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Week 9: Chap 16: Investing in Mutual Funds

by: Nj

Week 9: Chap 16: Investing in Mutual Funds FIN 331

Marketplace > Towson University > Finance > FIN 331 > Week 9 Chap 16 Investing in Mutual Funds
Principles Financial Management
Moon-Whoan Rhee

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Principles Financial Management
Moon-Whoan Rhee
Class Notes
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This 3 page Class Notes was uploaded by Nj on Thursday October 22, 2015. The Class Notes belongs to FIN 331 at Towson University taught by Moon-Whoan Rhee in Summer 2015. Since its upload, it has received 13 views. For similar materials see Principles Financial Management in Finance at Towson University.

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Date Created: 10/22/15
Chapter 16 Investing in Mutual Funds Why mutual funds 0 Easy way to invest Offer professional management 0 Funds can help you diversify you investment dollars According to the Mutual Fund Education Alliance wwwmfeacom a mutual fund pools the money of many investors its shareholders to invest in a variety of securities Major reasons why investors purchase mutual funds professional management and diversi cation Characteristics of mutual funds 0 A closedend fund fund whose shares are issued by an investment company only when the fund is organized Actively managed by portfolio managers 2 of funds 0 An exchangetraded fund ETF fund that generally invests in the stocks or other securities contained in a speci c stock or securities index Not actively managed by portfolio managers 8 of funds 0 An openend fund mutual fund whose shares are issued and redeemed by the investment company at the request of investors The net asset value NAV per share is equal to the market value of securities contained in the mutual fund s portfolio minus the mutual fund s liabilities divided by the number of shares outstanding NAV value of the fund s portfolioliabilitiesnumber of shares outstanding Example of net asset value Assume the portfolio of stocks bonds and other securities contained in the New American Frontiers mutual fund has a current market value of 655 million The fund also has liabilities totaling 5 million If this mutual fund has 30 million outstanding what is the net asset value per share NAV 655530 2167 per share Load fund quotAquot fund mutual fund in which investors pay a commission every time they purchase shares The commission sales charge may be as high as 812 of the purchase price Management fee 0 Charged yearly 051 average based on a percentage of the funds asset value 12b1 fees Class C shares 0 Annual fee to defray sales costs of the fund 0 Cannot exceed 1 of a fund s assets per year Expense Ratio 0 consists of the different management fees 12b1 fees if any and additional fund operating costs for a speci c mutual fund 0 this fee should not exceed 1 percent Example of sale load Assume you decide to invest 10000 in the Davis New York Venture fund This fund charges a sales load of 475 that you must pay when you purchase shares The dollar amount of the sales charge on your 10000 investment is 475 Sale load original investment x sales load stated as percentage 10000 x 00475 475 The quotstatedquot advantage of a load fund is that the fund s sales force account executives nancial planners or brokerage divisions of banks and other nancial institutions will explain the mutual fund to investors and offer advice as to when shares of the fund should be bought or sold A noload fund is a mutual fund for which the individual investor pays no sales charge Some mutual funds charge a contingent deferred sales load backend load or a B fund on withdrawals It is a 1 to 5 charge that shareholders pay when they withdraw their investment from a mutual fund Stock Funds Aggressive growth funds seek rapid growth by purchasing stocks whose prices are expected to increase dramatically in a short period of time Aggressive growth funds buy stocks in small fast growing companies Equit income funds invest in stock of companies with a ong history of paying dividends Global stock funds buy stock in companies in the US and other countries Return on investment The purpose of investing in a closedend fund exchangetraded fund or openend fund is to earn nancial return 3 ways for shareholders to receive a return 0 Income dividends earnings from dividend and interest income 0 Capital gain distributions payments resulting from the sale of securities in the fund s portfolio 0 Capital gain when shares in a mutual fund are sold pro t resulting from an increase in value Total return mutual fund Dollar amount of total return income dividends capital gain distributions change in share market value when sold Turnover ratio measures the of a fund s holdings that have changed or quotbeen replacedquot during a 12month period A higher turnover ratio can result in higher transaction costs and fund expenses


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