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Chapter 16 Study Guide

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19 views3 pages

Chapter 16 Study Guide

Uploaded by

princess.neethimanydeepak50
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 16 - Mutual Fund

Make sure you read book and Powerpoints


Princess Neethimany
1. Define Mutual Fund – Pools money together with other investors to purchase a variety of securities
such as stocks, bonds, or other securities.

What types of underlying assets can a Mutual Fund hold? Equities, bonds, and a range of ETF's.

It is important to know the objective of a particular mutual fund before purchasing because the
objectives can vary. (T/F)

Does a Mutual Fund typically provide some level of diversification to an investor? Explain.

A Mutual fund does provide some level of diversification because it invests in multiple market sectors,
assets and geographic regions.

Does past performance of Mutual Fund guarantee future returns? No

Define Actively Managed Mutual Fund - They are actively managed and fund holdings are determined
by the fund manager. Objective is to beat the investment returns of a related benchmark.

Define Index Fund - Passively managed and fund holdings selections are automated the assets of a
specific index. Objective is to match the return of the related benchmark. (e.g. the S&P 500) Index
funds can be bought and sold only at the end of the trading day.

Define Exchange-traded Fund (ETF) - Passively managed and fund holdings selections are automated
the assets of a specific index. Objective is to match the return of the related benchmark. (e.g. the S&P
500) ETF's can be traded throughout the day.

What types of underlying assets can an ETF, an Actively Managed Mutual Fund and an Index Fund hold?
Stocks, bonds, commodities, interest rates, currencies, and market indexes.

What are the average Expense Ratios associated with an ETF, an Actively Managed Mutual Fund and an
Index Fund?

Actively Managed: Average is 1% ETF: Average is less than 0.3% Index Fund: Average is less than 0.3%

What is a Life-Cycle Fund (also called a Targeted Date Fund)? Is a Life-Cycle Fund considered diversified
and why? How does the asset mix of a Life-Cycle Fund change over time?

Life-cycle funds are a passive fund. There are funds for different years available from many low cost
provider. Investors must pick the fund closest to the year they expect to retire. A life-cycle fund is
considered diversified because they automatically shift asset allocation to a conservative investment
mix as the age of retirement approaches.

Any of the different types of mutual funds (including a Life Cycle fund) can be offered and held within an
individual’s own Retirement account (401(k) and 403(b) accounts). (T/F)

2. Investment Expenses

Define Management Fee - Fee is a % of the asset value. Index funds can be 0.10% per year. Managed
funds may charge 1.5% per year.

Define Front-end Load fee - Investors pay a commision every time they purchase shares. Average load
charge is 3-5%.

Define Back-end Load fee - Investors pay a commission every time they sell shares. Average load
charge is 3-5%.

Define Expense Ratio - Consists of different management fees, 12b-1 fees, and additional operating
costs for a specific mutual fund (does not include front end and back end fees). This fee should be less
than 1%, ideally less than 0.5%.

Does the expense ratio that investors are charged matter much? Explain.
Fees matter, especially over time. A small difference in fees could be a $300,000 difference over 40
years.

If a mutual fund earns a return of 8.5% and has an expense ratio of 1.5% per year, the investor really
earns 7% return on their investments.
What is the Future Value of an investment of $4000 annually (an annuity) at 7% return for 40 years?
$858,438.28
If a mutual fund earns a return of 8.5% and has an expense ratio of .5% per year, the investor really
earns 8% return on their investments.

What is the Future Value of an investment of $4000 annually (an annuity) at 8% return for 40 years?
$1,123,124.16

Note: All investors should know how their Investor Advisor/Broker/Account Manager WILL BE PAID.
Every investor needs to know which fees they will pay directly or indirectly. Ask lots of questions until
the information is clear!

3. Nerd Wallet Article Index Fund vs. Mutual Fund

Index funds seek to earn the Market Average Returns. (T/F)

Actively managed funds tend to have lower fees than Index Funds and ETFs. (T/F) Higher

History shows that it is extremely difficult for an Actively Managed Mutual Fund to beat the Indexes over
time. (T/F)

Actively managed mutual funds attempt to beat the market but are rarely successful. (T/F)

Higher fees that actively managed funds charge significantly reduce long-term returns. (T/F)

For most investors, Index Funds and EFTs are a better choice than Actively Managed Funds. (T/F)

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