Module 5: Investment Companies and Mutual Funds

Practice flashcards covering nomenclature, definitions, and concepts related to investment companies and mutual funds from Module 5.

Investment company

A company that is engaged primarily in the business of investing in and managing a portfolio of securities.

Closed-end investment company

Offers investors an actively managed portfolio of securities and usually sells no additional shares after the initial public offering.

Exchange-traded fund (ETF)

A basket of stocks that tracks a particular sector, investment style, geographical area, or the market as a whole.

Open-end investment company (mutual fund)

Constantly issues new shares to investors and stands ready to buy back shares from shareholders.

Types of mutual fund

Money market mutual funds, equity (stock) funds, bond funds, hybrid or balanced (stock and bond) funds.

Money market funds

Funds that involve neither redemption fees nor sales charges but assess a management fee.

Fund investment objectives

Capital appreciation, total return, world equity, investment grade, high-yield, government bond, multi-sector bond, world bond, national municipal bond, state municipal bond.

Index funds

Unmanaged funds seeking to match a chosen market index.

Net asset value (NAV)

The market value of the securities in the mutual fund’s portfolio less any liabilities, divided by the number of shares currently outstanding.

Premiums and discounts for closed-end investment companies

Market prices of closed-end funds can vary from their NAVs.

12b-1 fees

A “distribution fee” that covers a mutual fund’s cost of distribution, marketing, and advertising.

Sales load

Charged either at the front end (at time of purchase) or the back end (at time of sale).

Expense ratios

The annual charge by a mutual fund to its shareholders as a percentage of assets under management (AUM).

Mutual fund expenses

Indirect, annual charges deducted from fund assets before earnings are distributed to shareholders.

Mutual fund fees

One-time charges directly paid by shareholders.

Benchmarks

Standards against which the performance of a security or investment manager can be measured.

Consistency of performance

The tendency of mutual funds with good investment performance to continue good performance.

Survivorship bias

Analyzing a sample of funds reflects only the companies that survived, ignoring those that didn’t.

International funds

Concentrate primarily on non-U.S. stocks

Global funds

Keep a minimum of $25\%$ of their assets in the United States.

Fund supermarkets

A mechanism by which investors can buy, own, and sell the funds of various mutual fund families through one source.

Hedge funds

Unregulated investment companies that seek to exploit market opportunities to earn larger-than-ordinary returns for their investors.