Chapter 04 – Mutual Funds and Other Investment Companies
4-1
CHAPTER FOUR
MUTUAL FUNDS AND
OTHER INVESTMENT COMPANIES
CHAPTER OVERVIEW
This chapter describes the various types of investment companies and mutual funds. The chapter
discusses services, expenses and loads associated with investing in mutual funds. It describes the
LEARNING OBJECTIVES
After studying this chapter the students should be able to identify key differences between open-end and
PRESENTATION OF MATERIAL
4.1 Investment Companies
Key services provided by investment companies are presented in this section. These include services that
4.2 Types of Investment Companies
A unit trust is a pool of funds invested in a portfolio that is fixed for the life of the fund. Trusts are often
set up for fixed-income securities. The trust life is dependent on the maturity of the securities. There are
two types of managed companies: closed-end and open-end. Since the shares in closed-end funds are
Chapter 04 – Mutual Funds and Other Investment Companies
4.3 Mutual Funds
The major types of mutual funds classified by investment policy are identified here. For example, in the
equity funds group, some funds emphasize growth while others emphasize income. Within the money
4.4 Costs of Investing in Mutual Funds
This section discusses issues relevant to costs associated with investing in mutual funds. Funds with a
front-end load initially reduce the investment amount. A back-end load or exit fee is charged when the
4.5 Taxation of Mutual Fund Income
Investor directed portfolios can take advantage of tax consequences but mutual fund investments cannot
be structured to take advantage of specific tax considerations. High turnover leads to tax inefficiency.
4.6 Exchange Traded Funds
Exchange Traded Funds have become popular and offer investors alternatives to traditional mutual funds.
4.7 Mutual Fund Investment Performance: A First Look
The evidence on mutual fund performance does not show a consistent superior performance to broad
4.8 Information on Mutual Funds
A partial list of sources of information on mutual funds appears in this section. As the popularity of
mutual funds has grown in recent years, nearly all major business publications feature some reporting on
performance of mutual funds.