Chapter 4: Mutual Funds And Other Investment Companies

Question 1

What do investments companies do? What do they provide?

Answer 1

They pool funds of individual investors and invest in a wide range of securities or other assets. They provide diversification, professional management, lower transaction costs, record keeping and administration.

Question 2

What are the two types of managed investment companies?

Answer 2

Open-end (issues shares when investors buy, redeems shares when investors cash out, priced at NAV)
Closed-end (shares outstanding constant; investors cash out by selling to new investors, priced @ premium or discount to NAV)

Question 3

What are mutual funds?

Answer 3

Open-end funds, widely available and provides access to a wide variety of assets, better LT, disclose portfolio holdings quarterly

Question 4

Mutual funds: How are funds sold?

Answer 4

Direct-marketed funds (by underwriters), sales force distributed - brokers and advisors receive commissions, potential conflicts of interest regarding fund selection.

Question 5

What are the three costs of investing in mutual funds?

Answer 5

1. Management fees and operating expenses (MER)
2. Front-end load (Initial sale charge ISC)
3. Back-end load (Deferred Sale charge (DSC))

Question 6

What does the pass-through status under the Canadian tax code mean?

Answer 6

• taxes are paid only by the investor
• funds investors do not control the timing of the sales of securities from the portfolio

Question 7

What are ETFs?

Answer 7

Exchange traded funds - closed-end funds, allow investors to trade index portfolios ex. TIPS, spiders, diamonds, cubes

Question 8

What are the advantages and disadvantages of ETFs?

Answer 8

Advantages
- Trade continuously like stocks
- Can be sold short or purchased on margin
- lower costs (lower MER)
- tax efficient

Disadvantages
- prices can depart from NAV
- must be purchased through brokers, typically a fee

Question 9

What are commingled funds?

Answer 9

Open-end, not regulated by SEC, lower operating costs than MFs, not publicly traded, less liquid thank MFs

Question 10

What are REITS?

Answer 10

Real estate investment trusts (closed-end, publicly traded, liquid, owns or finances income-generating REs) (equity trusts or mortgage trusts)

Question 11

What are Hedge funds?

Answer 11

• open-end, actively managed, risky and illiquid investments, lock-up period, redemption gates, heavy use of leverage, short sales, and derivatives