This homework for Adrian Monroe so please do not send me MSG

CHAPTER OVERVIEW

This chapter describes mutual funds as an investment alternative. We begin our discussion by considering why investors purchase mutual funds. Then, we examine the characteristics of closed-end, exchange-traded, and open-end mutual funds. The differences between load funds and no-load funds are explained. We also explore the different fees associated with fund investments. We describe the major categories of mutual funds in terms of the types of securities they invest in. Finally, methods that can be used to evaluate mutual fund investments and the mechanics of buying and selling mutual fund transactions are presented.

LEARNING OBJECTIVES

CHAPTER SUMMARY

After studying this chapter, students will be able to:

Obj. 1

Describe the characteristics of mutual fund investments.

The major reasons why investors choose mutual funds are professional management and diversification. Mutual funds are also a convenient way to invest money. There are three types of mutual funds. A closed-end fund is a mutual fund whose shares are issued only when the fund is organized. An exchange-traded fund (ETF) is a fund that invests in the stock and securities contained in a specific stock or securities index. Both closed-end funds and exchange-traded funds are traded on a stock or in the over-the-counter market. An open-end fund is a mutual fund whose shares are sold and redeemed by the investment company at the net asset value (NAV) at the request of investors. Mutual funds are also classified as load and no-load funds. Load funds charge a commission every time an investor purchases shares. No commission is charged to purchase shares in a no-load fund. Mutual funds can also be classified as “A” shares (commission charged when shares are purchased), “B” shares (commissions charged when money is withdrawn during the first five to seven years, and “C” shares (no commission to buy or sell shares, but higher, ongoing 12b-1 fees. Other possible fees include management fees, contingent deferred sales fees, and 12b-1 fees. Together all the different fees are reported as an expense ratio.

Obj. 2	Classify mutual funds by investment objective.	The major categories of stock mutual funds, in terms of the types of securities in which they invest, are aggressive growth, equity income, global, growth, index, international, large-cap, mid cap, regional, sector, small cap, and socially responsible. There are also bond funds that include high-yield, intermediate corporate, intermediate U.S. government, long-term corporate, long-term U.S. government, municipal, short-term corporate, short-term U.S. government and world. Finally, other funds invest in a mix of different stocks, bonds, and other investment securities that include asset allocation funds, balanced funds, fund of funds, lifecycle, and money-market funds. Today, many investment companies use a family of funds concept, which allows shareholders to switch their investments among funds as different funds offer more potential, financial reward, or security.
Obj. 3	Evaluate mutual funds for investment purposes.	The responsibility for choosing the “right” mutual fund rests with you—the investor. One of the first questions you must answer is if you want a managed fund or an index fund. Most mutual funds are managed funds with a professional fund manager (or team of managers) who chooses the securities that are contained in the fund. An index fund invests in the securities that are contained in an index like the Standard & Poor’s 500 stock index. Statistically, the majority of managed mutual funds have failed to outperform the Standard & Poor’s 500 stock index over a long period of time. The information on the Internet, from professional advisory services, in newspapers, in the prospectus and annual reports, and in financial publications can all help you evaluate a mutual fund.
Obj. 4	Describe how and why mutual funds are bought and sold.	The advantages and disadvantages of mutual funds have made mutual funds the investment of choice for many investors. For $250 to $2,500 or more, you can open an account and begin investing. The shares of a closed-end fund or exchange-traded fund are bought and sold on organized exchanges or the over-the-counter market. The shares of an open-end fund may be purchased through an account executive or salesperson who is authorized to sell them, from a mutual fund supermarket, or from the investment company that sponsors the fund. The shares in an open-end fund can be sold to the investment company that sponsors the fund. Shareholders in mutual funds can receive a return in one of three ways: income dividends, capital gain distributions when the fund buys and sells securities in the fund’s portfolio at a profit, and capital gains when the shareholder sells shares in the mutual fund at a higher price than the price paid. Unless your mutual fund account is part of an individual retirement account or 401k retirement account, income dividends, capital gain distributions, and capital gains are subject to taxation. A number of purchase and withdrawal options are available.