Conduct and Practices Handbook Course (CPH) Quiz 39

Value funds are mutual funds which aim to hold stocks that have an undervalued price and tend to pay out dividends. Since the share prices are undervalued, they are expected to rise in time and give the fund investors capital gains.

Growth funds are only suitable for aggressive investors who are comfortable with a high degree of risk. Because growth funds invest in younger, less established companies that are growing fast, the risk with this type of fund is greater than that of investing in an index fund of established companies across the spectrum of the American economy.

Income funds, like index funds, are generally considered more conservative, and are more suitable for investors with a strong aversion to risk. Income funds are not designed for capital gains, or for spectacular contrarian plays, but for safe, predictable, steady income.

Combination mutual funds are a cross between, or combination of, growth funds and income funds. In fact, they are often referred to as growth and income funds. They are not as risky as a pure growth fund, and not as conservative as a pure income fund, these funds are popular with investors who are seeking a balanced portfolio.

Balanced funds, unlike many mutual funds, invest in both stocks and bonds. For this reason, balanced mutual funds are also commonly known as hybrid funds. The objective is a balance between capital gains and income.

International funds are not usually suitable for investors with low tolerances to risk. International funds can post spectacular gains, but the risks attendant to investing in foreign companies is very high.

Index mutual funds are one of the more conservative mutual fund choices. Because these funds deliberately choose stocks to achieve the same performance as a broad based market index, (often the S&P 500), the portfolio will usually achieve roughly the same rate of return as the general market.

Life-cycle funds are a type of asset allocation fund that change the investment allocation as the investor ages. If the investor is younger, the allocation will involve stocks to increase risk, but as the investor ages, the allocation will involve more bonds to decrease risk.

Investors use money market funds to park cash while they are out of the market. They receive interest income, and have maximum liquidity, and generally face lower risk than with securities. Money market interest rates are always changing, and the net asset value is always at one dollar, although this is not actually guaranteed.

Mutual funds must offer automatic reinvestment of distributions in order to be allowed to charge the maximum sales charge of 8.5 percent. Additionally, many mutual funds that don’t charge the maximum also allow automatic reinvestment of distributions.

Many mutual fund companies allow investors in their fund to transfer their money in and out of different funds in the family without incurring sales charges. This is known as a conversion (exchange) privilege.

When a mutual fund charges the fee when the investor withdraws shares (instead of when the investor buys the shares), it is called a back-end load. Back-end loads encourage investors to invest for the long-term because the load decreases the longer the investor holds the shares.

Dollar-cost averaging occurs when a customer invests a fixed amount of money into a mutual fund on a regular basis—every month, every three months, etc. It is popular because it requires no decision making, and because it allows the investor to buy more shares when the price is lower.

Class A shares are bought with a front-end load, and the load can be lowered by investing in large enough amounts to qualify for breakpoints.

Class C shares are 12b-1 shares.

When a mutual fund shareholder wants to sell, the mutual fund company redeems the shares; that is, the mutual fund company buys the shares back. When shares are redeemed, they are destroyed, as mutual funds are constantly issuing new shares.

Many mutual funds allow investors to withdraw funds on a pre-planned, systematic basis. These methods are called withdrawal plans. There are three basic approaches to systematic withdrawal.

The first approach is when the customer wants to receive a fixed dollar amount at every interval. In this case, the fund redeems however many shares necessary at the current net asset value to raise the amount of money requested by the customer.

The customer may choose to redeem shares over a stated amount of time, known as a fixed-time withdrawal plan.

Long-term capital gains are capital gains realized from the sale of securities held for longer than a year, and they’re taxed at the capital gains rate of 15 percent. Capital gains realized from the sale of securities held for less than a year are taxed at regular income tax rates.

There are two types of management investment companies (MICs)—open-end and closed-end. Closed-end MICs are commonly known as publicly traded funds. They are called closed-end because they issue a fixed quantity of shares.

Open-end funds have an indefinite number of shares, but closed-end funds have a finite number.

One type of Investment Company is the unit investment trust (UIT). Unit investment trusts operate by issuing shares entitling the owner to a portion of the investment portfolio owned by the trust. These shares can’t be sold on the market, but only bought back, or redeemed, by the trust itself, and the trust is obligated to purchase them when an investor wants to sell.

Exchange-traded funds (ETFs) are types of mutual funds which are, like stocks, traded on an exchange. Many exchange-traded funds are designed to track an index, which is a passive type of investing and so requires smaller managing fees.

The advantage of ETFs is that they provide the diversification which comes with mutual funds, the lower fees which come with index funds, and the flexibility of trade which comes with ordinary shares of stock

Hedge funds are private investment funds that are legally restricted to very wealthy individuals, individuals who have an income surpassing the requisite threshold and at least a $1 million net worth

Real estate investment trusts (REITs) are a specialized type of investment in real estate that trade on the stock market, and which have special tax advantages for investors.

Equity REITs purchase real estate equity, owning real estate and making profit off of rent revenue or capital gains when the real estate is sold.

Funds of funds (FOFs) are investments that invest in other funds, rather than investing directly in Securities such as stocks or bonds. It can also be called multi-manager investment.

The reason investors are willing to invest in blind pools is due to the reputation of the individuals or company managing the fund.