Investment Companies Net Asset Value (NAV) (Total portfolio value - liabilities) / # of shares Management is usually contracted to an outside firm with fees ranging from 1/4% to 1/2% a year. Often management companies will start many funds and will provide advisory services, etc. for them.
Open-end Fund (Mutual Fund) new shares sold as demanded. company will buy back the shares at any time.
Closed-end Investment Company set number of shares / bought & sold on exchange market price usually < NAV, but... –emerging markets funds changes in the discount affect total return dividend yield usually above average because of discount must pay commission to buy or sell
Load vs. No-load most all funds obtained through brokers will have a load load = sales fee price = NAV + sales fee of 7 1/2% to 8% usually no redemption fee no-load funds are sold at NAV low-load funds have a fee of only about 3%
Tradeoffs Between Loads and Fees many no-load funds charge up to 1 1/2% per year for management some low-loads do this also. all funds charge management fees of from 1/2% to 1 1/2%. *** Read Prospectus ***
Types of Investment Companies Common stock funds –growth –income –index –mixed –industry specific (health care, airlines, etc.) –ecology minded –regional funds
Types of Funds, con’t. Balanced funds –stocks and bonds –percentages vary greatly –See prospectus for strategy Bond funds –corporate, government, junk, capital gains plays –mixed, municipals (state specific), income Money market funds
Performance After expenses, most funds do not consistently beat the market Performance figures do not take taxes into account The funds that tend to be the best in a given year do not tend to continue to perform at the top. Why?
Implications of Performance Studies For investors with little money? For investors with more money? Advisability of diversification among funds?
Tax Consequences of Mutual Funds Annual tax liability Comparison to individual stock and bond portfolio Implications? Sources of information on mutual funds