Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
25 Cards in this Set
- Front
- Back
|
When were mutual funds originated? |
Mid 19th century (1850s) -1st came into Canada in 1932 |
|
|
What is a mutual fund? |
-Pooled investment that can hold stocks, bonds, T-bills, cash, etc -A number of different investors can deposit their money -Managed by a portfolio manager that receives an MER -Has at least 10 different securities (instant diversification) -No guarantees and only FMV are received upon withdrawal or redemption |
|
|
What is the goal of the portfolio manager? |
Produce the best possible returns through balancing of the asset mix => make buying and selling decisions of the fund |
|
|
Mutual Fund Restrictions |
Can't hold more than 10% of 1 company -Must hold 10 different securities |
|
|
Mutual Fund Opportunities |
Allows people to invest as low as $25 to purchase mutual funds => Allow people with small amounts of money to have the same opportunity as investors with large amounts of money |
|
|
Closed-end Mutual Fund |
Company issues a fixed number of shares and once they are issued, that is the total number of shares traded -if an investor wants to purchase these shares, they would have to find another investor that is holding these shares -Does not exist today |
|
|
Open-end fund |
Company continuously issuing new shares => price is set by the NAVPS |
|
|
What happens to units when client's submit an application or redeem their mutual fund? |
-When client submits an application, new units are created -When a client redeems their mutual fund, the units are retired |
|
|
Why have mutual funds become so popular? |
-Declining interest rates on deposit-type investments -High returns on many mutual funds -Affordable professional management -Increased savings by the baby boom generation -Growing awareness of mutual funds as an investment alternative -Concern over retirement income -Increased demand for convenience, time-saving and variety |
|
|
Benefits of Investing in Mutual Funds |
Some -> Suitability for all risk tolerances Poor -> Professional Management Drunk -> Diversification Left -> Liquidity (T+3 is trade day + 3 days) Town -> Transferability (no fees, taxes when moving funds) Intoxicated -> Investor Protection (protected by MFDAIPC and CIPF cover up to $1M) Again -> Administrative Services (convenience for investors) |
|
|
Mutual Fund Complex / How are mutual funds organized? |
1) Decide if mutual fund is set up as a corporation or trust 2) Prepare prospectus -Portfolio manager makes buying and selling decisions -Custodian (bank or trust that is separate from management decision s that protects assets and securities for safekeeping) -Auditor (reviews sales practices of mutual fund) -Distributor (mutual fund dealer) (responsible for bringing assets into the fund) -Transfer Agent (maintains records for safekeeping) (when purchases, distributions and redemptions are made) |
|
|
Net Asset Value Per Share (NAVPS) |
NAVPS = (total assets - total liabilities) / total shares outstanding -Represents the value of each unit today (FMV per share) -Dictates how many units are purchased |
|
|
Dollar Cost Averaging |
Purchasing the same amount of the same investment at regular intervals (e.g. $1000 over 100 weeks) -Buy more units when NAVPS is low and less units when NAVPS is high => Results in more units and lower cost per share |
|
|
Systematic Withdrawal Plan (SWP) |
1) Ratio Plan (i.e. withdraw 8% of the FMV every year) 2) Fixed Dollar Plan (i.e. withdraw $500 monthly) 3) Fixed Period (i.e. I want my money gone by 5-6 years) 4) Life Expectancy (i.e. Match income in my mutual fund with how long I am expected to live) =>#1,2 risk is encroaching on capital if performance of mutual fund is poor (withdrawals eating away at principal) => taxes on growth upon withdrawal of the mutual fund |
|
|
What is a more tax-efficient way of withdrawing mutual funds? |
Series T Mutual Funds -T6, T8 (6% or 8% of annual payout is withdrawn) -Unit withdrawals are not required when redeeming mutual fund (withdrawals are based on the annual payout) -Annual payout includes both growth and principal => Principal is not taxable |
|
|
Management Expense Ratio (MER) |
Portfolio manager fees MER = total fund expenses / average NAV -dictated by the amount of work the portfolio manager has to do -MER is an indirect costs to investors (comes off investment returns, do not pay cash for it) -Interest charges, audit fees, legal fees, accounting fees, etc. apply to the MER -MER is found in prospectus |
|
|
What dictates the fund we should offer to clients? |
1) Their objectives 2) Their risk tolerance
|
|
|
Trailer fees |
Paid to investment representatives for servicing clients -Typically 0.25-1% of total assets just for servicing -Portfolio manager pays trailer fees (included in MER) |
|
|
Loads/Sales Charges |
1) No-Load Fund 2) Front-end Load 3) Back-end Load/DSC |
|
|
No-Load Fund |
No fees for purchasing or redeeming mutual fund -Only eligible to those who have $100K to invest => But fees applied to optional fees, account setting/closing fees |
|
|
Front-end Load |
Fees for purchasing mutual fund up front -NAVPS is adjusted -Adjusted NAVPS = NAVPS / (1-Sales Charge) => No fees for redeeming mutual fund |
|
|
Back-end Load/DSC |
Fees for withdrawing from mutual fund -The longer you hold the investment, the lower the DSC -After 7 years, DSC = 0
|
|
|
DSC is based on |
1) Book Value (ACB) DSC = FMV - (fee*ACB) 2) Market Value (FMV) DSC = FMV - (fee*FMV) =>Book Value has a lower fee but the DSC is decided by the mutual fund company |
|
|
What are back-end and front-end loads based on? |
Commission based model -Investors ok with status quo -Investors that want to see their advisors once a year (not very often) => People that do not like to make frequent changes to their investment |
|
|
Fee-based Investment |
A fee-based model is when investors pay a fee based on the value of the investment => Recommended for people that like to make frequent changes to their investment |
