment Companies • Administration & record keeping • Diversification & divisibility • Professional management • Reduced transaction costs

  3. Net Asset Value • Used as a basis for valuation of investment company shares. • Selling new shares • Redeeming existing shares • Calculation Market Value of Assets - Liabilities Shares Outstanding

  4. Types of Investment Organizations • Unit Trusts • Managed Investment Companies • Open-End • Closed-End • Other investment organizations • Commingled funds • REITs • Hedge funds

  5. Open-End and Closed-End Funds: Key Differences Shares Outstanding • Closed-end: no change unless new stock is offered. • Open-end: changes when new shares are sold or old shares are redeemed. Pricing • Open-end: Net Asset Value(NAV) • Closed-end: Premium or discount to NAV

  6. Investment Policies • Money Market • Fixed Income • Equity • Balance & Income • Asset Allocation • Indexed • Specialized Sector

  7. Costs of Investing in Mutual Funds • Fee Structure • Front-end load • Back-end load • Operating expenses • 12 b-1 charges • distribution costs paid by the fund • Alternative to a load • Fees and performance

  8. Exchange Traded Funds • Allow investors to trade funds based on indexes like stock. • Examples • SPDRS • WEBS • HOLDERS • Allow sector specialization

  9. A First Look at Fund Performance • Benchmark: Wilshire 5000 • Results • Most funds underperform • Not fair comparison because of costs • Adjusted Benchmark: Wilshire 5000 with passive management costs considered. • The majority of funds still under-perform.

  10. Consistency of Fund Performance • Do some mutual funds consistently outperform? • Evidence suggests that some funds show consistent stronger performance. • Depends on measurement interval • Depends on time period • Evidence shows consistent poor performance.

  11. Sources of Information on Mutual Funds • Wiesenberger’s Investment Companies • Morningstar • Investment Company Institute • Popular press • Investment services

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