mutual funds costs

Costs are the biggest problem with mutual funds. These costs eat into your return,
and they are the main reason why the majority of funds end up with sub-par
performance.
What's even more disturbing is the way the fund industry hides costs through a layer
of financial complexity and jargon. Some critics of the industry say that mutual fund
companies get away with the fees they charge only because the average investor
does not understand what he/she is paying for.
Fees can be broken down into two categories:
1. Ongoing yearly fees to keep you invested in the fund.
2. Transaction fees paid when you buy or sell shares in a fund (loads).

International Funds

An international fund (or foreign fund) invests only outside your home country.
Global funds invest anywhere around the world, including your home country.
It's tough to classify these funds as either more risky or safer. On the one hand they
tend to be more volatile and have unique country and/or political risks. But, on the
flip side, they can, as part of a well-balanced portfolio, actually reduce risk by
increasing diversification. Although the world's economies are becoming more inter-
related, it is likely that another economy somewhere is outperforming the economy
of your home country.

Balanced Funds

The objective of these funds is to provide a "balanced" mixture of safety, income,
and capital appreciation. The strategy of balanced funds is to invest in a combination
of fixed-income and equities. A typical balanced fund might have a weighting of 60%
equity and 40% fixed-income. The weighting might also be restricted to a specified
maximum or minimum for each asset class.
A similar type of fund is known as an asset allocation fund. Objectives are similar to
those of a balanced fund, but these kinds of funds typically do not have to hold a
specified percentage of any asset class. The portfolio manager is therefore given
freedom to switch the ratio of asset classes as the economy moves through the
business cycle.

bond funds

Income funds are named appropriately: their purpose is to provide current income
on a steady basis. When referring to mutual funds, the terms "fixed-income,"
"bond," and "income" are synonymous. These terms denote funds that invest
primarily in government and corporate debt. While fund holdings may appreciate in
value, the primary objective of these funds is to provide a steady cash flow to
investors. As such, the audience for these funds consists of conservative investors
and retirees.
Bond funds are likely to pay higher returns than certificates of deposit and money
market investments, but bond funds aren't without risk. Because there are many
different types of bonds, bond funds can vary dramatically depending on where they
invest. For example, a fund specializing in high-yield junk bonds is much more risky
than a fund that invests in government securities; also, nearly all bond funds are
subject to interest rate risk, which means that if rates go up the value of the fund
goes down.

Different Types of mutual funds

No matter what type of investor you are there is bound to be a mutual fund that fits
your style. According to the last count there are over 10,000 mutual funds in North
America! That means there are more mutual funds than stocks.
It's important to understand that each mutual fund has different risks and rewards.
In general, the higher the potential return, the higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk--it's never possible to diversify away all risk. This is a fact for all investments. (You can learn more about this in our financial concepts tutorial.)
Each fund has a predetermined investment objective that tailors the fund's assets,
regions of investments, and investment strategies. At the fundamental level, there
are three varieties of mutual funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds
All mutual funds are variations of these three asset classes. For example, while
equity funds that invest in fast-growing companies are known as growth funds,
equity funds that invest only in companies of the same sector or region are known as
specialty funds.
Let's go over the many different flavors of funds. We'll start with the safest and then work through to the more risky.

Unit Investment Trusts

Unit Investment Trusts are pools of money invested in a portfolio that is fixed for the life of the fund. To form a unit investment trust, a sponsor, typically a brokerage firm buys a portfolio of securities which are deposited into a trust. It then sells to the public shares, or "units," in the trust, called redeemable trust certificates. All income and payments of principal from the portfolio are paid out by the fund‘s trustees (a bank or trust company) to the shareholders. Most unit trusts hold fixed-income securities and expire at their maturity, which may be as short as a few months if the trust invests in short-term securities like money market instruments, or as long as many years if the trust holds long-term assets like fixed-income securities. The fixed life of fixed-income securities makes them a good fit for fixed-life unit investment trusts. In fact, about 90% of all unit investment trusts are invested in fixed-income portfolios, and a bout 90% of fixed-income unit investment trusts are invested in tax-exempt debt.
There is little active management of a unit investment trust because once established, the portfolio composition is fixed; hence these trusts are referred to as unmanaged. Trusts tend to invest in relatively uniform types of assets; for example, one trust may invest in municipal bonds, another in corporate bonds. The uniformity of the portfolio is consistent with the lack of active management. The trusts provide investors a vehicle to purchase a pool of one particular type of asset, which can be included in an overall portfolio as desired. The lack of active management of the portfolio implies that management fees can be lower than those of managed funds.
Sponsors of unit investment trusts earn their profit by selling shares in the trust at a premium to the cost of acquiring the underlying assets. For example, a trust that has purchased $5 million of assets may sell 5000 shares to the public at a price of 1030 per share, which (assuming the trust has no liabilities) represents a 3% premium over the net asset value of the securities held by the trust. the 3% premium is the trustee‘s fee for establishing the trust.
Investors who wish to liquidate their holdings of a unit investment trust may sell the shares back to the trustee for net asset value. The trustees can either sell enough securities from the asset portfolio to obtain the cash necessary to pay the investor, or they may instead sell the shares to a new investor (again at a slight premium to net asset value

Types of investment companies

In the United States, investment companies are classified by the investment company act of 1940 as either unit investment trusts or managed investment companies. The portfolios of unit investment trusts are essentially fixed and thus are called "unmanaged." in contrast, managed companies are so named because securities in their investment portfolios continually are bought and sold: the portfolios are managed. Managed companies are further classified as either closed-end or open-end companies are what we commonly call mutual funds.

investments companies

Investments companies are financial intermediaries that collect funds from individual investors and invest those funds in a potentially wide range of securities or those assets. Pooling assets is the key idea behind investment companies. Each investor has claim to the portfolio established by the investment company in proportion to the amount invested. These companies thus provide a mechanism for small investors to ' team up" to obtain the benefits of large-scale investing.
Investment companies perform several important functions for their investors:
1- Record keeping and administration. Investment companies issue periodic status reports, keeping track of capital gains distributions, dividend, investments, and redemption, and they may reinvest dividend and interest income for shareholders.
2- diversification and divisibility. By pooling their money, investment companies enable investors to hold fractional shares of many different securities. They can act as large investors even if any individual shareholder cannot.
3- professional management. Many, but not all, investment companies have full-time staffs of security analysts and portfolio managers who attempt to achieve superior investment results for their investors.
4- lower transactions costs. Because they trade large blocks of securities, investment companies can achieve substantial savings on brokerage fees and commissions.
While all investment companies pool assets of individual investors, they also need to divide claims to those assets among investors. Investors buy shares in investment companies, and ownerships proportional to the number of shares purchased. The value of each share is called the net asset value, or NAV. net asset value equals assets minus liabilities expressed on per-share basis

Disadvantages of preferred stock

The two major disadvantages of preferred stock are the seniority of the holder's claims and its cost.
Seniority of the holders´ claims.
Since holders of preferred stock are given preference over common stock holders with respect to the distribution of earnings and assets, the presence of preferred stock in a sense jeopardizes common shareholder's returns. Adding preferred stock to the firm's capital structure creates additional claims prior to those of common stockholders. If the firm's after-tax earnings are quite variable, its ability to pay at least token dividends to common stockholder may be seriously impaired.
Cost.
The cost of preferred stock financing is generally higher than the cost of debt financing. This is because the payment of dividends to preferred stockholders is not guaranteed, whereas interest on bond is. Since preferred shareholders are willing to accept the added risk of purchasing preferred stock rather than long-term debt, they must be compensated with a higher return. Another factor causing the cost of preferred stock to be significantly greater than that of long-term debt is the fact that interest on long-term debt is tax-deductible, while preferred dividends must be paid from earnings after taxes.

Instruments of the money market

The key instruments of the money market include treasury bills, tax-anticipation bills, treasury notes, federal agency issues, negotiable certificates of deposit, commercial paper, banker's acceptances, money market mutual funds, and repurchase agreements. These marketable securities will be described in next topic. It is important for you to a general understanding of the key characteristics of these instruments. One characteristic common to all is liquidity. The annual rate of return, or yield, on these securities reflects directly the "tightness' or "looseness" of money. Difference in return between various instruments result from the different degrees of risk associated with the issuers. Although the list of securities given above is not all-inclusive, it does contain the key money market instruments available to the corporate purchaser. The only instrument actually issued by a nonfinancial corporate business is commercial paper.

Disadvantages of leasing

The commonly cited disadvantages of leasing include high interest costs, the lack of salvage value, the difficulty of making property improvements, and obsolesce considerations. Though not relevant in every case, they may bear importantly on the
lease-purchase decision in certain instances.
High interest cost. A lease does not have an explicit interest cost; rather, the lessor builds a return for itself into the lease payment. In many leases the implicit return to the lessor is quite high, so that the firm might be better off borrowing to purchase the asset.
Lack of salvage value. At the end of the term of lease agreement, the salvage value of assets, if any, is realized by the lessor. If assets are expected to appreciate over the life of a lease agreement, it may be wiser to purchase them, although various other factors must be considered in making this decision. Appreciation in the value of assets is especially likely when land or buildings, or both, are involved. If the lease contains a purchase option this disadvantage may not exist.
Difficulty of property improvements Under a lease, the lessee is generally prohibited from making improvements on the leased property without the approval of the lessor. If the property were owned, this difficulty would not arise. Related to this disadvantage is the fact that it is often hard to obtain financing for improvements on leased property since it is difficult for the lender to obtain a security interest in the improvements. On the other hand, the lessor may agree in the initial lease contract finance or make certain leasehold improvements specified by the lessee.
Obsolescence considerations. If a lessee leases (under financial lease) an asset that subsequently becomes obsolete, it still as to make lease payments over the remaining life of the lease. This is true even if it is unable to use the leased asset. In many instances, a lessee will continue to use obsolete assets since it must pay for them. This type of situation can weaken a firm's competitive position by raising (or failing to lower) production costs and therefore forcing the sale price of its products to be increased in order to earn a profit.

Advantages of leasing

The basic advantages commonly cited for leasing are the ability it gives the lessor to, in effect, depreciate land, its effects on financial ratios, its effect on the firm's liquidity, the ability it gives the firm to obtain 100 percent financing, the limited claims of lessors in the event of bankruptcy or reorganization, the fact that the firm may avoid assuming the risk of obsolescence, the lack of many restrictive covenants, and the flexibility provided. Each of these often cited advantages is described and critically evaluated below.
-Effective depreciation of land. Leasing allows the lessee to, in effect; depreciate land, which is prohibited under a purchase of land. Since the lessee who leases land is permitted to deduct the total lease payment as an expense for tax purposes, the effect is the same as it would be if he or she purchased the land and then depreciated it. The greater the amount of land included in a lease agreement, the more advantageous this factor becomes from the point of view of the lessee. However, this advantage is somewhat tempered by the fact that land generally has a savage value for its purchaser, which it does not for a lessee.
- Effects on financial ratios. Leasing, since it results in the receipt o services from an asset possibly without increasing the assets or liabilities on the firm's balance sheet, may result in misleading financial ratios. With the passage of FASB No.13, this advantage no longer applies to financial lease, although in the case o operating leases it remains a potential advantage. Of course, even in the case of operating leases, the American Institute of Certified Public Accounts requires disclosure of the lease in a footnote to the Firm's statements. Today, most analysts are aware of the significance of leasing for the firm's financial position and will not view the firm's financial statements strictly as presented; instead, they will make certain adjustments to these statements that will more accurately reflect the effect of any existing operating leases on the firm's financial position.
- Increased liquidity .The use of sale-leaseback arrangements may permit the firm to increase its liquidity by converting an existing asset into cash, which can be used as working capital. A firm short of working capital or in a liquidity squeeze can sell an owned asset to a lessor ad lease the asset back for a specified number of years. Of course, this action binds the firm to making fixed payments over period years. The benefits of the increase in current liquidity are therefore tempered somewhat by added fixed financial payments incurred through the lease.
-100 percent financing; another advantage of leasing is that it provide 100 percent financing. Most loan agreements for purchase of fixed assets require the borrower to pay a portion of the purchase price as adown payment. As a result, the borrower receives only 90 to 95 percent of the purchase price of the asset. In the case of a lease, the lessee is not required to make any type of down payment; he or she must make only a series of periodic payments. in essence, a lease permits a firm to receive the use of an asset for a smaller initial out-of-pocket cost than borrowing. However, since large initial lease payments are often required in advance, it is possible to view the initial advance payment as type of down payment.
-Limited claims in the event of bankruptcy or reorganization; when a firm becomes bankrupt or is reorganized, the maximum claim of lessors against the corporation is three years of lease payments. If debt is used to purchase an asset, the creditors have a claim equal to the total amount of unpaid financing. Of course, in such a case an owned asset may have a salvage value that can be used to defray the firm's obligations to its creditors.
-Avoidance of the risk of obsolescence; in a lease arrangement, the firm may avoid assuming the risk of obsolescence if he lessor in setting the lease payments fails accurately to anticipate the obsolescence of assets. This is especially true in the case of operating leases, which generally have relatively short lives. However, most lessors are perceptive enough to require sufficient compensation in both the term and the amount of lease payments to protect themselves against obsolescence.
-Lack of many restrictive covenants; a lessee avoids many restrictive covenants that are normally included as part of a long-term loan. Requirements with respect to minimum working capital, subsequent financing, changes in management, and so on are not normally found in a lease agreement; the only restrictive covenant occasionally included in the lease relates to subsequent lease commitments. The general lack of restrictive covenants allows the lease much greater flexibility in its operations. This many be viewed as an important advantage by the lessee.
-Flexibility provided; In the case of low-cost assets that are infrequently acquired, leasing-especially operating leases-may provide the firm with needed financing flexibility. This flexibility is attributable to the fact that the firm does not have to arrange other financing for these assets and can somewhat conveniently obtain them through a lease, thereby preserving its funds-raising power for the acquisition of more costly assets. The firm also retains its ability to raise funds in economically preferred quantities at the right time, again helping to lower its overall capital costs. Flexibility is also provided in the sense that with a short-term operating lease the firm can buy time to shop around for an owned asset that may be more advantageous from the standpoint of long-run owners´ wealth maximization.

Leasing as a source of financing

Leasing is considered a source of financing provided by the lessor to the lessee. The lessee receives the service of a certain fixed asset for a specified period of time, while in exchange for the use of this asset the lessee commits itself to a fixed periodic payment. The only other way the lessee could obtain the services of the given asset would be to purchase it outright, and the out right purchase of the asset would require financing. Again, fixed-most likely periodic-payments would be required. The lessee might have sufficient funds to purchase the asset outright without borrowing, but the funds used would not be free, since there is an opportunity cost associated with the use of cash. It is the fixed-payment obligation for a set period that forces us to view the financial lease as a source of long-term financing. Although at this point the rationale for leasing may seem no different than that for borrowing when a cash purchase cannot be made, certain other considerations with respect to the lease-purchase decision do exist.

The Lease Contract

The key items in the lease contract normally include the term of the lease, provisions for its cancellation, lease payment amounts and dates, renewal features, purchase clause, maintenance and associated cost provisions, and other provision specified in the lease negotiation process. As we indicated in the preceding discussion, many provisions are optional. A lease can be cancelable or non-cancelable, but if cancellation is permitted the penalties must be clearly specified. The lease may be renewable. If it is, the renewal procedures and costs should be specified. The lease agreement may provide for the purchase of the leased assets during the contract period or at the termination of the lease. The cost and conditions of the purchase must be clearly specified. In the case of operating leases, it is likely tat maintenance costs, taxes, and insurance will be paid by the lessor. In the case of a financial lease these costs will generally be borne by the lessee. The bearer of these costs must be specified in the lease agreement.
The leased assets, the terms of the agreement, the lease payment, and the payment interval must be clearly specified in all lease agreements. The consequences of missing a payment or violating any other lease provisions must also be clearly stated in the contract. The consequences of violation of the agreement by the lessor must also be specified. Once the lease contract has been drawn up and agreed to by lessee and lessor, the notarized signatures of these parties bind them to the terms of the contract.

Legal requirements of leases

In order to prevent business firms from using leasing arrangements as a disguise for what is actually an installment loan, the internal revenue service code, Section1031, "Exchange of property Held for productive Use or investment," specifies certain conditions under which lease payments are tax-deductible. If a lease arrangement does not meet these basic requirements, the lease payments are not completely tax-deductible. In order to conform to the IRS Code, a leasing arrangement must meet the following requirements:
1- The terms of a lease must be less than 30 years. A lease with life greater than 30 years is considered a sale by the IRS.
2- The premium paid to the lessor must be " reasonable"- that is- equal to the premium being paid on leases of similar assets. a premium between 10 and 15 percent would currently (November,1981) be considered reasonable.
3- The renewal option payment must also be "reasonable." If an outsider is willing to pay a higher amount to obtain the lease, the lease cannot be renewed with the original lessee at a lower rate. This is an application of the "fair market value" concept, which is also applied to purchase options.
4- No preferential purchase option is permitted. the lessee can be given an opportunity to purchase the asset only at a price equal to or above any other offers received by the lessor.

Advantages and Disadvantages of Common Stock

Common stock has a number of disadvantage and disadvantages. Some of the factors to be reckoned with in considering common stock financing are discussed below.
Advantages. The basic advantages of common stock stem from the fact that it is a source of financing that places a minimum of constraints on the firm. Since dividends do not have to be paid on common stock and their nonpayment does not jeopardize the receipt of payment by other security holders, common stock financing is quite attractive. The fact that common stock has no maturity, thereby eliminating future repayment obligation, also enhances the desirability of common stock financing. Another advantage of common stock over other forms of long-term financing is its ability to increase the firm's borrowing power. The more common stock the firm sells, the larger the firm's equity base and therefore the more easily and cheaply long-term debt financing can be obtained.
Disadvantages. The disadvantages of common stock financing include the potential dilution of voting power and earnings. Only when rights are offered and exercised by their recipients can this be avoided. Of course, the dilution of voting power and earning resulting from new issues of common stock may go unnoticed by the small shareholder. Another disadvantage of common stock financing is it high cost. Normally, the most expensive form of long-term financing. This is because dividends are not tax-de-ductile and because common stock is a riskier security than either debt or preferred stock.

Charters and regulations of mutual savings banks

Mutual can be chartered by either the sates or the federal government. Moreover, state and federal governments also share responsibility for insuring their deposits. About 70 percent of all savings banks have their deposits insured by the Federal Deposit Insurance Corporation (up to $100,000); the remainders are covered by state insurance programs. Today, only 17 states permit the chartering of mutual within their borders, but these institutions are not bound by geography in raising funds or making loans and investment. Their mortgage-lending activities reach nationwide and occasionally even abroad to support the building of commercial and residential projects. The largest mutual savings bank in the United States is the Philadelphia savings fund society of Pennsylvania, which at year-end 1979 reported total deposited of almost $5.9 billion. Close behind was Bowery Savings Bank of New York City, with $4.7 billion in total deposits. Of the10 largest mutual in the United States, all but 3 are headquartered in the state of New York.

Number and distribution of mutual savings banks

The number of mutual operating today is small- less than 500. Moreover, the savings bank population has been on the decline through most of this century. For example, in 1990 there were 626 mutual operating in the United States, and the total number rose to a peak of 637 in 1910. Thereafter, a progressive decline set in until the number of savings banks totaled only 463 at year-end 1979.
Nevertheless, industry assets and deposit have grown quite rapidly. In 1950 total assets of all mutual stood at $22 billion, but at year-end 1980, industry assets had reached almost $172 billion. Of course, with declining numbers and rapidly expanding assets, the average size of mutual savings banks has grown tremendously and now exceeds $300 million in total assets. Thus, the average mutual savings bank is far larger than most credit unions, savings and loan associations, or even commercial banks. This increase in average size has aided mutual in offerings a greater variety of services and in keeping their operating costs low.
Mutual savings banks are not evenly distributed across the United States but rather are located primarily in New England and the Middle Atlantic States. For example, Massachusetts leads the list with 163 mutual operating as of year-end 1979, followed by New York with 112. other states which have mutual headquartered within their borders include Alaska, Connecticut, Delaware, Indiana, Maine, Maryland, Minnesota, New Hampshire, New jersey, Oregon, Pennsylvania, Rhode Island, Vermont, Washington, and Wisconsin.

How municipal bonds are marketed?

The selling of municipals is usually carried out through a syndicate of banks and securities dealers. These institutions underwrite municipals by purchasing them from the issuing unit of government and reselling the securities in the open market, hopefully at a higher price. Prices paid by the underwriting firms may be determined either by competitive bidding among several syndicates or by negotiation with a single securities dealer or syndicate. Competitive bidding normally is employed in the marketing of general obligation (GO) bonds, while revenue bonds more frequently are placed through negotiation.
In competitive bidding, syndicates interested in a particular bond issue will estimate its potential reoffer price in the open market and their desired underwriting commission. Each syndicate wants to bid a price high enough to win the bid, but low enough so that the securities can later be sold in the open market at a price sufficient to protect the group's commission. That is,
Bid price+ underwriting commission= market reoffer price
The winning bid carries the lowest net interest cost (NIC) to the issuing unit of government. The NIC is simply the sum of all interest payments that will be owed on the new issues of municipal bonds is a treacherous business. Prices, interest rates, and market demand for municipals all change rapidly, often without warning. In fact, the tax-exempt securities market is one of the most volatile of all financial markets. This is due in part to the dominant role of commercial banks, whose demand for municipals fluctuates with their net earnings and loan demand. Legal interest-rate ceilings, which prohibit some local governments from borrowing when market rates climb above those ceilings, also play a significant role in the volatility of municipal trading. These combined factors render the tax-exempt market highly sensitive to the business cycle, monetary policy, inflation, and a host of other economic and financial factors. The spectre of high interest rates often forces the postponement of hundreds of millions of dollars of new issues, while the onset of lower rates may unleash a flood of new security offerings.
There is trend today away from competitive bidding and toward negotiated sales of new state and local bonds, due partly to the treacherous character of the tax-exempt market. For example, during 1978 an estimated 53 percent of bonds issued in the market for long-term municipals were negotiated, compared with only 15 percent a dozen years before. This trend has aroused some concern among financial analysis because competitive bidding should result in the lowest net interest cost, reducing the burden on local taxpayers. A recent study sponsored by the Municipal Finance Officers Association (MFOA) concluded that taxpayers have borne some added interest burden as a result of the recent emphasis upon negotiated, rather than combative, sale.
This problem is especially severe in certain states. For example, the AFOA-sponsored study found that in Pennsylvania, where competitive bidding is not required by law, about 95 percent of all bonds sold by local governments were handled through negotiation with a single underwriter group. It was estimated that Pennsylvania local governments paid approximately $14 million in excess interest costs on bond sales totaling about $360 million. On the other side of the coin, underwriting firms argue that they provide extra services to borrowing governments during the negotiation process-services not generally available through competitive bidding. These include preparing legal offering statements, scheduling the sale of new securities, helping to secure desirable credit ratings, and contacting potential buyers.

Operational Problems in Offering Credit Cards

Banks and other companies offering credit cards must solve several significant operational problems. First, the break-even point in card operations appears to be relatively high, placing pressure on credit card companies to sign up enough merchants to accept the cards and enough individuals to use them. The two problems are, of course, interrelated. Merchants are willing to accept a card only if they believe there will be sufficient customers using it to make the program worthwhile. Similarly, individuals are willing to make use of their cards only if a large number of merchants will accept them in payment for goods and services. One problem that has plagued credit-card operations for many years is losses due to customer fraud. Recent estimates by the Federal Reserve System find that fraud losses represent 15 to 20 percent of total card charge-offs for most plans.
During the late 1960s some U.S. banks tried to overcome the card-acceptance barrier by mass mailing of unsolicited cards, resulting in large-scale credit and fraud losses. Fearing that the safety and soundness of the banking system might be jeopardized and public confidence in banks shaken, Congress Passed the Consumer Credit Protection act, which prohibits unsolicited mailing of credit cards. Moreover, once the card-issuing company has been notified, the customer is no longer liable for any unauthorized use of his or her card. Prior to notification, the cardholder can only be held responsible for a maximum of $50 in unauthorized charges per card. Moreover, the customer cannot be held liable for unauthorized use of his or her credit card if the card was not requested or used, if it carries a means of identifying the authorized user (such as a signature or photograph), or if the customer was not notified of the $50 maximum liability. In addition, card issuers must provide the customer with a means of notifying them in case of card loss or theft.
Federal legislation has done much to enhance public acceptance of credit cards. Most cards are issued to customers today only after a careful analysis of their credit standing. That is why cardholders frequently are able to use their cards as a credit reference to aid in the cashing of checks or to obtain other forms of credit. Most merchants know that charge-card holders tend to have higher incomes and better payment record than the general population.
The most profitable credit-card accounts from the point of view of the issuing companies are those with high balances which are not paid off immediately (I.e., those held by installment users). However, less than half the sales volume experienced by most card programs winds up as carry-over balances subject to finance charges. Most card users are convenience users, who pay off their credit purchases within the normal billing cycle. Banks have found that they cannot make significant profits on their credit card operations when over half their cardholders are only convenience users. Moreover, cards users with the highest incomes and best repayment records typically economize on their cash balances and delay payment as long as possible, which further reduces the earnings from card operations. However, the performance of credit-card programs does improve with experience. Card companies become more skillful at identifying profitable groups of customers and at minimizing fraud and bad-debt losses. In addition, credit card programs bring in customers who may purchase other financial services from the same institution, such as installment loans and savings plans.