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Management of Financial Institutions

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Management of Financial Institutions - MGT 604
VU
Lecture # 25
Mutual Funds
Cost of Ownership
Management Fee
All mutual funds, including no-load funds, have certain fixed expenses that are built into
their per share net asset value. These expenses are the actual costs of doing business.
They are deducted from the assets of the fund. It is advisable to check the prospectus to
determine the percentage of the fund's total net assets that is paid out for expenses.
Additionally, shareholder services provided by the fund, investment adviser's fees, bank
custodian fees, and fund underwriter costs also come out of the fund's assets. These charges
vary from fund to fund; however, they are clearly spelled out in the prospectus.
On a per-share basis, however, management expenses are usually quite small, because they
are spread over the tens of thousands, or the millions, of shareholders in the fund.
The formula for determining the cost of a fund's management expenses is simple: From the
current value of the fund's total assets subtract liabilities and expenses, and divide the result
by the number of outstanding shares. The fund's prospectus and /or annual reports often
provide this data. Management fees and expenses are usually expressed as a ratio of
expenses paid out to total assets. Generally, the prospectus will show these expense ratios.
Redemption Fee
All load funds levy a sales charge when purchasing shares. Some load and some no-load
funds also charge a redemption fee when you take money out (redeem shares). The
redemption fee is a percentage of the amount redeemed, usually 0.05% (1/2 of 1%).
Avoid funds with redemption fees. There are excellent funds available that will meet your
objectives and do not levy redemption fees.
Generally redemption fees are levied only with the intent to cut down on the number of
redemptions the fund experiences. The bottom line is that you are entitled to the full value
of the shares you redeem.
Switching Fee
Most, if not all, open-end mutual funds permit you to transfer all or any part of your
investment from one fund to another fund within its family. This kind of transfer is
commonly called "switching".
For many years there was no charge required switching funds. In recent years, however,
some funds have started to charge for switching. It is usually a flat fee. The few funds that
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Management of Financial Institutions - MGT 604
VU
are charging the investor for this service say it is to discourage too frequent moving in and
out of funds. Constant switching of funds increases the administrative costs involved in
keeping track of customer accounts made.
Maintenance Fee
Be on the lookout for a fee that is being assessed against the shareholder's account(s)
directly. It is called an "account maintenance" fee. According to prospectuses of the funds
that levy this fee, it is to "offset the costs of maintaining shareholder accounts."
The fee is deducted from the dividends to cover the maintenance fee, enough shares or
fractions of shares will be automatically redeemed from the account to make up the
difference.
Avoid funds that charge the investor a separate maintenance fee. The list below shows a list
of usual and justifiable fees charged by virtually all mutual funds. Expect to pay these fees;
they are minimal and necessary. On the other hand, the other fees about which for which
you need to take caution is not, in most cases, justifiable.
Customary Fees Charged by Most Mutual Fund Companies
Investment Advisory Fees:
The fund pays a set fee, stated in the prospectus, for investment management. This allows
the fund the use of the advisor's investment research staff, equipment, and other resources.
Administrative and accounting services, such as data processing, pricing of fund shares, and
preparing financial statements, are included in this fee.
Transfer Agent Fees:
The fund pays a set fee for each account for maintaining shareholder records and generating
shareholder statements, plus answering your phone inquiries and correspondence.
Audit Fees and Expenses:
Each fund is audited annually by an internationally recognized, independent accounting
firm which is not affiliated with the fund.
Custodian Fees and Expenses:
The Fund's assets, represented by stock certificates and other documents, are held by an
outside source for safe keeping.
Directors' Fees and Expenses:
The Fund's directors are compensated for their time and travel. The Board meets at least
quarterly, as a whole and in subcommittees, to review the fund's business. (Directors or
officers who are employed by the fund receive no compensation from the fund for serving
as directors.)
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Management of Financial Institutions - MGT 604
VU
Registration:
The SEC and various state securities agencies charge fees permitting a fun's shares to be
sold.
Reports to Shareholders:
Annual, semiannual, and interim reports are printed and mailed to shareholders on a
periodic basis.
Investment Fraud
Information is an investor's best tool when it comes to investing wisely and avoiding fraud.
And the best way to gather information is to ask questions- about both the investment and
the person or firm selling it. It doesn't matter if you are a beginner or have been investing
for many years, it's never too early or too late to start asking questions.
Too many investors who've suffered losses at the hands of swindlers could have avoided
trouble if they had only asked basic questions from the start.
This section will help you recognize and avoid different types of investment fraud. You'll
also learn what questions to ask before investing, where to get information about
companies, who to call for help, and what to do if you run into trouble.
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Table of Contents:
  1. Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS
  2. FINANCIAL INSTITUTIONS:Non Banking Financial Companies
  3. CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions
  4. POLICY INSTRUMENTS:Open Market Operations, Capital Requirements
  5. BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability
  6. STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments
  7. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS:Banking Inspection Department
  8. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Debt Management
  9. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Training Programs by SBP
  10. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Human Resources Department
  11. MAJOR DRIVERS OF FINANCIAL INDUSTRY:GLOBAL FINANCIAL SYSTEM, The World Bank
  12. INTERNATIONAL FINANCIAL INSTITUTIONS:ADB Projects in Pakistan, Paris Club
  13. PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions
  14. INCREASING FOREIGN DIRECT INVESTMENT:Industrial Sector, Managing the Debt
  15. ROLE OF COMMERCIAL BANKS:Services Typically Offered by Banks, Types of banks
  16. ROLE OF COMMERCIAL BANKS:Types of investment banks, The Management of the Banks
  17. ROLE OF COMMERCIAL BANKS:Public perceptions of banks, Capital adequacy, Liquidity
  18. ROLE OF COMMERCIAL BANKS:Problem bank management, BANKING SECTOR REFORMS
  19. ROLE OF COMMERCIAL BANKING:Private Deposit Insurance,
  20. BRANCH BANKING IN PAKISTAN:Remittances, Online Fund Transfer
  21. ROLE OF COMMERCIAL BANKS IN MICRO FINANCE SECTOR
  22. Mutual funds:Types of international mutual funds, Mutual funds vs. other investments
  23. Mutual Funds:Criticism of managed mutual funds, Money Market Fund
  24. Mutual Funds:Balanced Funds, Growth Funds, Specialized Funds, Measuring Risks
  25. Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
  26. Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud
  27. Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund
  28. Role of Investment Banks:Recent evolution of the business, Possible conflicts of interest
  29. Letter of Credit:Elements of a Letter of Credit, Commercial Invoice, Tips for Exporters
  30. Letter of Credit and International Trade:Terminology, Risks in International Trade
  31. Foreign Exchange & Financial Institutions:Investment management firms, Exchange Traded Fund
  32. Foreign Exchange:Factors affecting currency trading, Economic conditions include
  33. Leasing Companies:Basic Purpose of Leasing, Technological Benefits
  34. The Leasing Sector in Pakistan and its Role in Capital Investment
  35. Role of Insurance Companies:Indemnification, Insurer’s business model
  36. Role of Insurance Companies:Life insurance and saving
  37. Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
  38. Agriculture Sector and Financial Institutions of Pakistan:What is SMEs
  39. Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment
  40. Financial Crimes:Process of Money Laundering, Terrorist Financing
  41. DFIs & Risk Management:Managing Credit Risk, Managing Operational Risk
  42. Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits
  43. The Collapse of ENRON:Auditing Issues, Corporate Governance Issues, Corrective Actions
  44. Classic Financial Scandals:Corruption, Discovery, Black Wednesday
  45. RECAP:FINANCIAL INSTITUTIONS, CENTRAL BANK,