Question

1. a) What is the average standard deviation of an actively managed US mutusl fund?

b) What is the average expense ratio of an actively managed US mutual fund?

c) What are the key economic factors that influence the return of an actively managed US mutual fund?

d) What are the fees applicable when buying or selling an actively managed US mutual fund?

e) An insurance company has sold a large amount bonds. The proceeds from selling the bonds were invested in real estate. Would investing the proceeds in real estate reduce the assets' exposure to interest rate risk?

f) How would change in interest rate affect real estate value? Is real estate value exposed to interest rate risk?

g) Which one between price of bond and real estate value more sensitive to changes in interest rate?

h) What are the differences between voluntary winding up and compulsory winding up of a company? Which one is better between voluntary winding up and compulsory winding up of a company? Give examples of previous companies and previous MNCs which are voluntary winding up and compulsory winding up.

Answer 1

Answer-a

Standard deviation is a measure of volatility -- how far a measurement, such as rate of return, tends to deviate from an average over a particular period. To find standard deviation on a mutual fund, add up the rates of return for the period you want to measure and divide by the total number of rate data points to find the average return. Next, take each individual data point and subtract your average to find the difference between reality and the average. Square each of these numbers and then add them up. Divide the resulting sum by the total number of data points less one -- if you have 12 data points, you divide by 11. The standard deviation is the square root of that number.

The greater the standard deviation, the greater the range in what is being measured. If a fund has an average return of 4 percent and a standard deviation of 7, its past returns have ranged from -3 percent to 10 percent. The same fund with a standard deviation of 2 has a return range of 2 to 6 percent. In investing, high standard deviations typically indicate high volatility -- a return that fluctuates often and by large amounts.

Answer-b

An expense ratio reveals the amount that an investment company charges investors to manage an investment portfolio, a mutual fund, or an exchange-traded fund (ETF). The ratio represents all of the management fees and operating costs of the fund.

A reasonable expense ratio for an actively managed portfolio is about 0.5% to 0.75%, while an expense ratio greater than 1.5% is typically considered high these days.

Answer-c

The key economic factors that influence the return of an actively managed US mutual fund are as follow:-

1) Using Appropriate Benchmarks

2) The Greeks

3) Expense Ratio

4) Manager Tenure

5) Focus on Mid to Long Term Performance

6) Style Drift

7) Turnover Ratio

8) Credit Rating

9) Number of Holdings

Answer-d

The fees applicable while buying and selling an actively managed US Mutual Fund includes following types of Fees:-

Ø Management fees which are expenses paid to a fund’s investment advisors for managing the investment portfolio.

Ø Distribution and service fees, often called 12b-1 fees, are fees paid by the fund to cover distribution expenses and shareholder service expenses. The distribution fees are “fees paid for marketing and selling fund shares, such as compensating brokers and others who sell fund shares, and paying for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature” (SEC, 2013).

Ø Shareholder Fees are fees charged when an action is made on a fund. These fees are paid directly from the investment into a mutual fund. These expenses can include sales loads, redemptions fees, exchange fees, account service fees, and purchase fees.

Ø Sales loads are fees a mutual fund charges to compensate brokers who complete the buying and selling transactions of a fund. This fee is similar to the commission an investor pays when purchasing any type of security from a broker.

Ø Redemption fees are fees charged by a mutual fund when an investor sells her shares before a certain time period.

Ø Other shareholder fees include exchange fees, accounts fees, and purchase fees. An exchange fee is only applicable if an investor wishes to transfer shares to another mutual fund within the same fund group. An account fee is the fee mutual fund companies charge investors for the maintenance of their accounts (SEC, 2013). This fee may only apply to specific investors, as it frequently targets accounts that have balances below a certain dollar amount.

Ø There are a number of “hidden” fees and costs that apply to mutual funds. Generally, fees are considered hidden if they are not disclosed on the fee table in the prospectus.

Ø Transaction fees, or brokerage fees, are the transaction costs mutual funds incur from buying and selling securities in the portfolio.

Ø Tax inefficiencies are another hidden cost of investing in mutual funds.

Answer-e

For investors, fixed-income instruments pay a set interest rate return in exchange for investors lending their money. At the maturity date, investors are repaid the original amount they had invested—known as the principal.

Government and corporate bonds are the most common types of fixed-income products.

Thus, if the proceeds from bonds are invested in the real estate then it will reduce the assets exposure to interest rate risk because a maxim of bond investing is that when interest rates rise, bond prices fall, and vice versa.

Answer-f

Interest rates can affect the cost of financing and mortgage rates—changes in capital flows can also have a direct impact on the supply and demand dynamics for a property.

The most evident impact of interest rates on real estate values is in the derivation of discount or capitalization rates, as they are equal to the risk-free rate plus a risk premium.

Thus, the real estate value is exposed to interest rate risk.

Answer-g

Many factors impact bond prices, one of which is interest rates. A maxim of bond investing is that when interest rates rise, bond prices fall, and vice versa. The higher a bond’s duration, the greater its sensitivity to interest rates changes. This means fluctuations in price, whether positive or negative, will be more pronounced. Thus, we can say that, the price of bond is more sensitive to changes in interest rate compare to real estate value.

Answer-h

Voluntary Winding Up	Compulsory Winding Up
Also known as a Creditors Voluntary Liquidation (CVL), a voluntary winding up starts when the directors, and owners, decide to close their business as they cannot pay their creditors.	Compulsory liquidation is forced on a company by creditors, usually after the approval of a winding up petition in Court.
This requires a meeting of the shareholders and creditors to pass appropriate resolutions and appoint a liquidator. Neither the Court nor Official Receiver are part of voluntary liquidation. The process is quicker than a compulsory liquidation.	After approval, the Official Receiver will take over, freeze bank accounts and begin the investigation into what led to the company’s insolvency.
If the company passes a special resolution that the company should be wound up voluntary	If the company has by special resolution, resolved that the company should be wound up by the court

Voluntary winding up is the best for the company due to several reasons:-

1) The process is much quicker than compulsory winding up.

2) Outstanding debts are written off

3) Staff can claim redundancy pay

4) Legal action is halted

5) Leases can be cancelled

6) Relatively low costs involved

7) Avoid court processes

Some examples of well-known American companies that were liquidated, or wound up, including Circuit City, RadioShack, Blockbuster, Borders Group, and Toys "R" Us. In February 2019, the discount shoe store chain Payless closed its remaining stores, effectively beginning the winding-up process.