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48 Cards in this Set
- Front
- Back
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What are the advantages of using a mutual fund?
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Diversification Professional Management Liquidity Exchanges at Net Asset Value for No Sale Charge Convenience Record-Keeping SEC REgistration |
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What allows a mutual fund to qualify as Diversified?
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At lesat 75% of the assets must be invested No more than 5% of the invested assets can be invested in any one company No more than 10% of voting stock of any ohe company may be owned |
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Must must be provided to a potential customer of a mutual fund?
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A prospectus must be physically or electronically delivered
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What is the Statement of Additional Disclosure?
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Provides more detailed information than the prospectus but it is not required to be provided unless asked for
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The board of directors of a mutual fund is responsible for...
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Establishing investment policy Determinding when fund will pay dividends and capital gains distributions Appointing the fund's principal officers Selecting the fund's custodian, transfer agent, principal underwriter |
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What are soft dollars?
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Commission rebates received by an IA for channeling some or all trades through certain brokerage firms. When soft dollars are used clients may pay higher commission on trades, cannot be used if the adviser is planning to use the service/product
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Custodian Bank
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Responsible for safeguarding the fund's cash and securities and collecting dividend and interest payments from those securities
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Transfer Agent
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Issues new shares and cancels share investors have redeemed. Distributes capital gains and income dividends
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Principal Underwriter
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Sells the shares to the public either directly or through dealers
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Public Offering Price
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Net Asset Value + Sales Charge
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Net Asset Value
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Total Net Assets/ Number of Outstanding Shares
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How are mutual fund shares priced?
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they are priced at the end of that current day, so even if an order is taken at 11 AM you will buy the shares as of 4 PM
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When do mutual fund transactions settle? |
They settle on the same day as the purchase/redemption
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What is the difference between front end and back end loads?
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The front end load has the investor pay for the sales charge initially, while a back end load is charged when the money is being moved (but this can be waved if the investor keeps their money in the fund for a while (called the Contingent Deferred Sales Charge)
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How is sales charge calculated?
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(Public Offering Price - Net Asset Value)/POP
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12b-1 Charges
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Distribution charges can only be paid after a 12b-1 plan is in place which permits the board to enter into a contract with the principal underwriter that involves payment to the underwriter
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Service Fees
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Charges that are deducted from clients and used to pay for personal services or account maintanence
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How is expense ratio calculated? |
Total Expenses/Average Net Assets. Expense ratios should typically fall between .20% and 2%
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Different Mutual Fund Shares
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Class A: Front-end load, low service fees, breakpoints available B: Back end charges if not held for > 6-8 years, higher service fees than A, often convert to A after 6-8 years because no breakpoint available C: Front of back end load, same service fee as B typically, No conversion possible to A |
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What are the two ways sales charges can be reduced?
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Breakpoints - the more shares put in the less sales charge assessed Fund Families: No sales charges assessed when moving funds within the same family |
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Determining the Offering Price based on sales charge percentage
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POP= NAV/ (100%- Sales Charge %)
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Letter of Intent
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Enables an investor to qualify for a discount whithout initially depositing the entire amount required. It allows the investor to deposit money over next 13 months. The letter is non-binding
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Rights of Accumulation (ROAs)
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Investors can receive cumulative discounts when purchasing mutual fund shares across the same family
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Dollar Cost Averaging
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Allows a customer to deposit the same amount into an account each month, so over the course of many months the average cost per share may be lower than the average price (similar to retirement funds) |
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Systematic Withdrawal Plans from Mutual Funds
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Fixed-Dollar: Investors receive same amount of money with each payment Fixed-percentage: receive 1% each month (or different number) Fixed-time payout plan: will liquidate their holdings over a specified time frame |
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Redemption Fees
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Many mutual funds charge redemption fees intiially to dissuade customers from withdrawing fees too quickly |
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Prohibited Mutual Fund Sales Practices
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Breakpoint Sales: Inducing clients to avoid a breakpoint level (to get more commission) Selling Dividends: Cannot pressure clients to purchase mutual funds to capture an impending dividend Switching: Shouldn't convice client to switch funds from one family to another to invoke sales charge Purchasing Large Quantities of Class B Shares: this doesn't qualify for breakpoints like Class A |
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Mutual Fund Taxation
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A mutual fund investor's cost basis for taxation is calculated by dividing total assets invested by total number of shares owned |
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The following mutual fund events are taxable:
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Receiving dividends, reinvesting dividends, exchanging shares (within a fund family), switching shares (outside a fund family)
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High Risk Mutual Funds
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Aggresive Growth Funds: small companies often going public Specialized/Sector Funds: Funds concentrated in an industry or specific location International and Global Funds: Focus on foreign securities Emerging Markets: Funds focused on emeraging market countries |
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Moderate Risk Category
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Growth Funds: Invest in stocks that show above-average growth in share price Equity Income Fund: Companies that pay high dividends in relation to market prices Growth and Income Funds: High growth and higher dividends than most growth stocks, less capital appreciation Bond Funds: Government bond fund, corporate bond fund, mortgage-backed bonds Index Funds: Mirror stock or bonds indeces Balanced Funds: Maintain some percentage of assets in stocks, bonds, cash equivalents Asset Allocation: Similar to balanced, but can zero out one of the asset types |
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Low Risk Mutual Fund Category
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Money-Market Funds: Cash equivalent funds that are very liquid and safe
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Face Amount Certificate Company
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Issues debt certificates that pay a predetermined rate of interest, but investors who cash in certificates early will receive a lesser amount
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Unit Investment Trust
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Redeemable securties called shares of beneficial interests (SBIs) taht can be sold in secondary market. Each unit gives holder undivided interest in UIT's portolio proportionate to money invested. No associated managed fee since UIT are not activly managed |
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Exchange Traded Funds (ETFs)
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Represent an interest in an underlying basket of securities that mirror an index. Unlike mutual funds in that they are traded on an exchange, have lower expenses, may be sold short, may be purchased on margin
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Inverse ETFs
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Designed to perform the opposite of how the index is. Uses short selling and if the index performs poorly, the inverse ETF will do well. This typically a short-term daily strategy since the next day the index may do well and the inverse ETF would lose the gains
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Leveraged ETFs
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Designed to deliver 2-3 times the index
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HOLDRs
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Created by depositing securities of a certain sector into a trust and selling interests in the trust to investors. Unlike ETFs, owners have an ownership interest in the companies. Composition typically remains the same
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Closed End Companies
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Issue common shares to the public on a one-time basis and then they are resold on the secondary market
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Business Development Company (BDC)
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Publicly traded company that is designed to aid in raising money for small/mid-market companies. BDCs are more liquid than PE and VC funds, are regulated, and are only required to pay taxes on the earnings they choose to retain |
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Hedge Funds
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Private investment pools that are not required to register with the SEC. Typically only work with high-end investors, and can take a two and twenty (high) fee
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Fund of Funds
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A mutual fund that invests in other mutual funds. Dsigend to provide investors with greater diversification but also greater fees
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Fund of Hedge Funds
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A mutual fund that invests in private hedge funds. Typically they have to register with SEC unlike normal hedge funds
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Comparison of Packaged Products
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Product, Secondary Market Trading, Portfolio, Marginable Mutual Fund, No, Adjustable, No Closed-end Fund, Yes, Adjustable, Yes ETF, Yes, Generally fixed, yes UIT, Yes, Fixed, No Hedge Fund, No, Adjustable, No |
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SEC Rule 156- Investment Company Sales Literature
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An ivnestment company cannot distribute any literature or any names/attributes that are misleading
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Use of Investment Company Rankings in Retail Communications
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Only rankings distributed by ranking entities can be used in communication
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Real Estate Investment Trust (REITs)
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A portfolio of real estate investments from which investors can earn profits. Mortgage REITS provide funding to real estate purchasers, Equity REITs own and operate income-producing real estate and Hybrid REITs do both
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REIT Tax Benefits
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If 90% of oridnary income generated from portfolio is distributed to investors, income will only be taxed once. Following three tests must be passed for REIT to qualify for tax benefits: At least 95% of gross income derived from dividends, interest and rent from real property At least 75% of gross income derived from real property income No more than 30% of gross income derived from sale or disposition of stock/securities held for less than 12 months |
