a. Net asset value = Market value of the portfolio (assets)- Liabilities/ Number of shares outstanding
= 1,050,000 – 50,000/10,000 = $100
b. Net asset value = 2,100,000 – 0 /10,000 = $210
No of shares = 5000/210 = 23.81 shares.
The NAV is not determined continuously throughout the day because it is valued at the closing stock prices of the day. Therefore it can only be determined at the close of the day.
Closed-end funds is a publicly traded investment by the Securities Exchange Commission. It is a pooled investment fund with a manager overseeing the portfolio; it raises a fixed amount of capital through an initial public Offering (IPO)
Closed-end funds use leverage to generate more money unlike issuing of shares like the mutual funds because, through leverage, they make use of borrowings which adds the risk element as compared to the open end funds but has a greater reward than the issuing of shares. Therefore the closed end funds generate more funds.
There is a divergence in the price of NAV because in some cases there are reasons of the premium or discounts.
A share price may be below the NAV because the funds have a large built-in tax liability and investors are discounting the share prices for that tax liability.
The fund’s shares may trade at a premium to the NAV because the funds offer relatively cheap access to, and professional management of, stock in another country about which information is not readily available to small investors.
The difference between unit trust and closed end funds
The assets held in the closed end funds are actively managed whereas the assets held in the assets trust funds are passively managed.
In the closed end funds, the investor cannot directly redeem the shares whereas the unit trust funds can be directly redeemed.
The unit trust funds have a limited duration whereas the closed end funds are operated continuously and are indefinite.
Front end load, It is the load (sales charge for the agent- distributed fund) deductible from the invested amount by the client and which is paid to the agent or distributor.
Back end load, It is a sales charge or fee that investors pay when selling mutual fund shares, and the fee amount to a percentage of the value of the share being sold. They are imposed at the time funds shares are sold or redeemed.
Level load, these are sales charges which are deducted every year on a consistent basis from an investor’s mutual funds to pay for distribution and marketing costs for as long as the investor holds the funds.
12b-I fee, it is an annual operational expense imposed by mutual fund for purposes of marketing, distribution including continuing agent’s compensation and manufacturers marketing and advertisement expenses
Management fee, It is the costs which accrued to the mutual fund’s manager for having an investors assets managed professionally. The fee is used to compensate managers to select securities for a fund’s portfolio and manage based on the fund’s investment objective.
Mutual funds classes of shares are used to indicate the type and the number of fees charged for the shares in the fund. There are different classes of shares in the mutual fund so as to avoid the high fees that make investors suffer losses, and also they help to maximize the investment returns of shares. Also, the different share classes are suitable for investors as they provide the knowledge of what kind what kind of fees they will be paying when they invest in a mutual fund.
An index fund is a mutual fund which has a portfolio created to track the components of a market index. It provides large exposure to the market and also it gives low operating expenses, and low portfolio turnover
Target funds are mutual funds that base the allocation of assets on a given date, the investors date of retirement and then it sets to a conservative allocation as and when its due. The motivation for creating such as a fund is that they have been specified as one of the default options for the Pension Protection Act of 2006, according to which employers can direct their employee’s funds if they do not make an allocation choice themselves. As a result, it has contributed to its rapid growth.
Mutual costs incur different costs. They may be; Ongoing yearly fees; these keeps the investor invested in the funds .Transaction fees; paid when the investor buys or sells shares. Some of these costs include-The expense ratio- it is the ongoing expense of a mutual fund. It is composed of the administrative costs. The costs of hiring the fund’s manager, paying the brokerage commissions, advertising, marketing. There are also other costs such as the fee paid to the salesperson also referred to as loads and the brokerage compensation fees
An investor in mutual funds may be faced with the potential tax liability arising from capital gains even though the investor did not benefit from such gain because the capital gains distributions must occur annually and they occur late towards the end of the calendar year. The gains may be either long term or short term depending on the type of funds held. Therefore, mutual funds investors have no control over the size of these distributions and as a result the timing and amount of the taxes paid on the fund’s holdings completely out of control.
A withdrawal by some investors may call for sales of the funds, which as a result causes realized capital gains and tax liability to accrue to investors who maintain their holdings.
An investment company provides more economic function that individual investors cannot provide for themselves on their own. It can is supported by the fact that through the Securities Company Act of 1940 (‘the ’40 Act), it is a requirement that all investment companies be registered with the SEC. The main reason behind the act is to reduce Investment Company selling abuse and to ensure that investors receive sufficient and accurate information. The Act also provides some tax advantage for the eligible RICs.
Besides, the ’34 Act of 1988 is extended to provide protection so that advertisement and claims by mutual funds companies would not be inaccurate or misleading to investors.
A family of funds might hire a sub-advisors for some of its funds because;
· They improve a fund in a region in which the fund family has no experience,
· can be using to develop performance,
· The assets can increase under management
A fund can qualify as a regulated investment company by providing information on its fees and objectives, that is, it should file all if financial reports and they should also show the amount on their income which is distributed.
Gaming this status has its benefits attached to it. They include:-
Exempting a regulated investment company from taxation on all its ordinary and capital gains income as long as at least 90% of these funds are distributed to the stockholders. The distributions are then taxable to the stockholders.
ETF also known as Exchange Trade Fund is a new investment vehicle that resembles mutual funds only that it is a trade like a stock on an exchange. it can have determined continuously the price instate of the closing price.
ETF has several advantages which are about open end and closed end investment companies.
· ETFs is traded throughout the day on an exchange just as stock.
· It is possible to execute different types such as market, limit and stop-loss orders.
· ETFs can also be traded on short or bought on margin, that is, by using borrowed money.
· It is possible to trade options on most ETFs.
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