Download to read offline
Uploaded byFlorida Atlantic University
FIN4504 Investment Analysis 2.3 Mutual Fund Investments and Net Asset Value NAVs
Mutual funds
More Related Content
Similar to FIN4504 Investment Analysis 2.3 Mutual Fund Investments and Net Asset Value NAVs
![Mutual funds[1]](https://cdn.slidesharecdn.com/ss_thumbnails/mutualfunds1-140128115104-phpapp01-thumbnail.jpg?width=640&height=640&fit=bounds)
More from Florida Atlantic University
FIN4504 Investment Analysis 2.3 Mutual Fund Investments and Net Asset Value NAVs
- 1.
- 2. Shiva Indukoori 2 LearningObjectives • LO 3-1 Cite advantages and disadvantages of investing with an investment company rather than buying securities directly. • LO 3-2 Contrast open-end mutual funds with closed end funds, unit investment trusts, hedge funds, and exchange-traded funds. • LO 3-3 Define NAV and measure the rate of return on a mutual fund. • LO 3-4 Classify mutual funds according to investment style. • LO 3-5 Demonstrate the impact of expenses and turnover on mutual fund investment performance.
- 3. Mutual funds Shiva Indukoori • Itis an investment company which act as a financial intermediary that invest the funds of individual investors in securities or other assets. • Pool of money invested according to the stated objectives and policies of the fund. • Total fund is divided into shares or units. • Each unit value is based on the market value of the fund divided by number of units. • The unit value is known as net asset value (NAV) 3
- 4. Why mutual funds Shiva Indukoori • Professionalmanagement • Variety of investment choice • Transparency • High expected return • Low investment • Tax benefits 4
- 5. Types of MutualFunds Shiva Indukoori • Nature of the fund: Unit Investment Trusts, Managed Investment companies. • Openness of the fund: Open-end and closed-end fund. • Regulations: Regulations and liberal companies(Hedge Funds). • Underlying asset: ETFs, Index funds. • Management: Active and Passive funds. 5
- 6. Types of investment companies Shiva Indukoori 6 Unit InvestmentTrusts • Money pooled from many investors is invested in portfolio fixed for life of fund. • Low expenses as it has limited portfolio size. • Ex: UITs of First Trust Portfolios and Invesco. Managed Investment Companies • A professional investment firm that manages a portfolio for an annual fee. • Load: Sales commission. • Open-end or Closed-end fund.
- 7. Types of funds Shiva Indukoori 7 Based onManagement activity • Active managed funds • Equity funds • Debt funds • Hybrid funds • Money market mutual funds (MMMF) • Passive managed funds • Exchange Traded Funds (ETFs)
- 8. Types of funds Shiva Indukoori 8 Based onManagement activity • Active managed funds • Equity funds • Debt funds • Hybrid funds • Money market mutual funds (MMMF) • Passive managed funds • Exchange Traded Funds (ETFs): Investment strategies in index stocks and gold. • Index funds: Investment vehicles tracking indices
- 9. Shiva Indukoori 9 U.S.Mutual Funds by Investment Classification
- 10. Shiva Indukoori 10 Typesof mutual funds Investment Policy Characteristics Money Market Mutual Fund (MMMF) Commercial Paper, Repurchase Agreements, CDs Equity Funds Stocks, Some fixed-income or other securities Equity Sector Funds Stocks concentrated in a particular industry Bond Funds Specialize in fixed-income (bond) sector Global Funds Worldwide securities, including the U.S.A. International Funds Worldwide securities, excluding the U.S.A. International Regional Funds Foreign securities concentrated in certain regions Emerging Markets Funds Securities from developing nations
- 11. Shiva Indukoori 11 Typesof mutual funds based on investment style Investment Policy Characteristics Balanced Fund: Hold both equities and fixed-income securities Life Cycle Fund: Static Allocation Hold both equities and fixed-income securities stable proportions Life Cycle Fund: Targeted-Maturity Targeted maturity funds become more conservative as investor ages Asset Allocation/Flexible Funds Hold both equities and fixed-income securities— proportion varies according to market forecast (market timing) Index Funds Try to match performance of broad market index; Buy shares in proportion to security’s representation in index Fund of Funds Mutual funds that primarily invest in other mutual funds
- 12. Net Asset Value (NAV) Shiva Indukoori •Total Assets = Market value of the securities invested , cash, and any other asset • Brokerage and other transaction costs are part of the value of the assets. • Total liabilities = Accrued expenses, management fees • NAV = 12
- 13. Shiva Indukoori 13 Costsof Investing in Mutual Funds: Fee Structure Fee Structure Definition Operating Expenses Costs incurred by mutual fund in operating portfolio like management fee, administrative, legal, accounting, etc. 12b-1 charges Annual fees charged by mutual fund to pay for marketing/distribution costs Front-end Load One time sales commission paid when purchasing shares. No-load funds don’t charge this. Back-end load Same as Front-end load but charged on exit when shares are redeemed.
- 14.
- 15. Shiva Indukoori 15 Costson Investment Performance
- 16. Shiva Indukoori 16 Expenseratio • Gives the proportion of mutual fund expenses to its assets. • Higher the expense ratio, lower the returns. • Total Annual operating expenses = . • Average annual net assets: Average of assets at beginning and end of the year. • Expense ratio =
- 17. Shiva Indukoori 17 Taxationof Mutual Fund Income • Distributions and short term capital Gains are taxed at normal income tax rates. • Long term (more than a year )capital gains are taxed at lower rates.
- 18. Shiva Indukoori 18 Exchange-TradedFunds • Offshoots of mutual funds that allow investors to trade entire portfolios. • Much like shares of stock.
- 19. Shiva Indukoori 19 Assetsin ETFs
- 20. Shiva Indukoori 20 InvestmentCompany Assets under Management.
- 21. Shiva Indukoori 21 InvestmentCompany Assets under Management, Open end funds
- 22. Shiva Indukoori 22 MutualFund Investment Performance • Average MF performance < broad market performance
- 23. Shiva Indukoori 23 Sourcesof Information on Mutual Funds • Morningstar (www.morningstar.com) • Yahoo finance • Fund prospectus • The Wall Street Journal • Investment Company Institute (www.ici.org) • American Institute of Individual Investors • Brokers
- 24.
Editor's Notes
- #9 Table 4.1 breaks down the number of mutual funds by investment orientation.
- #12 Management fees: Fees owed to the fund manager. Operating expenses: Costs like legal, accounting, and administrative fees. Accounts payable: Any bills or invoices that the fund has received but has not yet paid. Borrowed capital: Any loans or money the fund has borrowed.
- #14 Many funds offer classes, which represent ownership in the same portfolio of securities, but with different combination of fees. Each investor must choose the best combination of fees.
- #15 Table 4.2 considers an investor who starts with $10,000 and can choose between three funds that all earn an annual 10% return on investment before fees but have different fee structures. The table shows the cumulative amount in each fund after several investment horizons.
- #19 Figure 4.2 shows the rapid growth in the ETF market since 1988.
- #20 Figure 4.3 shows that ETFs have captured a significant portion of the assets under management in the investment company universe.
- #22 Asset-weighted average return on domestic equity funds was below the return on the Wilshire 5000 Index in 33 of the 52 years from 1971 to 2022.