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Irwin/McGraw-Hill 1 Mutual Funds

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  • 1. Mutual Funds Chapter 4 Financial Institutions Management, 3/e By Anthony Saunders
  • 2. Mutual Funds
    • Open-ended
    • Closed-end
    • End of 1997:
      • More than 5,300 stock and bonds mutual companies.
      • Total assets of $3.7 trillion.
  • 3. Size, structure and composition
      • First mutual fund: Boston, 1924
      • Slow growth, initially.
      • Advent of money market mutual funds, 1972.
        • Regulation Q
      • Total assets in mutual funds:
        • 1940: $0.4 billion
        • 1990: $568.5 billion
        • 1996: $2,637.4 billion
  • 4. Size, Structure and Composition
      • By asset size, the mutual fund industry is the second most important FI group.
    • Types of mutual funds:
      • Long-term funds (76.4% of assets, 1997)
        • Bond and income funds
        • Equity funds
      • Short-term funds (23.6% of assets, 1997)
        • Taxable and tax-exempt MMMFs
        • Generally higher returns than bank deposits but uninsured
  • 5. Overview of Mutual Funds
      • Objectives, rates of return, and risk characteristics vary.
    • Examples:
      • Aggressive growth funds
      • Growth funds
      • Precious metals
      • International
      • Ginnie Mae
  • 6. Returns to Mutual Funds
      • Income and dividends of underlying portfolio.
      • Capital gains on trades by mutual fund management.
      • Capital appreciation in values of assets held in the portfolio.
        • Marked-to-market.
        • Net-asset value (NAV).
  • 7. Types of Funds
      • Open-ended funds: contrast with most corporate securities traded on stock exchanges.
      • Closed-end investment companies:
      • Fixed number of shares
        • Example: REITs
        • May trade at premium or discount.
      • Load versus no-load funds.
  • 8. Balance Sheet and Trends
    • Money Market Funds
      • Key assets are short-term securities.
      • Many have share values fixed at $1 and adjust number of shares owned by the investor.
  • 9. Balance Sheet and Trends
    • Long-term Funds
      • Stocks comprise over 62.8 % of asset portfolios at September 1997.
      • Shift to U.S. Treasuries, municipal bonds etc. when equity markets are not performing as well.
  • 10. Regulation
      • One of the most closely regulated among non-depository FIs.
      • Primary regulator: SEC
        • Emphasis on full disclosure and anti-fraud measures to protect small investors.
        • NASD supervises mutual fund share distributions.
  • 11. Legislation
      • Investment Advisers Act, 1940.
      • Insider Trading and Securities Fraud Enforcement Act of 1988.
      • Market Reform Act of 1990
        • Allows SEC to halt trading and introduce circuit breakers.
      • National Securities Markets Improvement Act of 1996.
        • Exempts mutual fund sellers from state securities regulatory oversight.

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