chapter 4, 3fb3 Flashcards
(34 cards)
Q: What are investment companies, and how do they work?
Investment companies pool funds from individual investors to invest in securities or assets.
They provide divided claims on pooled assets to investors.
Investors benefit from professional management and diversification of their funds.
Q: What 4 key services do investment companies offer to investors?
A: Record-keeping and administration – Handle investor accounts and statements.
Diversification and divisibility – Spread investments across assets, allowing smaller investors to own fractions of securities.
Professional management – Experienced managers oversee investments.
Lower transaction costs – Economies of scale reduce costs per transaction.
Q: What are the key features of an open-end managed investment company?
A:Redeemable Shares: Always ready to issue or redeem shares directly with investors.
Pricing: Shares are priced at net asset value (NAV).
Flexibility: The number of shares changes daily based on investor activity.
Q: How does a closed-end managed investment company differ from an open-end one?
Fixed Shares: Does not redeem or issue new shares—number of shares is fixed.
Selling Process: Investors sell shares to other investors in the market to cash out.
Pricing: Shares may trade at a premium or discount to NAV, depending on market demand.
Q: What are the key differences between open-end and closed-end managed investment companies?
A: Open-End: Shares priced at NAV, flexible share issuance/redemption.
Closed-End: Shares traded in the market, priced at a premium or discount to NAV.
Open-end focuses on continuous share management, while closed-end has a fixed supply of shares.
Q: What are commingled funds, and how do they function?
A: Structure: Partnerships where investors pool funds together.
Purpose: Managed by professional managers, designed for specific investment strategies.
Accessibility: Typically used by institutional investors like retirement funds or trusts.
Q: What are the main features of Real Estate Investment Trusts (REITs)?
A: Structure: Similar to closed-end funds.
Types:
Equity Trusts: Own and operate income-generating properties.
Mortgage Trusts: Invest in mortgages and mortgage-backed securities.
Focus: Provide investors with income through dividends from real estate investments.
Q: What are hedge funds, and how do they operate?
A: Purpose: Allow private investors to pool assets for management by a fund manager.
Flexibility: Use diverse strategies like leverage, derivatives, or short-selling.
Exclusivity: Typically available to high-net-worth individuals or institutional investors
Q: What are mutual funds, and how do they work?
Definition: Investment vehicles pooling money from many investors to buy a diversified portfolio of securities.
Management: Managed by professional portfolio managers.
Benefit: Provide diversification and lower transaction costs for individual investors.
Q: What are the different types of mutual funds?
A: Equity Funds: Invest in stocks; focus on capital growth.
Bond Funds: Invest in fixed-income securities; focus on income stability.
Money Market Funds: Invest in short-term, low-risk securities.
Balanced Funds: Mix of stocks and bonds for both growth and income.
Q: What are the primary costs associated with mutual funds?
Front-end Load: Fee when buying shares.
Back-end Load: Fee when selling shares.
Expense Ratio: Annual operating expenses as a percentage of assets.
No-Load Funds: Funds without sales fees but may still have an expense ratio.
Q: What are International Funds, and how are they categorized?
A: Global Funds: Invest in both U.S. and international markets.
International Funds: Focus exclusively on non-U.S. markets.
Regional Funds: Target specific geographical areas (e.g., Europe, Asia).
Emerging Market Funds: Invest in rapidly developing economies with higher growth potential but greater risk.
Q: What are Balanced Funds, and how are they structured?
A: Designed as a one-stop investment portfolio.
Composition: Mix of stocks, bonds, and sometimes other assets.
Aim to provide both income and growth, suitable for individuals seeking moderate risk and diversification.
Q: How do Asset Allocation and Flexible Funds differ from Balanced Funds?
Hold both stocks and bonds, but actively engage in market timing to adjust allocations.
They are not inherently low-risk and are often used for tactical investment strategies rather than stability.
Q: What are Index Funds, Liquid Alternatives, and ESG Funds?
Index Funds: Track the performance of a broad market index, offering low-cost, passive investing.
Liquid Alternatives: Provide hedge fund-like strategies with daily liquidity.
ESG Funds: Focus on companies meeting environmental, social, and governance criteria, appealing to ethical investors.
Q: How can funds be sold directly?
A: Funds are sold directly by the fund underwriter, eliminating the need for intermediaries.
Q: What role do brokers play in fund sales?
A: Brokers act on behalf of the underwriter and receive a commission or fee for selling mutual fund units to investors.
Q: What is a financial supermarket in the context of mutual funds?
A platform where brokers split management fees with mutual fund companies, offering a wide selection of funds to investors.
Q: What are management fees and operating expenses in mutual funds?
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A: These are ongoing costs for professional management and day-to-day operations of the fund
Q: What is a front-end load?
A: A fee charged at the time of purchase, reducing the initial investment amount.
Q: What is a back-end load?
A: A fee charged when selling shares, often decreasing the longer the investment is held.
Q: What are trailing commissions?
A: Ongoing fees paid to brokers/financial advisors for providing advice or services to investors.
Q: What is pass-through status in mutual fund taxation?
A: It means taxes are paid only by the investor, not the fund itself.
Q: Why don’t fund investors control the timing of securities sales?
A: Because the portfolio manager decides when to sell securities, which can result in taxable events for the investor.
