Mutual Funds1.docVIP

Mutual Funds -pooling of savings ADVANTAGES - professional manager - diversification - liquidity - various types of funds - transfer within fund families - eligible for margin - acceptable as collateral DISADVANTAGES - unsuitable for short term investment - unsuitable as emergency reserve Structure OPEN END (Trust) CLOSED END (Corporation) - issue/redeem on continuous basis @ NAV - fixed # of units O/S - buy/sell to fund - can redeem any time - trade on stock exchanges - price based on underlying value of securities held - price based on supply/demand - usually at discount to value - income/capital gain flow to unit holder - income/capital gains taxable in corporation and taxable to individual - may borrow temporarily up to 5% - may have up to 25% debt financing - usually specialty investments - less liquid types of investments Organization Structure Director - Fund manager - Distributor - Custodian - Buy Sell Redemption Purchase Securities Securities of Units of Units Pricing Net Asset Value per Share (NAVPS) - value at which fund purchases redemptions are made NAVPS = (Total Assets (at market) - Total Liabilities)/Total Units Outstanding Offering Price = NAVPS/(100% - sales charge %) - if front end load Selling Price = NAVPS – Sales Commission if deferred load - if based on NAVPS at redemption, sales commission = NAVPS * % - if based on original purchase price, sales commission = original price * % Mutual Funds 2 Purchase Methods - primary market --- use prospectus -1) lump sum cash purchase - 2) dividend reinvestment - 3) accumulation plans FEES - 1) sales commissions (loads) 2) annual admin and mgmt fees Sales Commissions Front End Load Back End Load (Deferred) No Load - paid at time of purchase - paid at time of sale - none - could be based on original price or NAVPS at redemption - declines with size of order - declines as # years fund held increases eg. $25,000 - 5%