Essentials of Investments

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.

Fourth Edition

Irwin / McGraw-Hill

Bodie • Kane • Marcus1

Chapter 4

Mutual Funds and Other Investment Companies

Essentials of Investments

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.

Fourth Edition

Irwin / McGraw-Hill

Bodie • Kane • Marcus2

Services of Investment Companies

• Administration & record keeping

• Diversification & divisibility

• Professional management

• Reduced transaction costs

Essentials of Investments

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.

Fourth Edition

Irwin / McGraw-Hill

Bodie • Kane • Marcus3

Net Asset Value

• Used as a basis for valuation of investment company shares– Selling new shares– Redeeming existing shares

Calculation

Market Value of Assets - Liabilities

Shares Outstanding

Essentials of Investments

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.

Fourth Edition

Irwin / McGraw-Hill

Bodie • Kane • Marcus4

Types of Investment Organizations

• Unit Trusts

• Managed Investment Companies– Open-End– Closed-End

• Other investment organizations– Commingled funds– REITs

Essentials of Investments

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.

Fourth Edition

Irwin / McGraw-Hill

Bodie • Kane • Marcus5

Open-End and Closed-End Funds: Key Differences

Shares Outstanding• Closed-end: no change unless new

stock is offered• Open-end: changes when new shares

are sold or old shares are redeemedPricing• Open-end: Net Asset Value(NAV)• Closed-end: Premium or discount to

NAV

Essentials of Investments

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.

Fourth Edition

Irwin / McGraw-Hill

Bodie • Kane • Marcus6

Investment Policies

• Money Market

• Fixed Income

• Equity

• Balance & Income

• Asset Allocation

• Indexed

• Specialized Sector

Essentials of Investments

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.

Fourth Edition

Irwin / McGraw-Hill

Bodie • Kane • Marcus7

Costs of Investing in Mutual Funds

• Fee Structure– Front-end load– Back-end load

• Operating expenses

• 12 b-1 charges– distribution costs paid by the fund– Alternative to a load

• Fees and performance

Essentials of Investments

© 2001 The McGraw-Hill Companies, Inc. All rights reserved.

Fourth Edition

Irwin / McGraw-Hill

Bodie • Kane • Marcus8

Sources of Information on Mutual Funds

• Wiesenberger’s Investment Companies

• Morningstar

• Investment Company Institute

• Popular press

• Investment services