Chapter 16 investing in mutual funds

mutual fund

mutual fund

Pools the money of many investors—its shareholders—to invest in a variety of securities.

closed-end fund

A fund whose shares are issued by an investment company only when the fund is organized.

exchange-traded fund (ETF)

A fund that generally invests in the stocks or other securities contained in a specific stock or securities index.

open-end fund

A mutual fund whose shares are issued and redeemed by the investment company at the request of investors

net asset value (NAV)

The current market value of the securities contained in the mutual fund’s portfolio minus the mutual fund’s liabilities, divided by the number of shares outstanding.

no-load fund

A mutual fund for which the individual investor pays no sales charge.

contingent deferred sales load

A 1 to 5 percent charge that shareholders pay when they withdraw their investment from a mutual fund.

12b-1 fee

A fee that an investment company charges to defray the costs of marketing and selling fund shares and commissions paid to brokers who sell shares in the mutual fund.

expense ratio

All the different management fees, 12b-1 fees, if any, and fund operating costs for a specific mutual fund.

income dividends

The earnings a fund pays to shareholders from its dividend and interest income.

capital gain distributions

The payments made to a fund’s shareholders that result from the sale of securities in the fund’s portfolio.

reinvestment plan

A service provided by an investment company in which income dividends and capital gain distributions are automatically reinvested to purchase additional shares of the fund.

The following are typical types of mutual funds?

• closed-end

• open-end

• exchange-traded

Net asset value equation

Value of funds portfolio - liabilites / number of shares outstanding

sales load equation

original investment x sales load %

Contingent deferred sales load equation

Withdrawl amount x contingent deferred sales load %

Financial planners suggest that the expense ratio of a mutual fund should not be more than

1%

A long-term corporate bond fund usually invests in:

investment-grade corporate bonds maturing in 10 years or more.

The primary objectives of a balanced fund are:

• long-term growth.

• conserving principal.

• providing income.

Intermediate corporate bond funds usually invest bonds maturing in x to x years.

3-10

Asset allocation funds typically invest in

• stocks

• money market instruments

• bonds

Lifecycle funds become increasingly Blank______ as the specified date approaches and investors are closer to retirement.

conservative

Shareholders in mutual funds can receive return on investment:

• from dividends and interest income.

• from capital gains distributions.

• from the sale of their shares for a profit.

Money market funds invest in:

CDs, government securities, and other safe and highly liquid investments.

Lifecycle funds are popular with investors planning for

retirement