Questions about Mutual Funds - Winter 2002 I'm still answering your questions. Check back for more in a few days.

1. The book says that a short-term investor will want to invest in Class C shares and a long-term investor will want to invest in Class A shares. What would be the advantages to an investor to invest in the Class B shares
   Holders of the Class B shares would probably hold the the fund for an intermediate to long-term period of time. If the shares are held for 6-8 years, the investor avoids both the intial load and the back-end load. Of course this is offset somewhat by the higher expense ratio
2. How do you measure the portfolio turnover rate of a mutual fund?
   The turnover rate is a measure of trading activity by a fund's manager(s). The more trading that takes place in a fund the more transactions costs are generated. This usuually leads to higher expenses. It is calculated by dividing total purchases or sales of portfolio securities (whichever is lower) by the fund's net assets.
3. What are the differences between value/growth funds and large cap/small cap funds?
   I'm not sure what types of fund to compare here. Capitalization has to do with the market value of the companies in which a fund invests. Value is a strategy that attempts to buy securities at a good price. You can think of a value fund manager as a bargain shopper. Growth See chapter 6 pages 157-173 for a good discussion of these differences
4. What is the point of a limit order option on an open-ended mutual fund?
   A limit order option allows the investor to try to buy or sell at a NEt Asset Value (NAV) that is better than the current price. It's the same basic principle used for common stock orders.
5. What is the reasoning for selling shares of a closed fund at a discount? What does the latest research have to say about this?
   Levy offers four reasons for the discount. They include (1) unrealized capital appreciation (capital gains tax falls on whoever holds the fund when capital gains are distributed), (2) management fees and transaction costs, (3) performance of the fund, and (4) turnover (the more trades that take place in a fund, the higher the tranactions costs. Still looking into the latest research.
6. If the price per share of a closed end fund usually sells at a discount, who buys these funds as initial public offerings?
   When the fund is first offered to the public, the investment company will push hard to sell the fund. New closed-end funds actually tend to sell at a premium (because of the marketing effort?) but then fall over time and eventually sell at a discount.
7. If a rich individual could buy all the shares of a mutual fund then sell them at an arbitrage profit, why don't they?
   The buying pressure would cause the price to increase and reduce the discount. It's possible that the buying would cause the fund to sell at a premium. Also transactions costs would probably wipe out any arbitrage value.
8. Is there some way to account for 12b-1 fees when calculating a fund's return?
   It can be included in the load fee (see page 460 formula 19-2). You can get information on the 12b-1 fee in the fund's prospectus. For example, search the prospectus for the Putnam Research Fund for 12b-1 fees
9. What is the difference between redeeming and selling? How can there be no owner for redeemed shares?
   For an open-ended fund there is no difference. Remember that when you sell an open-ended fund you are essentially selling it back to the fund itself (not into the market to another investor), and the shares you once owned simply cease to exist
10. Is there a difference in the securities purchased for an index fund compared to an average mutual fund? Do they still concentrate on market sectors?
    An index fund tries to mimic the performance of a particular index such as the S & P 500 or the Dow Jones Industrial Average. I'm not sure what the "average mutual fund" would be, but it would depend on the fund's investment strategy. Funds can concentrate on market sectors. There are Exchange Traded Funds that follow different market sectors.
11. Please provide an example of what a fund family is!
    Fidelity, Putnam, and Vanguard, Brandywine Funds are four examples of fund families. A fund family, according to your text is a "collection of mutual funds covering many different investment objectives, but all managed by the same company." see page 544.
12. Which usually has a better return - load funds or no-load funds?
    No-loads usually have better returns because, everything else being equal, there are fewer fee to reduce performance. (See page 458 in the text for information on a 1999 Bloomberg study: Lean, Mean Money Machines: 2000:Cheap Thrills: Our annual survey of mutual funds proves again that, no matter your wealth strategy, it pays to be cheap., and 2001: Simply The Best .) But if you find a load fund that does well, especially over the long-term, the load may well be worth it.
13. Are there any mutual funds out there made of just other mutual funds? If so, are the returns usually higher or lower than the traditional mutual fund?
    See text p. 468
14. Please explain 12b-1 fees. Why do load funds typically charge this fee?
    12b-1 fees
15. What's the difference between large-cap and small-cap common stock funds?
    The difference is in the size of the companies in which the fund invests. Market capitalization is found by multiplying the number of shares outstanding by the price per share. According to the Wall Street Journal small cap stocks have a total market value of less than $600 million.
16. Why invest in a bond fund?
    Here's one reason from the Wall Street Journal's recent Mutual Funds Quarterly Review: "For the second consecutive year, investors in most bond mutual funds enjoyed solid returns in 2001, a respite from the miserable returns in stocks over that period.(Fixed-Income Funds Leave Stock Portfolios in the Dust by Tyler Lifton). There are also tax advantages to investing in municipal bond funds.
17. Are there any short-term advantages to owning bond funds?
18. What is a hedge fund?
    See definition in your text on page 545. Hedge Funds are usually reserved for the very wealthy. Most hedge funds require that an investor limit their exposure to the fund to a certain percentage of their overall wealth. However, there was a recent article in Barrons having to do with the recent trend of mutual funds investing in hedge funds. ( January 7, 2002 Hedging Their Bets: Fund groups offer vehicles once meant only for the rich; are there dangers? By Erin E. Arvedlund)
19. Why would an investor what to purchase a hedge fund?
20. Where did the name "Blue Sky Laws" come from?
    It came from Kansas of all places when laws were enacted to prevent unscrupulous salesmen from selling securites that had nothing behind the but the "wide blue sky."
21. Where can I find explanations of A, B, and C fund types?
    In the fund's prospectus. See for example the prospectus for John Hancock Equity Funds. You will find the share class descriptions under the "Choosing a share class" section of the prospectus. (On page 30 of the most recent prospectus)
22. If I were to buy an open-ended mutual fund would they add to the size of it or do I just buy some of what they already owned?
23. On page 451 - Why can't fund managers buy fund shares once they reach a certain discount level, break up the fund and sell all the stocks at a huge profit?
24. Why can't funds just use e-mail and save the costs of snail-mail (see Eligibility section of chapter)?
25. How and where does an investor go to purchase no-load funds?
26. Can i buy mutual funds through any online investment service such as Ameritrade?
27. How are emerging market funds used in developing countries? Which countries sell these kinds of funds?
28. On page 454, why purchase mutual funds if they tend to underperform?
29. Why would mutual funds invest in other mutual funds? It seems that this would be a problem if a person is trying to diversify their portfolio.
30. Is the investment advisor like a CEO? Is it possible to hire and fire advisers?
31. Would it be advantageous for someone who has enough money to diversify on their own to invest in mutual funds?
32. What are some of the disadvantages of investing in a balanced fund?
33. Do balanced funds tend to be less risky than other mutual funds? Is it not true that most mutual funds tend to be somewhat balanced anyway?
34. Who regulates International or Global funds? The SEC?
35. Over time, is there a particular type of fund that fairs better during recessions? What is the primary factor in such success?
36. What, if any is the best single source for understanding mutual funds and the tax ramifications of funds?
    Sorry, no single best resource. Morningstar, however, offers a list of the five best books on fund investing
37. If capital gains are reinvested, what if there is not enough money to buy a share? Does the money get held until there is enough to buy more shares or is the money sent out in small checks?
38. Why would anyone buy an out-of-state bond if they had to pay income tax on it?
39. How exactly do tax swaps work? Does the IRS allow for tax write-offs if you have a loss in a security?
40. What is the purpose of a money market fund? The text says they are used for a temporary cash haven while awaiting reinvestment somewhere else. What exactly does that mean?
41. What is an investment objective and why is it important?
42. The text says that mutual funds are almost always organized as a regulated investment company. This allows the mutual fund to escape taxation. What other ways can a mutual fund choose to organize?
43. How does the performance of a stock equate to trading at a discount of premium?
44. Why does high turnover of securities lead to greater transaction costs?
45. What is an expanses ratio? Please give an example.
46. What is the incentive to a broker to selling a load fund?
47. Why do some funds charge a load?
48. What are the advantages or disadvantages of holding a closed-end fund over and open-end fund?
49. How does a bond fund decrease interest rate risk?
50. If mutual funds are traded similarly to stocks do they also respond to market changes similarly?
51. How reliable is the Internet for performance data and other relevant information regarding mutual funds?
52. Why is it that fund managers do not get paid more for better performing funds?
53. Why is it necessary in the prospectus to disclose any person who owns more than 5% of the funds shares? Are mutual funds like stocks where upon accumulation a person could control ownership of the fund?
54. What is the difference between shares of stock and closed-end investment shares?
55. If using the S & P 500 is not an accurate way of rating the performance of mutual funds, what is?
56. Do funds require a minimum purchase amount?
    See page 459ff in the text.