Chap4 - Chapter 04 - Mutual Funds and Other Investment...

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Chapter 04 - Mutual Funds and Other Investment Companies CHAPTER 04 MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES 1. Mutual funds offer many benefits. Some of those benefits include the ability to invest with small amounts of money, diversification, professional management, low transaction costs, tax benefits, and reduce administrative functions. 2. Close-end funds trade on the open market and are thus subject to market pricing. Open- end funds, are sold by the mutual fund and must reflect the NAV of the investments. 3. Annual fees charged by a mutual fund to pay for marketing and distribution costs. 4. A unit investment trust is an unmanaged mutual fund. Its portfolio is fixed and does not change due to asset trades, as does a close-end fund. . 5. Exchange-traded funds can be traded during the day, just as the stocks they represent. They are most tax effective, in that they do not have as many distributions. They also have much lower transaction costs. They also do not require load charges, management fees, and minimum investment amounts. 6. Hedge funds have much less regulation since they are part of private partnerships and free from mist SEC regulation. They permit investors to take on many risks unavailable to mutual funds. Hedge funds, however, may require higher fees and provide less transparency to investors. This offers significant counter party risk and hedge fund investors need to be more careful about the firm the invest with. 7. An open-end fund will have higher fees since they are actively marketing and managing their investor base. The fund is always looking for new investors. A unit investment trust need not spend too much time on such matters since investors find each other. 8. Asset allocation funds may dramatically vary the proportions allocated to each market in accord with the portfolio manager’s forecast of the relative performance of each sector. Hence, these funds are engaged in market timing and are not designed to be low- risk investment vehicles. 9. a. A unit investment trusts offer low costs and stable portfolios. Since they do not change their portfolio, the investor knows exactly what they own. They are better suited to sophisticated investors. b. Open-end mutual funds offer higher levels of service to investors. The investors do not have any administrative burdens and their money is actively managed. This is better suited for less knowledgeable investors. c. Individual securities offer the most sophisticated investors ultimate flexibility. They
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Chap4 - Chapter 04 - Mutual Funds and Other Investment...

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