Irwin/McGraw-Hill 1 Mutual Funds

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Irwin/McGraw-Hill 1 Mutual Funds

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

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