Investment Company Securities Flashcards Preview

Expense ratio

0.25%

NAV per share

Increase in NAV

No impact

POP

Contingent deferred sales charge

Prospectus

Accumulation unit

90 days

Class A

Annual fees paid by investors to cover a mutual fund’s marketing and distribution expenses. The maximum 12b-1 fee that a fund can charge is 1% of the fund’s average net assets, though if a fund wants to advertise itself as being no-load (not having a sales charge), then it cannot charge 12b-1 fees of more than 0.25% of the average net assets.

A mutual fund that has an investment adviser that actively manages the portfolio with the goal of exceeding the average returns of the market through security selection and trading activity.

A mutual fund that combines stocks for growth, bonds for income, and cash or cash equivalents for safety and liquidity. Some of these types of funds maintain a set mix of these three target asset classes over time, while others will vary their investments based on economic and market conditions.

Allow mutual fund investors to reinvest distributions into the fund at the NAV without having to pay any sales charges on these new purchases. Investors must still pay taxes on these distributions, however.

A mutual fund that invests in the debt securities of corporations or governments depending on its investment objectives. The overarching goal of these funds is to produce interest income for investors.

A prohibited sales practice in which a registered representative tries to earn a higher commission by encouraging the sale of mutual fund shares at an amount just below the point where the sales charge is reduced.

Discounts off the sales charge based on the amount of money invested within a mutual fund.

A type of mutual fund share that has a front-end sales charge, which investors pay when they buy into the fund. This share class tends to be the most economical for investors, as it offers breakpoints and has lower 12b-1 fees than other classes of shares.

A type of mutual fund share that has a back-end sales charge which investors pay if they redeem their shares within a specified number of years. This share class typically has higher 12b-1 fees than class A shares and does not offer breakpoints.

A type of mutual fund share that has a level-load sales charge. These shares typically have relatively high 12b-1 fees and do not offer breakpoints.

A type of management investment company that issues a fixed number of exchange- traded shares. Similar to mutual funds, these types of investment companies are actively managed and have a net asset value. However, because an active secondary market exists for these, share prices are based on supply and demand.

Also referred to as a growth and income fund, it is an equity mutual fund that includes some stock for growth and others that pay high dividends.

Allow customers to aggregate their investments with the same mutual fund group in order to get reduced sales charges. Additionally, spouses and minor children can combine their investments in the same fund to receive breakpoints.

A back-end sales charge that investors pay when they redeem their mutual fund shares within a certain number of years. Generally, this fee will decrease each year the investor holds the shares.

Mutual fund shares are offered through this process, in which there is no limit of shares the fund will issue. Instead, the fund will create brand new shares for any customer who wants to invest.

A bond mutual fund that invests in debt securities issued by corporations, ranging from short-term to long-term maturities and from large, well-established firms to small companies. The interest income paid out by these funds is taxable at all levels.

An exchange-traded investment company security that is designed to closely track the performance of a specific sector, benchmark, or index. The fund is not actively managed and typically only changes when the underlying benchmark it tracks changes.

A calculation of a mutual fund’s expenses, including management fees and operating expenses, divided by the fund’s average annual net assets.

A type of investment company that issues debt securities to its investors and is backed by interest on real property and other securities.

This is the method by which mutual funds calculate the purchase and redemption price for shares. It is based on the next NAV calculation after the order is received.

An equity mutual fund that invests in the stocks of companies from all over the world, potentially including US businesses as well.

An upfront sales charge that an investor pays when purchasing mutual fund shares. This fee is added to the fund’s NAV in order to calculate the public offering price that inves-tors will pay for the shares.

Also referred to as a junk bond fund, this is a bond mutual fund that invests in below investment-grade debt. The greater credit risk for these funds results in higher yields than those of safer funds.

An equity mutual fund that invests in stocks of companies that are expected to appre-ciate at a faster rate than the market average. Stocks of these companies rarely pay dividends; instead earnings are reinvested further for research and development.

An equity mutual fund that invests in dividend-paying companies including utility stocks, blue chip stocks, and preferred stocks.

A federal legislation that defines and regulates investment companies, including face-amount certificates, unit investment trusts, and management companies.

An entity that pools investors’ capital and professionally invests it into the securities market. Examples include face-amount certificates, unit investment trusts, and management companies.

An account formed by a group of individuals who pool their capital to invest their money together.

A contract offered by a mutual fund that allows a purchaser to invest in installments and receive breakpoints. An LOI is good for up to 13 months and can be backdated 90 days. If the customer fails to meet the terms, the otherwise applicable sales charges will apply.

A prohibited practice where mutual fund orders are received after the close of business and are filled at that day’s price rather than the next day’s price. This is a violation, as it could provide an information advantage for the investor receiving the shares since after-market close news could be considered. Orders are required to be priced at the next NAV calculation.

A type of investment company that actively manages a portfolio of securities to achieve a stated investment objective for investors. This is the most common type of investment company and includes both closed-end funds as well as mutual funds.

The fee paid to the investment advisor who is responsible for actively managing the portfolio of a management investment company, such as a mutual fund or closed-end fund. It is typically the greatest expense of any management company.

A mutual fund that consists of money market securities, which are short-term debt instruments with maturities of one year or less. These funds are considered extremely safe and liquid.

Also known as an open-end fund, it is a management investment company that makes a continuous offering of redeemable shares. The portfolio of the fund is actively managed to achieve a clearly defined investment objective. However, because the shares are redeemable, there is no secondary market trading; instead the shares can only be bought from and sold back to the fund.

A mutual fund that invests in debt securities issued by municipalities. The interest income paid out by these funds is typically tax-exempt at the federal level and may also be tax-free at the state and local levels if the fund includes issues of a single state and is purchased by that state’s residents. Because of the tax benefits, these funds are most appropriate for high-net-worth investors.

Mutual funds that are sold at their NAV, without any sales charges added. For these funds, the NAV and POP will be the same. These shares are typically purchased directly from the fund itself, rather than through an outside broker or sponsor.

The value of a mutual fund, calculated by dividing the total value of all the cash and securities in a fund’s portfolio, less any liabilities, by the number of shares outstanding.
When a customer purchases a share, he pays the public offering price, which includes the NAV plus a sales charge. When a customer sells his shares back to the fund, he receives the NAV.

1. The price paid to purchase a share of a mutual fund, which is calcu-lated as the NAV plus a sales charge.
2. The price an investor pays when purchasing a new-issue security in an initial public offering.

A security for which there is no secondary market; instead the shares are sold back to the issuer when an investor wants to sell. Both mutual funds and unit investment trusts issue redeemable shares.

Also referred to as the sales charge, it is the fee an investor pays when buying a mutual fund share. To calculate the public offering price, the sales load is added to the NAV.

An equity mutual fund that invests in one specific area of industry, for example, technology or healthcare. These funds have less diversification and therefore the potential for more risk compared to companies that invest in a wider range of industries.

A prohibited practice in which a registered representative sells a mutual fund to an investor right before the fund pays out a dividend. This is a violation because the dividend distribution creates a tax liability for the investor, as the investor must immediately pay taxes on the distribution.

The underwriter contracted by an investment company or limited partnership to help sell its shares.

A mutual fund that invests in equity securities of companies that align with its investment objectives. The goal of these funds is typically long-term growth through appreciation, although income from dividends is also available through some stock investments.

A condensed version of the longer, more detailed prospectus that reviews critical information for mutual fund investors. It includes the fund’s fee structure, investment objectives, trading strategies, as well as tax information.

A prohibited practice in which a registered representative moves a customer from one mutual fund to another that has similar objectives for no legitimate investment purpose while generating additional sales charges.

An investment company that issues redeemable securities representing an undivided interest in a trust. As with mutual funds, no secondary market exists for these. However, unlike management companies, there is a fixed portfolio with no active management.

A bond mutual fund that invests primarily in bonds issued by the US Treasury or federal government. These funds offer a high level of safety, but therefore lower yields than other bond funds. The interest income paid out by these funds is tax-free at the state and local levels.

A money market fund is a mutual fund that invests in short term debt instruments with maturities of one year or less. Examples include Treasury bills and commercial paper.

Securities Act of 1933 and Investment Company Act of 1940

The Investment Company Act of 1940

A UIT will purchase a defined and fixed portfolio from a broad range of securities (often including stocks, bonds and munis) and has no restrictions on what kind of securities it can buy. Importantly, once the portfolio is created, it is fixed, meaning whatever is in the portfolio stays there. It is not actively managed.

Similar to mutual funds, because UITs offer redeemable shares, investors pay sales charges when they purchase the units. They do not pay commissions as UITs are not exchange traded products.

None. There are no exchanges for UITs, they must be redeemed with the issuer.

UITs are not allowed to charge any management fees since the UIT is fixed and there is no active buying and selling of securities.

In a management investment company, the investors’ funds are actively managed to acheive an investment objective. This means that the management company hires an investment adviser that will actively trade the portfolio to meet the fund’s goals.

Open-end funds (aka mutual funds) and closed-end funds

Common stock. Similar to shares of a corporation, a closed-end fund have a one time initial public offering for shares that are actively traded on an exchange. Because the shares of a closed-end fund are exchange-traded, similar to common stock, the price of each share is based on supply and demand.

Closed-end funds would be most appropriate for investors as they combine active management with exchange-trading. Mutual funds also provide active management, but do not issue exchange-traded shares. Instead, the shares are only redeemable with the issuing investment company.

Mutual funds, also referrred to as open-end funds, register a continuous offering of redeemable shares. This means that there is no secondary market for mutual funds, the shares are redeemable, meaning bought and sold directly with the mutual fund itself. Also, importantly, mutual funds are actively managed

Mutual funds do not trade on a secondary market. Instead, the shares are reedeemed by the investor with the fund.

Fund managers are generally hired by the board of directors of the investment company.

at least 40%

The custodian bank serves administrative functions for the fund and safeguards the financial assets of the fund.

Yes, mutual fund dividends are taxed when declared by the fund regardless if they are taken in cash or reinvested back into the fund.

Management expenses and trading fees

They redeem them directly with the fund

Mutual funds and unit investment trusts

Shares of a mutual fund are redeemed with the fund that issued them.

(POP - NAV)/POP

Mutual funds are actively managed and redeemable (meaning there is no secondary market). ETFs, on the other hand, are not actively managed and are exchange-traded.

Because they are exchange-traded, closed-end funds may trade at a premium of discount to the NAV based on the supply and demand of the shares