Download Investing in Mutual Funds

LO#1
Learning Objective # 1
Describe the characteristics of
mutual funds.
LO#1
Why Investors Purchase Mutual Funds
 Professional management
Who is the fund’s manager?
 Managers can change so investors must be careful
Diversification
 Investors funds are pooled and used to purchase a variety of
investments.
 Funds own stock in hundreds of different companies
 Buys from different asset classes (stocks, bonds & other securities
Investment Company
 A firm that, for a management fee, invests the pooled finds of small
investors in securities appropriate to its stated investment objectives
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LO#1
Characteristics of Mutual Funds
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Closed-end Mutual Funds
 A fund of finite size
 Shares are issued by an investment company only when
the fund is originally set up
 After all original shares are sold you can only purchase
shares from another investor
Open-end Mutual Funds
 Shares are issued and redeemed by the investment
company at the request of investors.
 Investors can buy and sell shares at the net asset value.
LO#1
Characteristics of Mutual Funds
Net Asset Value
The current market value of the securities contained in
the mutual funds portfolio minus the mutual funds
liabilities divided by the number of shares outstanding
 Calculated at the close of trading each day
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(Value of the fund’s portfolio – Liabilities)
Number of shares outstanding
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Characteristics of Mutual Funds
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Index Fund
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Exchange Traded Funds (ETF’s)
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An affordable way for investors to invest in a diversified
basket of securities; constructed to track the components of a
market index such as the S&P 500 or the S&P/TSX Composite
An affordable way for investors to invest in a diversified
basket of securities; provides the diversification of an index
fund with the flexibility of a stock
Short Sell
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The practice of selling a borrowed stock in the hope of
covering the sale by buying it at a lower price later
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Characteristics of Mutual Funds
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Load Fund
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No-Load fund
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No sales charge
Front-end load
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A mutual fund in which investors pay a commission (as high as 8.5%) every time
they purchase or sell shares
Contingent Deferred Sales Load – pay upon withdrawal of funds
A sales fee charged with each purchase; reduces the funds actually invested. Most
fund companies have lowered the maximum front-end load on their funds to
around 6 %
Back-end load
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Also referred to as a contingent deferred sales load. One to six percent of
withdrawals on sliding scale decreasing with time held, then zero if selling after a
set number of years.
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Management Fees & Other Charges
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Expense Ratio
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Expressed as a fixed percentage of the fund’s total value,
called the Management Expense Ratio (MER). Ranges from
0.25 percent (rare) to 4 percent, to cover investment
company’s costs. Fee is up to 0.5 percent higher for backend load funds.
Special Fees
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Annual RRSP, RRIF, RESP trustee fee
Account set up fee
Short term trading fee
Processing fee
Service fees