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48 Cards in this Set
- Front
- Back
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What is a mutual fund? |
Investment vehicle operated by an investment company pooling contributions from many investors and investing in a variety of securities, including stocks, bonds and money market instruments. Investors become unit-holders, and have a claim to a proportional piece of the pool's return. |
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What is net asset value per share? |
NAVPS is the value at which the units/shares are redeemable. Depends upon the market value of the fund's portfolio of securities at that time. |
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Where are the fund's prime investment goals stated? |
They are stated in the fund's fund facts document and prospectus and generally cover the degree of safety/risk that is acceptable, whether income or capital gain is prime, and the types of securities in the fund's portfolio. |
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What are the advantages of mutual funds? |
1. Low Cost Professional Management 2. Diversification 3. Variety of Types of Funds, Transferability 4. Variety of Purchase/Redemption Plans 5. Liquidity 6. Ease of Estate Planning 7. Loan Collateral, Margin Eligibility |
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Where can investors find all the specific special options details of various mutual funds? |
SEDAR (System for Electronic Document Analysis and Retrieval) |
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What are the disadvantages of mutual funds? |
1. Costs 2. Unsuitable As ST Investment 3. Vulnerable Management 4. Tax Complications |
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What is the mutual fund trust structure? |
Most common structure for most mutual funds - unincorporated open-end trust. Enables fund to avoid taxation by being a trust. Income that flows through is taxed in hands of the unit holder. |
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What is a trust deed? |
Establishes the open-ended trust fund's principal investment objectives, investment policy, restrictions on investments, identifies the managers, etc. |
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What are some other things to consider with open-ended trust mutual fund structures? |
Unit holders have the right to redeem their units at a price equal to the fund's current net asset value per unit. Holders may or may not be given voting rights under the terms of the trust agreement. |
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What is the mutual fund corporation structure? |
Funds may also be set as federal or provincial corporations, if they meet conditions set in the Income Tax Act. - must consist of a diversified portfolio of sec.s - income must be from interest dividends, capital gains - investors receive shares in the actual fund, not units |
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How can mutual funds with the corporation structure achieve virtual tax-free status? |
Declaring dividends during the course of the year that are equivalent to the corporation's net income after fees and expenses. Dividends are eventually taxed in the hands of the shareholder. |
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How are mutual funds typically organized? |
Directors/Trustees - hold ultimate responsibility for fund activities - ensure activities meet objectives Fund Manager - provides daily supervision of the fund's portfolio - calculate fund's net asset value - prepare fund facts docs, prospectus and reports Distributors - sell and distribute shares in funds and fund units Custodian - independent financial org. that collects money and arranges for dividend payments and other cash flows |
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How are mutual fund units or shares priced? |
Shares or units are purchased from the fund, and cannot be sold to other investors, but rather back to the fund by redemption. NAVPS = TA - TL / # units outstanding NAVPS helps determine the redemption price. |
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What is important to remember about the mutual funds redemption price policy? |
Since most funds calculate a redemption price at the close of the market each day, a deadline during the day is set. Orders received after deadline process next day. Fund reps must transmit orders for buy/redemption on day order is given. Payment made within 3 business days of buy. |
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In reality, how often do most large funds calculate their NAVPS? |
Each business day after the markets have closed. If calculates less frequently than daily, sales and redemptions made at next valuation date. |
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How does calculating the NAVPS apply to real estate funds? |
Real estate funds must compute the NAVPS at least once per year, although most calculate on a quarterly basis. |
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What are the two categories of sales commissions or load that is levied? |
Front-end loads and back-end loads. Front - charged when investor initially makes purchase Back - charge at redemption |
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What are no-load funds? |
No-load funds are sold to the public on a no-load basis with little to no direct selling charges. However, brokers may levy an administration fees to process the purchase, and the funds may charge management fees. |
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How do front-end loads work? |
Payable to distributor at time of purchase. Expressed as a % of the purchase price or NAVPS. Decreases as the amount of purchase increases. |
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How do back- end loads (deferred sales charges) work? |
Payable to distributor at time of redemption or sale of the fund. Fee may be based on original contribution to the fund, or on the net asset value at the time of redemption. Decrease the longer the fund is held in most casese. |
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What are trailer fees? |
Sometimes called a service fee - what a fund may pay to the distributor that sold the fund. Usually paid out of the fund manager's management fee. Rep provides ongoing service to investors, like advice, guidance and statement analysis. |
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What are some other various fees that may be charged? |
Small funds charge a set-up fee, on top of a front-end or back-end load. Early redemption fee, even in no-load funds, might mention that redemption within 90 or so days of purchase may be subject to a flat or proportional fee of the original purchase cost. Discourage ST trading. |
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What are switching fees? |
May apply when an investor exchanges unit of one fund for another in the same family or fund company. |
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What are management fees? |
Vary widely by the type of fund - fees will largely depend on the level of service required to manage the fund. Generally expressed as a straight % of the net assets under management. Criticized - rewards managers not on performance but on level of assets managed. |
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What is the management expense ratio? (MER) |
Represents the total of all management fees and other expenses charged to a fund, expressed as a % of the fund's average net asset value for the year. e.g. if fee expenses are 10 million, with 500 million AUM, then 10/500 = 2% MER |
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What are F-class funds? |
Client is charged a % of the AUM, rather than a commission/fee for each transaction. F-class is identical to regular funds, but charges a lower MER. |
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What are Labour Sponsored Venture Capital Corporations? |
LSVCCs or Labour Sponsored Investment Funds (LSIFs) are managed investment funds sponsored by labour organizations to provide capital for small to medium-sized and emerging companies. |
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What are some advantages of labour-sponsored funds? |
Generous federal and provincial tax credits received for investing in them. 15% federal credit, and additional 15% in some provinces (ann. max. of $5,000) Most are eligible for RRSPs, RRIFs |
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What are some disadvantages of labour-sponsored funds? |
Considered a high-risk investment due to the nature of the companies in which they invest. Redemption is often more complicated than traditional mutual fund shares. ITA requires shares be held for 8 years to avoid recapture of federal tax credits, repay if sold early. MERs tend to be much higher. |
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How are mutual funds regulated? |
Securities regulations related to mutual funds are based upon 3 broad principles... 1. Personal trust 2. Disclosure 3. Regulation |
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What does the code split industry rules/regulation into? What are these 5 primary values? |
1. Mutual fund reps must use proper care and exercise professional judgement. 2. Mutual fund reps should conduct themselves with trustworthiness and integrity. 3. Reps should conduct business in a professional manner. 4. Reps must act in accordance with prov'l securities law and observe req'ts of SROs 5. Reps must hold client info in the strictest confidence. |
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What are mutual fund regulatory organizations? |
Mutual Fund Dealers Association (MFDA) is the mutual fund industry's SRO for the dist'n side of the fund industry. Does not regulate funds themselves. Does regulate how the funds are sold. Does not regulate other SRO members, e.g. IIROC members selling mutual fund products. |
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Who regulates the mutual fund industry in Quebec? |
Mutual fund industry is under the responsibility of the Autorite des marches financiers and the Chambre de la securite financiere. Autorite oversees operation of fund companies in Quebec Chambre sets and monitors continuing education req'ts and for enforcing a code of ethics. |
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What are the national instruments 81-101 and 81-102? |
National Instruments 81-101 deals with mutual fund prospectus and fund facts disclosure. National Instruments 81-102 and a companion policy contain req'ts and guidelines for the dist'n and advertising of mutual funds. |
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What are the general mutual fund requirements? |
Set out in NI 81-101, funds must... - have a fund facts document - a simplified prospectus - an annual info form - annual audited financial statements - other req'd info by the province |
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What is the fund facts document? |
Designed to give investors key info about a mutual fund, in an easily understood format, described in plain language. Limited length of 2 double-sided pages. Delivery is mandatory within 2 business days of purchasing the fund. |
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What type of info tends to be disclosed in the fund facts document? |
Intro - date, name of fund, fund manager, name of class or series Quick Facts - key background, net asset value, MER, portfolio manager info, date of dist'ns, min. investment needed Investment of Fund - "what do we invest in" Risks - outlines degree and type of risk, and overall risk rating out of 5 Past Performance - over past 10 years or inception, best/worst returns in 3 months, average net return for 10 years Suitability - "who is this fund for" Tax Impact - "words about taxes" |
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What type of info is contained in the second heading of the fund facts doc? |
1. Cost of buying, owning and selling the fund 2. Statement of rights 3. Extra fund info |
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What is the simplified prospectus? |
Normally shorter and simpler than that of a new issue of common shares - issuer must abide by the same laws and deadlines that apply to full prospectuses. Must be filed with sec. comm. annually, but need not be updated annually unless a change in affairs of the fund occurs. |
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What are the 2 sections of the simplified prospectus? |
1. Part A - intro info about the fund, general info about mutual funds, info applicable to funds managed by this organization 2. Part B - specific info about the mutual fund |
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What types of mutual funds may not use the simplified prospectus system under NI 81-101? |
Mutual funds that invest in real property and those that constitute a commodity pool program. |
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What is the annual information form? |
The AIF is available on request for investors - similar disclosure to the simplified prospectus. Additionally includes... - significant holdings in other issues - tax status of issuer - directors, officers, trustees of fund - associated persons, principal holders - conflicts of interest |
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What are the prohibited mutual fund management practices? |
- purchases of no more than 10% of single issuer's securities - funds cannot buy share in their own company - no more than 10% of net assets in single issuer or 20% in same industry - no leveraging - no margin buying or short selling - no commodity futures purchases - limitations on illiquid securities |
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How do mutual funds use derivatives? |
Hedging against risk and facilitating market entry and exit. Often cheaper and quicker to enter the market using derivatives rather than purchasing underlying securities directly. |
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What is one focus of NI 81-102 concerning derivatives? |
Allow use of derivatives to benefit investors by minimizing overall portfolio risk while, at the same time, ensuring that portfolio managers do not use derivatives to speculate with investors' money. |
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What are the selling practices prohibited for mutual funds? |
- quoting a future price - offering to repurchase to avoid downturn in price - selling without a license - advertising the registration - promising future price - sales made from one province to another - sales of unqualified securities (ineligible sec.s) |
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What are the guidelines and restrictions placed upon distributor firms and fund managers? |
- cannot give distributors cash in support of clients - cannot change comm. rates w/o new prospectus - may not provide co-op funds for practices considered marketing expenses - cannot subsidize training courses |
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What is the "know your client" rule? |
Dealers and their mutual fund reps obtain info about their client to ensure that the purchase of funds is suitable. Do due diligence on clients... - learn essential facts (net worth, age, goals) - facts relevant to every order - circumstances behind each transaction - ensure recommendations are appropriate |
