Learning Objective # 1 Describe the characteristics of mutual funds. LO#1

Why Investors Purchase Mutual Funds  Professional management  Who is the fund’s manager?  Managers can change so investors must be careful  Diversification  Investors funds are pooled and used to purchase a variety of investments.  Funds own stock in hundreds of different companies  Buys from different asset classes (stocks, bonds & other securities  Investment Company  A firm that, for a management fee, invests the pooled finds of small investors in securities appropriate to its stated investment objectives LO#1

Characteristics of Mutual Funds  Closed-end Mutual Funds  A fund of finite size  Shares are issued by an investment company only when the fund is originally set up  After all original shares are sold you can only purchase shares from another investor  Open-end Mutual Funds  Shares are issued and redeemed by the investment company at the request of investors.  Investors can buy and sell shares at the net asset value. LO#1

Characteristics of Mutual Funds Net Asset Value  The current market value of the securities contained in the mutual funds portfolio minus the mutual funds liabilities divided by the number of shares outstanding  Calculated at the close of trading each day LO#1 (Value of the fund’s portfolio – Liabilities) Number of shares outstanding

Characteristics of Mutual Funds  Index Fund  An affordable way for investors to invest in a diversified basket of securities; constructed to track the components of a market index such as the S&P 500 or the S&P/TSX Composite  Exchange Traded Funds (ETF’s)  An affordable way for investors to invest in a diversified basket of securities; provides the diversification of an index fund with the flexibility of a stock  Short Sell  The practice of selling a borrowed stock in the hope of covering the sale by buying it at a lower price later LO#1

Characteristics of Mutual Funds  Load Fund  A mutual fund in which investors pay a commission (as high as 8.5%) every time they purchase or sell shares  Contingent Deferred Sales Load – pay upon withdrawal of funds  No-Load fund  No sales charge  Front-end load  A sales fee charged with each purchase; reduces the funds actually invested. Most fund companies have lowered the maximum front-end load on their funds to around 6 %  Back-end load  Also referred to as a contingent deferred sales load. One to six percent of withdrawals on sliding scale decreasing with time held, then zero if selling after a set number of years. LO#1

Management Fees & Other Charges  Expense Ratio  Expressed as a fixed percentage of the fund’s total value, called the Management Expense Ratio (MER). Ranges from 0.25 percent (rare) to 4 percent, to cover investment company’s costs. Fee is up to 0.5 percent higher for back- end load funds.  Special Fees  Annual RRSP, RRIF, RESP trustee fee  Account set up fee  Short term trading fee  Processing fee  Service fees LO#1