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Fourth Edition

Chapter 4

Mutual Funds and Other Investment Companies

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Services of Investment Companies

Administration & record keeping Diversification & divisibility Professional management Reduced transaction costs

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Net Asset Value

Used as a basis for valuation of investment company shares - Selling new shares - Redeeming existing shares Calculation Market Value of Assets - Liabilities Shares Outstanding
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Types of Investment Organizations

Unit Trusts Managed Investment Companies - Open-End - Closed-End Other investment organizations - Commingled funds - REITs

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Open-End and ClosedEnd Funds: Key Differences

Shares Outstanding Closed-end: no change unless new stock is offered Open-end: changes when new shares are sold or old shares are redeemed Pricing Open-end: Net Asset Value(NAV) Closed-end: Premium or discount to NAV

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Investment Policies
Money Market Fixed Income Equity Balance & Income Asset Allocation Indexed Specialized Sector

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Costs of Investing in Mutual Funds

Fee Structure - Front-end load - Back-end load Operating expenses 12 b-1 charges - distribution costs paid by the fund - Alternative to a load Fees and performance
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A First Look at Fund Performance

Benchmark: Wilshire 5000 Results - Most funds underperform - Not fair comparison because of costs Adjusted Benchmark: Wilshire 5000 with passive management costs considered - The majority of funds still underperform

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Consistency of Fund Performance

Do some mutual funds consistently outperform? Evidence suggests that some funds show consistent stronger performance - Depends on measurement interval - Depends on time period Evidence shows consistent poor performance
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Sources of Information on Mutual Funds

Wiesenbergers Investment Companies Morningstar Investment Company Institute Popular press Investment services

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