Chapter 16 Flashcards by Bhargav Arimilli

How many individuals own mutual funds?

90 million

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How many mutual funds are there today?

over 11,000

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What is the combined value of assets owned by mutual funds in 2018?

$18.75 trillion

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What are the three major reasons investors purchase mutual funds?

professional management; convenient way to invest; diversification

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Elaborate on diversification as a reason for investors to purchase mutual funds.

investors’ funds are used to purchase a variety of investments, which provides some safety

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Define closed-end funds. (2)

shares issued by an investment company only when fund is organized; after all original shares are sold, you can purchase shares only from another investor who is willing to sell

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How many closed-end funds were there in 2017?

568

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What was the value of closed-end funds in 2017?

$289 billion

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Define exchange-traded funds. (3)

funds that invest in the stocks contained in a specific stock index; not actively managed; trade like a stock

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How many exchange-traded funds were there in 2017?

1,411

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What was the value of exchange-traded funds in 2017?

$2 trillion

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Describe open-end funds. (2)

shares issued and redeemed by the investment company at the request of investors; investors can buy and sell shares at the net asset value

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How many open-end funds were there in 2017?

7,923

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What was the value of open-end funds in 2017?

$15.9 trillion

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What is net asset value?

the price per share after expenses

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What is the formula to calculate net asset value?

(value of fund’s portfolio - liabilities) / number of outstanding shares

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Define load fund. (2)

investors pay commission (sales charge) every time they purchase shares; average charge is 2-5% for which an investor can get purchase advice and explanations

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Give two synonyms for load fund.

front load; Class A shares

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Define no-load fund. (2)

investors pay no upfront sales charge because there are no sales people; deal directly with investment company

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Define contingent deferred sales load. (3)

charged upon withdrawal of funds (1-5%); discourages early withdrawal of funds; generally decreases on a sliding scale, depending on the number of years the shares are held

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Give two synonyms for contingent deferred sales load.

back load; Class B shares

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Define management fee.

charged yearly (0.5 - 1% average) based on a percentage of the fund’s asset value

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Define 12b-1 fees.

Annual fee to defray distribution and marketing costs; cannot exceed 1% of a fund’s assets per year; cannot exceed 0.25% to be called “no-load”

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Give a synonym for 12b-1 fees.

Class C shares

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Define expense ratio. (2)

consists of different management fees and additional fund operating costs for a specific mutual fund; should not exceed 1%

Aggressive growth funds buy

risk-oriented stocks in fast-growing companies, such as Amazon, Facebook, and Uber

Equity income funds invest in

stocks of companies with a long history of paying dividends, such as McDonald's or AT&T

Global stock funds buy

stock in companies in the U.S. and other countries (Vanguard Global Stock Index Fund: 55% overseas and 45% US)

Growth stock funds buy

stock in companies with higher-than-average revenue and earnings growth, such as Target or ExxonMobil

Index funds buy

stocks that mirror and index, such as Vanguard Inflation-Protected Securities Fund

International funds invest in

foreign stocks sold in securities markets throughout the world, excluding the US, such as Shell Oil

Large-cap funds invest in

companies with a capitalization of $10 billion or more, such as Apple

Mid-cap funds invest in

companies with a total capitalization of $2 to $10 billion, such as Ulta or Best Buy

Regional funds buy

stock in companies in a specific region of the world, such as Europe or the Pacific Rim

Sector funds buy

stock in companies in a particular industry, such as biotechnology or energy

Small-cap funds buy

stock in lesser-known companies with a capitalization of between $300 million and $2 billion, such as Fossil

Socially responsible funds avoid

investing in companies that produce harmful products

High yield (junk) bond funds buy

corporate bonds that are higher risk and higher yield

What is the term length of intermediate corporate bonds?

3-10 years

Intermediate U.S. bond funds buy

Treasury notes with maturities of 3-10 years

What is the term length of long-term corporate bonds?

greater than 10 years

Long-term U.S. bond funds buy

U.S. Treasury and U.S. zero-coupon bonds with maturities greater than 10 years

What are short-term corporate bonds?

investment-grade bonds with maturities of 1-3 years

Short-term U.S. bond funds invest in

U.S. Treasury issues of 1-3 years

Municipal bonds provide

investors a tax-free interest income

World bond funds buy

bonds of foreign companies and governments

Define asset allocation funds.

invest in various asset classes, such as stocks and bonds, with precise amounts within each type

Define balanced funds.

invest in both stocks and bonds, with the primary objectives of conserving principal, providing income as well as growth

Define funds of funds.

invest in shares of other mutual funds

Define lifecycle funds.

initially invest in more risk-oriented securities and become increasing conservative + income-oriented as specified retirement date approaches

Give another name for lifecycle funds.

target date funds

Define money market funds.

invest in CDs, government securities, and other safe investments

What are exchange privileges?

allow you to move your money from one fund to another within the fund family with little or no penalty

An index mutual fund is

mirror image of a specific index

How have most managed funds performed in the S&P 500?

Most managed funds have underperformed in the S&P 500 Index over a long period of time

Which one has a lower expense ratio — managed or indexed funds?

indexed funds, with a lower expense ratio less than or equal to 0.50%

Which types of mutual funds have to be purchased in a securities exchange or in the OTC market?

closed-end funds or exchange-traded funds

Define income dividends.

earnings that fund pay to shareholders from dividend and interest income

How are income dividends taxed?

taxed as regular income (5% if MTR is 10-15%; 15% if MTR is 25-35%)

Capital gains are reported where?

Sch. D of Form 1040

How are shares taxed when selling?

taxed on short-term basis if less than 1 year, taxed on long-term basis if 1 year or greater

What are capital gain distributions?

payments to shareholders from fund's internal sale of securities

Where are capital gain distributions reported?

Sch. D of form 1040

How are capital gain distributions taxed?

taxed as long-term, regardless of how long you own shares in the mutual fund

Which sources/outputs of money can be reinvested in a mutual fund?

income; capital gains distribution

What is the turnover ratio?

measures percentage of fund that has been replaced in one year

What is the relationship between turnover ratio and tax liability in funds that are NOT tax deferred?

higher turnover ratio = higher tax liability

What are automatic investments?

money is taken from your account monthly and invested in a fund

What are reinvestment plans?

income from dividends and capital gain distributions are automatically used to purchase more shares

What is internal switching?

moving money fro one fund to another in the same family