Mutual Fund
Mutual Fund
Mutual funds
Mutual funds belong to a group of investment companies, which are in the business of collecting funds from investors and pooling them for the purpose of building a portfolio of securities according to stated objectives
Mutual Fund
Following are the Profit and Loss Account of Lahore Trading Company Limited For the Tax year ended 30th June 2007
Following are the Profit and Loss Account of Lahore Trading Company Limited For the Tax year ended 30th June 2007
Types of Mutual Funds
Mutual Fund
Open-end Fund
The term mutual fund is the common name for an open-end investment company. Being open-ended means that, at the end of every day, the fund issues new shares to investors, and buys back shares from investors wishing to leave the fund.
Mutual Fund
Closed end Funds
Closed end Funds issue a certain number of shares but do not stand ready to buy back. Their shares are traded on Stock Exchange.
Mutual Fund
Unit Investment Trust
Their portfolio consists of fixed set of securities for life. They stand ready to buy back their shares.
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Who should invest in income funds?
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Cost of Ownership
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Selecting the Best Mutual Fund
Mutual Fund
Net Asset Value
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Load
A load fund charges a fee for the sale of shares (front end load) and/or redeeming shares (back end load). It will sell shares at its net asset value plus the sales charge. A no-load fund has no initial sales charge, so it will sell its shares at its net asset value.
Mutual Fund
Diversification
You definitely should care about how well a mutual fund is diversified. One of the major advantages of a mutual fund is instant diversification, so it truly is important. Given the CAPM, it is known that the market only pays for systematic risk so it is important to eliminate unsystematic risk, which is the purpose of diversification. A portfolio that is completely diversified will be perfectly correlated with the market portfolio (R2= + 1.00).
Mutual Fund
Net Return
The net return for a fund is the return after all research and management costs. The gross return is before these expenses. The net return is the return reported to the stockholder since all expenses have been allowed for in the NAV. To compute the gross return it is necessary to compute the expenses of the fund and add these back to the ending NAV and compute the returns with these expenses added back. Typically, the average difference in return is about one percent a year, but this varies by fund. As an investor, it is the net return that is important because these are the returns that you derive
Mutual Fund
Suppose ABC Mutual fund had no liabilities and owned only four stocks as follows:
Stock | Shares | Price | Market Value |
W | 1,000 | $12 | $12,000 |
X | 1,200 | 15 | 18,000 |
Y | 1,500 | 22 | 33,000 |
Z | 800 | 16 | 12,800 |
| | | $75,800 |
The fund began by selling $50,000 of stock at $8.00 per share. What is its NAV?
Mutual Fund
Current NAV = $75,800/6,250 shares = $12.13
Mutual Fund
Suppose you are considering investing $1,000 in a load fund that charges a fee of 8 percent, and you expect your investment to earn 15 percent over the next year. Alternatively, you could invest in a noload fund with similar risk that charges a 1 percent redemption fee. You estimate that this no-load fund will earn 12 percent. Given your expectations, which is the better investment and by how much?
Mutual Fund
Load fund = ($1,000 - $80) x 1.15 = $1,058.00
Represents a 5.80 percent growth
No-load fund = ($1,000 x 1.12) x (1 - .01) = $1,108.80
Represents a 10.88 percent growth
The no-load fund offers an extra $50.80 over the load fund for a $1,000 investment held over a one-year time period. The difference in percent growth is 5.08 percent.
Mutual Fund
Suppose that at the start of the year, a no-load mutual fund has a net asset value of $27.15 per share. During the year, it pays its shareholders a dividend distribution of $1.12 per share and finishes the year with an NAV of $30.34.
a. What is the return to an investor who holds 257.876 shares of this fund in his (nontaxable) retirement account?
b. What is the after-tax return for the same investor if these shares were held in an ordinary savings account? Assume that the investor is in the 30 percent tax bracket.
Mutual Fund
c. If the investment company allowed the investor to automatically reinvest his cash distribution in additional fund shares, how many additional shares could the investor acquire? Assume that the distribution occurred at year end and that the proceeds from the distribution can be reinvested at the year-end NAV.
Mutual Fund
(a). Beginning value = $27.15 x 257.876 = $7,001.33
Dividends = $1.12 x 257.876 = 288.82
Ending value = $30.34 x 257.876 = 7,823.96
($7,823.96 - $7,001.33) + 288.82
Return = = 15.87%
$7,001.33
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(b). Assuming that the tax rate of 30% is applied to all cash flows:
($7,823.96 - $7,001.33) + 288.82 = $1,111.45
$1,111,45(1 - .30) = $778.02
Return = $778.02/$7,001.33 = 11.11%
(c). Alternatively, the $1,111.45 could be reinvested at the year-end NAV of $30.34. The investor could purchase $1,111.45/$30.34 = 36.63 shares
Mutual Fund
The Focus Fund is a mutual fund that holds long-term positions in a small number of non dividend paying stocks. Their holdings at the end of two recent years are as follows:
Mutual Fund
| Year 1 | | Year 2 | | |
Stock | Share | Price | Share | Price | |
A | 100,000 | $45.25 | 100,000 | $48.75 | |
B | 225,000 | 25.38 | 225,000 | 24.75 | |
C | 375,000 | 14.5 | 375,000 | 12.38 | |
D | 115,000 | 87.13 | 115,000 | 98.5 | |
E | 154,000 | 56.5 | 154,000 | 62.5 | |
F | 175,000 | 63 | 175,000 | 77 | |
G | 212,000 | 32 | 212,000 | 38.63 | |
H | 275,000 | 15.25 | 275,000 | 8.75 | |
I | 450,000 | 9.63 | 450,000 | 27.45 | |
J | 90,000 | 71.25 | 90,000 | 75.38 | |
K | 87,000 | 42.13 | 87,000 | 49.63 | |
L | 137,000 | 19.88 | 0 | 27.88 | |
M | 0 | 17.75 | 150,000 | 19.75 | |
| | | | | |
Cash | | $3,542,000 | | $2,873,000 | |
Expenses | $730,000 | | $830,000 | | |
Mutual Fund
At the end of both years, Focus Fund had 5,430,000 shares outstanding.
a. Calculate the net asset value for a share of the Focus Fund at the end of Year 1, being sure to
include the cash position in the net total portfolio value.
b. Immediately after calculating its Year 1 NAV, Focus Fund sold its position in Stock L and purchased its position in Stock M (both transactions were done at Year 1 prices). Calculate the Year 2 NAV for Focus Fund and compute the growth rate in the fund share value on a percentage basis.
Mutual Fund
c. At the end of Year 2, how many fund shares of the Focus Fund could the manager redeem without having to liquidate her stock positions (i.e., using only the cash account)?
Mutual Fund
| Year 1 | | |
Stock | Share | Price | Portfolio Value |
A | 100,000 | $45.25 | $4,525,000.00 |
B | 225,000 | 25.38 | $5,710,500.00 |
C | 375,000 | 14.5 | $5,437,500.00 |
D | 115,000 | 87.13 | $10,019,950.00 |
E | 154,000 | 56.5 | $8,701,000.00 |
F | 175,000 | 63 | $11,025,000.00 |
G | 212,000 | 32 | $6,784,000.00 |
H | 275,000 | 15.25 | $4,193,750.00 |
I | 450,000 | 9.63 | $4,333,500.00 |
J | 90,000 | 71.25 | $6,412,500.00 |
K | 87,000 | 42.13 | $3,665,310.00 |
L | 137,000 | 19.88 | $2,723,560.00 |
M | 0 | 17.75 | $0.00 |
| | | $73,531,570.00 |
Mutual Fund
(a). Portfolio value $73,531,570
Cash 3,542,000
Expenses (730,000)
Net Asset Value $76,343,570/5,430,000 = $14.06
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Stock | Share | Price | Portfolio Value |
A | 100,000 | $48.75 | $4,875,000.00 |
B | 225,000 | 24.75 | $5,568,750.00 |
C | 375,000 | 12.38 | $4,642,500.00 |
D | 115,000 | 98.5 | $11,327,500.00 |
E | 154,000 | 62.5 | $9,625,000.00 |
F | 175,000 | 77 | $13,475,000.00 |
G | 212,000 | 38.63 | $8,189,560.00 |
H | 275,000 | 8.75 | $2,406,250.00 |
I | 450,000 | 27.45 | $12,352,500.00 |
J | 90,000 | 75.38 | $6,784,200.00 |
K | 87,000 | 49.63 | $4,317,810.00 |
L | 0 | 27.88 | $0.00 |
M | 150,000 | 19.75 | $2,962,500.00 |
| | | $86,526,570.00 |
| | | |
Mutual Fund
(b). Portfolio value of $86,526,570
Cash 2,873,000
Expenses (830,000)
Net Asset Value $88,569,570/5,430,000 = $16.31
Growth = ($16.31 - $14.06)/$14.06 = 16.0%
(c). $2,873,000/$16.31 = 176,149.61 shares
Mutual Fund
You have been asked to evaluate the investment performance of three different professional asset managers relative to each other and to the Standard and Poor’s 500 index. After gathering quarterly return data over the past five years, you compute the following statistics:
Portfolio | Average Annual Return | Beta | Diversification Level |
A | 10.20% | 0.82 | 86% |
B | 15.4 | 1.36 | 63 |
C | 13.2 | 0.99 | 98 |
S&P | 13.3 | 1 | 100 |
Mutual Fund
a. Based on this data, can you conclude that Manager A underperformed the market and Manager B outperformed the market? Why or why not?
b. What additional information do you think you would require in order to perform a compelling analysis of the investment performance of these managers?
c. What was the most likely investment objective followed by Portfolio Manager C? By Manager A?
d. What might explain the fact that Manager B’s portfolio is so much less diversified than those run by Managers A and C?
Mutual Fund
(a). Based upon a market return (S&P) of 13.3%, Portfolio A had an average annual return of only 10.2% (underperformed), while Portfolio B with an average annual return of 15.4% outperformed the market.
(b). Additional risk measures such as standard deviation and risk/return measures should be calculated. Portfolio style (value, growth, market-oriented or small-capitalization) should be identified. What fees are involved (front-load, back-load, management, etc.). What is the expense ratio? What is the portfolio turnover rate? What are the funds’ objectives and constraints? Consistency of results - the reported results are for the last five years, what about the previous 5 or 10 years? Same portfolio manager, or has there been a change?
Mutual Fund
(c). Since Portfolio C has an average return of 13.2% which is close to the index return of 13.3%, with a beta of .99, I would assume that the portfolio manager had designed the portfolio to replicate the index. Portfolio A has a lower than market beta which would explain the lower than market return, following a very conservative investment approach.
(d). Portfolio B has a much higher beta value than either of the two other portfolios and the market, thus one would expect a higher return for the portfolio - more risk, more return. Probably this portfolio has been investing in high return stocks such as technology companies, thus explaining the lower diversification level.
Mutual Fund