Post on 21-Dec-2015
1.2Investments Chapter 3
Chapter 3 Questions
What is a mutual fund? How does one compute the net asset value (NAV)? What expenses and changes might a mutual fund
investor face? What does research on mutual fund performance
tell about fund expenses, portfolio turnover, and returns?
What is a good procedure for determining which mutual funds to purchase?
When might it be appropriate to sell shares in a mutual fund?
What are the similarities between mutual funds and some other managed investments?
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Mutual Fund Growth
Mutual funds have become very popular investment vehicles.
Nearly $7 trillion in total assets in 2002.
Total assets have grown 600% since 1990.
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我国证券投资基金发展的历史起源于 1992 年,规范的基金起源于 1998 年 3 月
2007 年 9 月 21 日,我国共批准设立 59 家基金管理公司,其中合资基金管理公司 28 家。所有基金管理公司管理基金 341 只,基金总规模为 18962 亿份,金额达 30228 亿元,基金净值也已经是年初的 3.1 倍 。
目前,我国基金投资帐户数已经超过 9000 多万个
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What is a mutual fund?
Mutual funds are open-end investment companies. The fund sells shares to the public and invests the
proceeds in a pool of funds, which are jointly owned by the fund’s investors.
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Computing Net Asset Value
For investors, the performance of their investment depends on what happens to the fund’s per share value, or net asset value (NAV).
NAV= Market Value of Assets – Liabilities
Number of Shares Outstanding
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Mutual Fund Management
Most funds are started by investment management
companies who hire the fund manager to make investment
decisions.
Fidelity, Vanguard, etc.
Usually offer many different funds and allow investors to
switch between funds.
Funds (open-end) sell additional shares to those who want to
invest, redeem shares at the NAV (less any fees) to those
who want to sell their shares.
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Why invest with mutual funds?
Liquidity
Funds buy and sell their own shares quickly, even if fund
investments are illiquid
Diversification
Small minimum investment buys a typically well-diversified
investment
Professional management and record-keeping
Expertise and services
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Why invest with mutual funds?
Choice and flexibilityFamilies of funds offer a variety of investments to
match investor needs
IndexingSome funds track a broad market index which insures
that investors will earn the “market return”
Increasingly popular mutual fund alternative
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Mutual Fund Drawbacks
Active trading contributes to high costs which lower fund returns
Tax consequences can be a disadvantageTax impacts of asset trading are passed through to
investorsTax bill can be large even when the NAV falls
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Mutual Fund Returns
Three sources of return:
Income distributions (ID)
Bond interest, stock dividends
Capital gain distributions (CGD)
Realized gains/losses from selling assets
Changes in NAV (NAV)
From unrealized gains/losses from assets
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Mutual Fund Returns
Return = (ID + CGD + NAV)/Beg.NAV
By dividing the sum of the three components of
dollar returns by the beginning NAV, we have the
mutual fund’s holding period return.
Most mutual funds allow investors to either receive
distributions in cash or to reinvest in additional
shares.
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Types of Mutual Funds
Funds can be classified according to the type of security in which they investStock FundsTaxable Bond FundsMunicipal Bond FundsStock and Bond FundsMoney Market Funds
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Common Stock Funds
Most popular type of fund Wide variety with different objectives and levels of
riskGrowthIndustry or sector fundsGeographic areasInternational or GlobalEquity Index funds
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Taxable Bond Funds
Generally seek to generate current income with limited risk Can vary by maturity
Short-term, Intermediate-term, Long-term Can vary by type of bond
GovernmentCorporateMortgage-backedInternational/GlobalBond Index funds
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Municipal Bond Funds
Provide investors with income exempt from Federal taxation
Often concentrate on single states to avoid state income taxation as well
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Stock and Bond Funds
Seek to provide a combination of income and value appreciation.
Different namesBalanced fundsBlended fundsFlexible funds
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Money Market Funds
Provide safe, current income with high liquidity Invest in money market securities
T-bills, Bank CD’s, Commercial paper, etc. NAV stays at $1; income either paid out or
reinvested daily Provide an alternative to bank deposits, but not
FDIC insured
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Mutual Fund Innovations
Life-stage fundsOffer different mixes of securities based on the age of
the investor
Supermarket fundsOffer a wide variety of funds with “one-stop” fund
shoppingTransfer services between fundsExpenses/fees can be high
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Mutual Fund Prospectus
Must be available to investors and should be review by investors.
Contains:Fund’s investment objectiveInvestment strategyPrincipal risks faced by investorsRecent investment performanceExpenses and feesLots of other detailed information
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Mutual Fund Expenses and Considerations
LoadsCommission to the broker to financial advisor who sold the
fund to the investorFor load funds, the offer price is the fund’s NAV less the load
(while no-load funds are sold at their NAV)Load range from around 3% (low-load) to 8.5%
12b-1 FeesFees deducted from the asset value of the fund to cover
marketing expensesAn alternative to loads
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Mutual Fund Expenses and Considerations
Deferred Sales LoadsRedemption charges when fund shares are sold (rather than
when purchased)Often high (5-7%) if shares are sold within the first year, but
then fall over time, perhaps even disappearing eventually Share Classes
Many funds offer several different classes of shares (A-B-C) with different fee structures
Best choice usually depends of investment horizon
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Mutual Fund Expenses and Considerations
Management FeesFees deducted from the fund’s asset value to
compensate the fund managersSome adjust fees according to the fund’s performance
Expense ratioAdding all fees and calculating expenses as a
percentage of the fund’s asset
%100assetsnet
expenses of sumratio exp
averageense
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Portfolio TurnoverNot an explicit cost, but very important determinant of
shareholder returnsTrading costs rise with turnoverIn order for high turnover to pay off, fund managers must be
successful in their active trading strategies
Sources of InformationWall Street Journal, Business WeekMorningstar
Fund history, tax efficiency, risk analysisHexun http//funds.hexun.comSina http://finance.sina.com.cn/fund/
Mutual Fund Expenses and Considerations
securitiesfundfor
periodholdingveragearateover turn
months12
portfolio
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Mutual Fund Return and Risk Performance
Return Performance On a risk-adjusted basis, the average stock fund under-
performs market averages While portfolio managers seem to out-perform the market
before expenses, net returns are below the market index Some above-average performers over short time horizons,
but such performance is not generally sustained (just luck?) These results help to explain the growing popularity of index
funds
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Mutual Fund Return and Risk Performance
Risk Performance While returns are not consistent, risk is Objectives lead to strategies that lead to varying
degrees of investment risks Return is positively related to the level of risk Risk is therefore an important consideration
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Mutual Fund Return and Risk Performance
Fees and expenses: Do higher fees pay off? Investment performance is no better (and perhaps worse) for
load funds vs. no-load Expenses lower returns in predictable ways – lower expense
funds give better returns Turnover affects returns in several ways, including taxes –
high turnover means more short-term realized gains Tax efficiency is an important consideration – after-tax
returns may be 30-40% less than pre-tax
returntax -Pre
return adjusted-taxefficiency Tax
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•Mutual Fund Investment Strategies
Choose in funds consistent with your objectives, constraints, and tax situation.
Consider index funds for a large portion of your fund portfolio.
When possible, invest in no-load funds with below-average expense and turnover ratios.
Invest at least 10-20% in international or global funds. Own funds in different asset classes and consider life-
cycle investing.
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•Mutual Fund Investment Strategies
If you actively manage your portfolio, consider the past year’s “hot funds.”
Do not attempt to time the market; timing strategies add little except costs and risk.
Use dollar cost averaging by investing a set dollar amount each month.
Avoid investing money shortly before the capital gain distribution dates (prospectus).
Do not own too many funds. You will get average returns with high expenses.
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When should you sell a mutual fund?
Personal considerationsPortfolio rebalancing points due to life cycle considerations
Be aware of the quick trigger, selling on the first dip in NAV; think long-term
Be aware of capital gains with selling fund shares
Fund considerationsChange in portfolio managerChange in investment styleFund is growing “too large” or “too fast”Persistent bad performance
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Other Managed Investments
Closed-end investment companies Shares trade like stock rather than being bought
and sold from the fund Number of shares are fixed Often sell at a discount from NAV (a puzzle for
modern finance) Often a means of investing in a pool of assets from
a foreign country
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Other Managed Investments
Exchange-traded funds (ETFs) Relatively new, yet very popular Like closed-end funds, they trade like individual stocks Passively managed to mirror a market index, both broad and
narrow Low expenses, but do involve brokerage commissions Tax and liquidity concerns
More detail about ETF
http://baike.baidu.com/view/92662.htm