Mutual Funds and Other Investment Companies

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Investments
CHAPTER 4
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Mutual Funds and

Other Investment
Companies
Slides by
Christopher V. Chua, CPA
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image Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved
McGraw-Hill/Irwin
McGraw-Hill/Irwin
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Investment Companies
Investment Companies are
– financial intermediaries that collect funds
from individual investors; and
– invest those funds in a potentially wide
range of securities or other assets.
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Services of Investment Companies
 Administration & record keeping

 Diversification & divisibility
 Professional management
 Reduced transaction costs
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Net Asset Value

 Used as a basis for valuation of
investment company shares
– Selling new shares
– Redeeming existing shares
Calculation
Market Value of Assets - Liabilities
Shares Outstanding
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Types of Investment Companies
 Unit Investment Trusts

 Managed Investment Companies
– Open-End
– Closed-End
 Other investment organizations
– Commingled funds
– REITs
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Unit Investment Trust

 are pools of money invested in a
portfolio that is fixed for the life of the
fund.
 UNMANAGED.
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Unit Investment Trust

Forming a Unit Investment Trust
 A sponsor, typically a brokerage firm,
buys a portfolio of securities which are
deposited into a trust
 Sells to the public shares, or “UNITS” in
the trust called redeemable trust
certificates.
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Managed Investment Companies

Types
1.Open-End Funds
Stand ready to redeem or issue shares at their NAV
2.Closed-End Funds
Do not redeem or issue shares
 In both cases, the fund’s board of directors, which is elected by

shareholders, hires a management company to manage the
portfolio for an annual fee that typically ranges from .2% to 1.5%
of assets.
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Open-End and Closed-End Funds: Key Differences
Shares Outstanding
 Closed-end: no change unless new
stock is offered
 Open-end: changes when new shares
are sold or old shares are redeemed
Pricing
 Open-end: Net Asset Value(NAV)
 Closed-end: Premium or discount to
NAV
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Figure 4.1 Closed-End Mutual Funds
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Figure 4.2 Listing of Mutual Fund Quotations
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Other Investment Organizations

Financial Intermediaries NOT formally
organized or regulated as investment
companies that nevertheless serve
functions similar to investment
companies.
2 of the more important other investment

organizations.
1. Commingled Funds
2. Real Estate Investment Trust (REIT)
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COMMINGLED FUND
 Partnerships of investors that pool their
fund.
 Management firm that organizes the
partnership manages the fund for a fee.
 Typical partners might be trust or
retirement accounts which have portfolios
that are much larger than those most
individual investors but are still too small
to warrant managing on a separate basis
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REAL ESTATE INVESTMENT TRUSTS
(REITs)
 Similar to closed-end fund.
 Invest in real estate or loans secured by
real estate.
 2 Principal Kinds or REITs
– Equity Trusts – invest in real estate directly
– Mortgage Trusts – invest primarily in
mortgage and construction loans.
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MUTUAL FUNDS in the PHILIPPINES

Mutual Fund is a professionally managed
type of collective investment that pools
money from many investors and invests
typically in investment instruments like
stocks, bonds, money market instruments,
other mutual funds and commodities like
gold silver.
* Mutual Fund Companies are regulated by

the Securities and Exchange
Commission (SEC)
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Types of Mutual Funds in the Philippines
1. Stock/Equity Fund
2. Fixed-Income Fund
3. Balanced Fund
4. Money Market Fund
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1. Stock/Equity Fund
 Invests primarily in stocks
 Riskier since performance depends on
the stock market but may give you the
highest return.
 It’s like investing in stock market
indirectly
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2. Fixed-Income Fund
 Invests in any instruments that yield
fixed regular income.
 Least riskier
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3. Balance Fund
 Holds both equities and fixed-income
securities
 Minimize investment risks so far as this
is possible without unduly sacrificing
possibilities for long-term growth and
current income. (Weisenberger)
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4. Money Market Fund

 Invests in short-term debt securities.
 Limit loss of investment that may be
cause by market, credit and liquidity.
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Mutual Funds in the Philippines
Category
Equity Funds (PhP) 8
Equity Funds (USD) 1
Balanced Funds (PhP) 7
Balanced Funds (USD) 1
Bond Funds (PhP) 10
Bond Funds (USD) 9
Bond Funds (Euro) 2
Money Market (PhP) 5
TOTAL 43
Investment Company Association of the Philippines (ICAP)

September 30, 2010
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How Funds Are Sold

 Directly marketed – distributed by an
UNDERWRITER
– Indirect marketed – brokers acting on behalf of
the underwriter
 Sales force distributed
 Financial supermarkets
– Allows customers to buy funds from many
different fund groups.
– Spliting management fees of mutual fund
company instead of charging customers a sales
commision.
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Costs of Investing in Mutual Funds
 Explicit Costs – fees and expenses that

appear on your mutual fund statement
each month
– LOADS – sales charge
• Front-End Load – Purchase of Fund
• Back-End Load – Redemption of Fund
– MANAGEMENT FEES – compensation of
the portfolio manager
– ANNUAL CUSTODY FEE – holding the
fund
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Costs of Investing in Mutual Funds
– Other Fees (12b-1, distribution fees, and

transfer agent fees)
– Overall expense ratio
 Implicit Cost – expenses that must be
accounted for to calculate the true
return of you portfolio. (Taxes)
– Bond dividends and interest
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Taxation of Mutual Funds in the Philippines

A mutual fund company which is established
in the Philippines is taxable like any
domestic corporation.
 Interest income on currency bank deposit
and yield or any other monetary benefit
from deposit substitutes and from trust
funds and similar arrangement – 20%
FINAL TAX
 Interest income derived from a depository
bank under the expanded foreign currency
deposit system – 7.5% FINAL TAX
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 Interest income from other debt instruments
is subject to normal corporate income tax at
the rate of 30%
 Capital gain on sale of share of stock listed
and traded on the stock exchange – 0.5%
based on Gross Selling Price
 Capital gain on sale of share of stock listed
but not traded on the stock exchange and
unlisted shares – 5% on the first P100,000
of Net capital gains & 10% on net capital
gains in excess of P100,000
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 Dividend income on shares of stock of
another domestic corporation is
EXEMPT from INCOME TAX
 Capital gains from sale of real estate
which is deemed a capital asset is
subject to a FINAL TAX of 6 percent on
the gross selling price or current fair
market value whichever is higher
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4- 1

Mutual Funds and

Services of Investment Companies

 Administration & record keeping

Net Asset Value

 Unit Investment Trusts

Unit Investment Trust

Unit Investment Trust

Managed Investment Companies

 In both cases, the fund’s board of directors, which is elected by

Open-End and Closed-End Funds: Key Differences

Figure 4.1 Closed-End Mutual Funds

Figure 4.2 Listing of Mutual Fund Quotations

Other Investment Organizations

2 of the more important other investment

Other Investment Organizations

Other Investment Organizations

MUTUAL FUNDS in the PHILIPPINES

* Mutual Fund Companies are regulated by

Types of Mutual Funds in the Philippines

Types of Mutual Funds in the Philippines

Types of Mutual Funds in the Philippines

Types of Mutual Funds in the Philippines

Types of Mutual Funds in the Philippines

4. Money Market Fund

Mutual Funds in the Philippines

Investment Company Association of the Philippines (ICAP)

How Funds Are Sold

 Explicit Costs – fees and expenses that

– Other Fees (12b-1, distribution fees, and

Taxation of Mutual Funds in the Philippines

Taxation of Mutual Funds in the Philippines

Taxation of Mutual Funds in the Philippines

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