Mutual Funds Overview <ul><li>Mutual funds are financial intermediaries that pool the financial resources of investors and...
Historical Trends <ul><li>First mutual fund established in 1924 </li></ul><ul><li>Advent of money market mutual funds in 1...
Growth of the Mutual Fund Market
Types of Mutual Funds <ul><li>Long Term </li></ul><ul><ul><li>Equity funds - funds consisting of common and preferred stoc...
Mutual Fund Prospectuses and Objectives <ul><li>Regulations require mutual fund managers to specify the investment objecti...
Types of Mutual Funds <ul><li>Open-end mutual fund -  a fund for which the supply of shares is not fixed but can increase ...
Investor Returns from Mutual Fund Ownership <ul><li>The return for the investor reflects three aspects of the underlying p...
Calculation of NAV <ul><li>NAV  =  Total market value of assets under management </li></ul><ul><li>Number of mutual fund s...
Mutual Fund Costs <ul><li>Mutual funds charge shareholders a price or fee </li></ul><ul><li>Two types of fees are incurred...
Mutual Fund Costs <ul><li>Expense Ratio – annual fee  </li></ul><ul><ul><li>Management fee </li></ul></ul><ul><ul><li>Oper...
Load vs No-Load Funds  <ul><li>The SEC defines a no-load fund as: </li></ul><ul><ul><li>No upfront load </li></ul></ul><ul...
Mutual Fund Performance <ul><li>The average mutual fund does not beat the market.  At best, they perform well enough to of...
Index Funds <ul><li>Mutual Funds that attempt to duplicate the performance of a market index </li></ul><ul><li>Examples of...
Exchange Trade Funds (ETFs) <ul><li>Mutual funds with shares that trade throughout trading day like closed end funds. </li...
Regulation <ul><li>This industry is heavily regulated to protect investors </li></ul><ul><li>SEC is the primary regulator ...
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Mutual Funds Overview Mutual funds are financial ...

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Mutual Funds Overview Mutual funds are financial ...

  1. 1. Mutual Funds Overview <ul><li>Mutual funds are financial intermediaries that pool the financial resources of investors and invest those resources in diversified portfolios of assets </li></ul><ul><li>Enjoy economies of scale by incurring lower transaction costs and commissions </li></ul><ul><li>Shareholder services offered include free exchanges of investments between a company’s funds, automatic investing, check-writing, automatic reinvestment of dividends, and automatic withdrawals </li></ul><ul><li>As of January 2000, more than 7,800 mutual funds held total assets of $6.8 trillion </li></ul>
  2. 2. Historical Trends <ul><li>First mutual fund established in 1924 </li></ul><ul><li>Advent of money market mutual funds in 1972 as investors looked for ways to earn market rates on short-term funds </li></ul><ul><li>Tax-exempt money market mutual funds introduced in 1979 </li></ul><ul><li>Special-purpose equity, bond, emerging market, and derivative funds exploded on the scene during the 1990’s bull market </li></ul>
  3. 3. Growth of the Mutual Fund Market
  4. 4. Types of Mutual Funds <ul><li>Long Term </li></ul><ul><ul><li>Equity funds - funds consisting of common and preferred stock securities </li></ul></ul><ul><ul><li>Bond funds - funds consisting of fixed-income capital market debt securities </li></ul></ul><ul><ul><li>Hybrid funds - funds consisting of stock and bond securities </li></ul></ul><ul><li>Short Term </li></ul><ul><ul><li>Money market mutual funds - funds consisting of various mixtures of money market securities </li></ul></ul>
  5. 5. Mutual Fund Prospectuses and Objectives <ul><li>Regulations require mutual fund managers to specify the investment objectives of their funds in a prospectus available to potential investors </li></ul><ul><li>The prospectus includes a list of the securities that the fund holds and the investment objectives (i.e., aggressive growth funds, high-growth and high-risk securities) </li></ul><ul><li>The SEC is proposing an initiative to require mutual funds to disclose more information about their return risk as well as the returns themselves to better enable investors to compare </li></ul>
  6. 6. Types of Mutual Funds <ul><li>Open-end mutual fund - a fund for which the supply of shares is not fixed but can increase or decrease daily with purchases and redemptions of shares </li></ul><ul><li>Closed-end investment companies - investment companies that have a fixed supply of outstanding shares. Shares trade in the stock market throughout the trading day. </li></ul><ul><li>Exchange Trade Fund (ETF) – hybrid between open-end and closed-end funds. Shares trade throughout the day, but number of shares not fixed. </li></ul><ul><li>REIT - a closed-end investment company that specializes in investing in mortgages, property, or real estate shares </li></ul>
  7. 7. Investor Returns from Mutual Fund Ownership <ul><li>The return for the investor reflects three aspects of the underlying portfolio of mutual fund assets </li></ul><ul><ul><li>portfolio earns income and dividends on those assets </li></ul></ul><ul><ul><li>experiences capital gains sells an asset at a higher price </li></ul></ul><ul><ul><li>capital appreciation in the underlying values of its existing assets adds to the value of mutual fund shares </li></ul></ul><ul><li>Marked to market - asset and balance sheet values adjusted to reflect current market prices </li></ul><ul><li>NAV - the net asset value of a mutual fund -- equal to the market value of the assets in the mutual fund portfolio divided by number of shares outstanding </li></ul>
  8. 8. Calculation of NAV <ul><li>NAV = Total market value of assets under management </li></ul><ul><li>Number of mutual fund shares outstanding </li></ul><ul><li>Important Note: For open end funds the NAV is calculated once per day based on prices as of 4 pm in New York. </li></ul><ul><li>Market Timing – Rapid trading in and out of open end fund shares to take advantage of stale prices due to once a day calculation of NAV. Market timing is legal, but most funds claimed to discourage it. </li></ul><ul><li>Late Trading – Trading open end fund shares after the NAV has been calculated to take advantage of news released after the cutoff. Late trading is illegal. </li></ul>
  9. 9. Mutual Fund Costs <ul><li>Mutual funds charge shareholders a price or fee </li></ul><ul><li>Two types of fees are incurred by investors </li></ul><ul><ul><li>Load versus No-load Funds </li></ul></ul><ul><ul><ul><li>Load fund - a mutual fund with an up-front sales or commission charge that the investor must pay </li></ul></ul></ul><ul><ul><ul><li>No-load fund - a mutual fund that does not charge up-front sales or commission charges on the sale of mutual fund shares to investors </li></ul></ul></ul><ul><ul><li>Fund Operating Costs </li></ul></ul><ul><ul><ul><li>annual fees charged to cover all fund level expenses experienced as a percent of fund assets </li></ul></ul></ul>
  10. 10. Mutual Fund Costs <ul><li>Expense Ratio – annual fee </li></ul><ul><ul><li>Management fee </li></ul></ul><ul><ul><li>Operating expenses </li></ul></ul><ul><ul><li>12b-1 charge (sales charge) </li></ul></ul><ul><li>Sales Charges (Loads) </li></ul><ul><ul><li>Upfront load </li></ul></ul><ul><ul><li>Deferred Withdrawal Fee (Contingent Deferred Sales Charge) </li></ul></ul><ul><ul><li>12b-1 charge (part of annual expense) </li></ul></ul><ul><li>Trading costs </li></ul>
  11. 11. Load vs No-Load Funds <ul><li>The SEC defines a no-load fund as: </li></ul><ul><ul><li>No upfront load </li></ul></ul><ul><ul><li>No deferred withdrawal fee </li></ul></ul><ul><ul><li>12b-1 charge no greater than 0.25% </li></ul></ul><ul><li>Pure no-load fund </li></ul><ul><ul><li>No upfront load </li></ul></ul><ul><ul><li>No deferred withdrawal fee </li></ul></ul><ul><ul><li>No 12b-1 fee. </li></ul></ul>
  12. 12. Mutual Fund Performance <ul><li>The average mutual fund does not beat the market. At best, they perform well enough to offset costs. Most studies find they don’t even do that. </li></ul><ul><li>While a few funds do better than the market, they are no more than could be expected from pure chance. </li></ul><ul><li>Little evidence that winners repeat. However, some evidence that losers repeat. </li></ul>
  13. 13. Index Funds <ul><li>Mutual Funds that attempt to duplicate the performance of a market index </li></ul><ul><li>Examples of indices: </li></ul><ul><ul><li>S&P 500 </li></ul></ul><ul><ul><li>Wilshire 5000 (total market) </li></ul></ul><ul><ul><li>Bond market </li></ul></ul><ul><ul><li>International stock market </li></ul></ul><ul><li>Advantages </li></ul><ul><ul><li>Low fees </li></ul></ul><ul><ul><li>Above average performance </li></ul></ul>
  14. 14. Exchange Trade Funds (ETFs) <ul><li>Mutual funds with shares that trade throughout trading day like closed end funds. </li></ul><ul><li>Mechanisms designed to keep price close to NAV. </li></ul><ul><li>Examples </li></ul><ul><ul><li>SPDRs </li></ul></ul><ul><ul><li>QQQ – “Cubes” (Nasdaq 100 Index) </li></ul></ul><ul><ul><li>DIAMONDS </li></ul></ul><ul><ul><li>iShares </li></ul></ul><ul><ul><li>HOLDRs </li></ul></ul>
  15. 15. Regulation <ul><li>This industry is heavily regulated to protect investors </li></ul><ul><li>SEC is the primary regulator </li></ul><ul><ul><li>Securities Act of 1933 requires a mutual fund to file a registration statement with the SEC </li></ul></ul><ul><ul><li>Securities Exchange Act of 1934 makes the purchase and sale of mutual fund shares subject to various antifraud provisions and appointed the National Association of Securities Dealers (NASD) to supervise </li></ul></ul><ul><ul><li>Investment Advisers Act and Investment Company Act of 1940 established rules to prevent conflicts of interest, fraud, and excessive fees or charges </li></ul></ul><ul><ul><li>Insider Trading and Securities Fraud Enforcement Act of 1988 requires mutual funds to develop mechanisms and procedures to avoid insider trading abuses </li></ul></ul>
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