Chapter 4 - Learning Objectives You are probably going to...

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Learning Objectives You are probably going to be a mutual fund investor very soon, so you should definitely know the following: 1. The different types of mutual funds. 2. How mutual funds operate. 3. How to find information about how mutual funds have performed. 4. The workings of Exchange Traded Funds and hedge funds. 4-1
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4-2 Mutual Funds: Overview Mutual funds are simply a means of combining or pooling the funds of a large group of investors. The buy and sell decisions for the resulting pool are then made by a fund manager, who is compensated for the service provided. Like commercial banks and life insurance companies, mutual funds are a form of financial intermediary .
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4-3 Investment Companies and Fund Types, I. An Investment company is business that specializes in pooling funds from individual investors and making investments. An Open-end fund is an investment company that stands ready to buy and sell shares in itself to investors, at any time . A Closed-end fund is an investment company with a fixed number of shares that are bought and sold by investors, only in the open market .
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4-4 Investment Companies and Fund Types, II.
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4-5 Investment Companies and Fund Types, III. Net asset value (NAV) is the value of the assets less liabilities held by a mutual fund, divided by the number of shares. Shares in an open-end fund are worth their NAV, because the fund stands ready to redeem their shares at any time. In contrast, share value of closed-end funds may differ from their NAV.
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4-6 Example: 4-1 The Fidelity Magellan Fund is one of the largest mutual funds in the United States with about $42.8 billion invested and approximately 465 million shares outstanding (as of mid-2007). What is its net asset value (NAV)? NAV = $42.8 billion / 465 million = $92.04
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4-7 Mutual Fund Operations Organization and Creation A mutual fund is simply a corporation. It is owned by shareholders, who elect a board of directors. Most mutual funds are created by investment advisory firms (say Fidelity Investments) or brokerage firms with investment advisory operations (say Merrill Lynch). Investment advisory firms earn fees for managing mutual funds.
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4-8 Mutual Fund Operations Taxation of Investment Companies A “regulated investment company” does not have to pay taxes on its investment income. To qualify, an investment company must: Hold almost all its assets as investments in stocks, bonds, and other securities, Use no more than 5% of its assets when acquiring a particular security, and Pass through all realized investment income to fund shareholders
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Mutual Fund Operations The Fund Prospectus and Annual Report Mutual funds are required by law to supply a prospectus to any investor who wishes to purchase shares. Mutual funds must also provide an annual report to their
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Chapter 4 - Learning Objectives You are probably going to...

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