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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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