Chapter 4 - Mutual Funds and Other Investment Companies

Chapter 4 - Mutual Funds and Other Investment Companies -...

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Chapter 4: Mutual Funds and Other Investment Companies 4.1 Investment Companies Investment companies- financial intermediaries that collect funds from individual investors and invest in those funds in a potentially wide range of securities or other assets. Perform several functions: o Record keeping and administration – Issue periodic status reports, keeping track of capital gains distributions, dividends, investments and redemptions and they reinvest dividend and interest income for shareholders o Diversification and diversibility- By pooling their money, investment companies enable investors to hold fractional shares of many different securities. o Professional management- can support full time staffs of security analysts and portfolio managers who attempt to achieve superior investment results for their investors o Lower transaction costs- because they trade large blocks of securities, investment companies can achieve substantial savings on brokerage fees and commissions Net asset value- value of each share o NAV= [Market value of assets-liabilities]/Shares Outstanding 4.2 Types of Investment Companies Investment Company Act- companies are classified as either investment trusts or managed investments companies Unit Investment Trusts-pools of money invested in a portfolio that is fixed for life of the fund o Sponsor, usually brokerage firm buys portfolio of securities that are deposite into a trust sells shares or units in the trust (redeemable trust certificate) income and payments of principal from portfolio are paid by fund’s trustees to shareholders o Little active management portfolio composition is fixed o Profit earned by selling shares in the trust at a premium to the cost of acquiring the underlying assets
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Managed Investment Companies o Two types: closed end and open end o In both board of directors is elected by shareholders, which hires management to manage the portfolio for fee o Open End Funds- ready to redeem or issue shares at their net asset value (although both purchases and redemptions may involve sales charge) o Closed End Funds- do not redeem or issue shares. Investors who wish to cash out must sell shares to other investors o Price of open end funds cannot fall below NAV, because these funds stand ready to redeem shares at NAV o Offering price will exceed NAV if the fund carries a load, a sales tax. Load funds are sold by securities brokers and directly by mutual fund groups o Unlike closed end funds, open end mututal funds do not trade on organized exchanges Other Investment Organizations o Commingled Funds- partnerships of investors that pool funds. Management firm that organizes the partnership ( bank or insurance)
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This note was uploaded on 08/07/2011 for the course FIN 380 taught by Professor Winder during the Spring '10 term at Rutgers.

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Chapter 4 - Mutual Funds and Other Investment Companies -...

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