In a previous article, we introduced the
CFA Institute Investment Foundation Program (Read
more here). It is a free program
designed for anyone who wants to enter or advance within the investment
management industry, including IT, operations, accounting, administration, and
marketing. Candidates who successfully
pass the online exam earn the CFA Institute Investment Foundations Certificate.
There are total of 20 Chapters in 7
modules, covering all the essential topics in finance, economics, ethics and
regulations. This series of articles
will highlight the core knowledge of each chapter.
Chapter 14 provides an overview of Investment
Vehicles. The learning outcome of chapter 14 is as follows:
·
Compare
direct and indirect investing in securities and assets;
·
Distinguish
between pooled investments, including open-end mutual funds, closed-end funds,
and exchange-traded funds;
·
Describe
security market indices including their construction and valuation, and
identify types of indices;
·
Describe
index funds, including their purposes and construction;
·
Describe
hedge funds;
·
Describe
funds of funds;
·
Describe
managed accounts;
·
Describe
tax-advantaged accounts and describe the use of taxable accounts to manage tax
liabilities.
Investment vehicles are assets offered
by the investment industry to help investors move money from the present to the
future, with the hope of increasing the value of their money. These assets
include securities, such as shares, bonds, and warrants; real assets, such as
gold; and real estate. Many investment vehicles are entities that own other
investment vehicles. For example, an equity mutual fund is an investment
vehicle that owns shares.
Investors make direct investments when
they buy securities issued by companies and governments and when they buy real
assets, such as precious metals, art, or timber.
But a common way to invest is through
indirect investment vehicles. That is, investors give their money to investment
firms, which then invest the money in a variety of securities and assets on
their behalf. Thus, investors make indirect investments when they buy the
securities of companies, trusts, and partnerships that make direct investments.
Most indirect investment vehicles are
pooled investments (also known as collective investment schemes) in which
investors pool their money together to gain the advantages of being part of a
large group. The resulting economies of scale can significantly improve
investment returns.
The three main types of pooled
investments are open-end mutual funds, closed-end funds, and exchange-traded
funds (ETFs). Investors like them because they allow them to cheaply invest in
highly diversified portfolios in a single low-cost transaction. Exhibit 1 offers a summary table of
characteristics of open-end mutual funds, closed-end funds, and ETFs.
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