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CHAPTER 23

CHAPTER 23. Mutual Fund Operations. CHAPTER 23 OVERVIEW. This chapter will: A. Explain how characteristics vary among mutual funds B. Describe the various types of stock and bond mutual funds C. Describe the characteristics of money market funds. What is a mutual fund?.

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CHAPTER 23

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  1. CHAPTER 23 Mutual Fund Operations

  2. CHAPTER 23 OVERVIEW This chapter will: A. Explain how characteristics vary among mutual funds B. Describe the various types of stock and bond mutual funds C. Describe the characteristics of money market funds

  3. What is a mutual fund? • Mutual fund is an investment company that sells shares and uses the proceeds to manage a portfolio of securities. • 8,000 mutual funds

  4. Exhibit 1.4 Asset Sizes of Financial Institutions (in Billions of Dollars) Source: Board of Governors, Federal Reserve System, 2007.

  5. Advantage of Mutual Funds 1. Diversification for small investors 2. Professional managers 3. Other services such as check-writing

  6. Types of Funds a. Open-End Funds b. Closed-End Funds c. Exchange Traded Funds looks like a stock, mimic stock indexes examples: Cube, Spider, Diamond ETFs d. Hedge Funds less regulated, high risk

  7. Regulation • Investment Company Act of 1940 • Securities and Exchange Commission (SEC) • State laws

  8. How to find information of a mutual fund? 1. Prospectus: mini amount of investment, investment objective, past returns, services, fees, managers name, etc. 2. Annual shareholder report: investment return of the past year, holding composition, total net assets, risk, etc. 3. Other documents

  9. Net Asset Value (NAV) NAV indicates the value per share. It is the total market value of the portfolio subtracted by any expenses and divided by the number of shares of the fund outstanding.

  10. Mutual Fund classifications • Equity funds • Bond funds • Money market fund • Hybrid funds

  11. Characteristics of Mutual Funds 1. Expenses Incurred by Shareholders: expense ratio 2. Sales Load a)no-load b)frond-end load c)back-end load 3. Distribution fees:12b-1 Fees

  12. Governance of Mutual Funds • Mutual fund and its custodian (fund family) • Board of directors and fund family • Late trading • Window-dressing

  13. Types of Equity Mutual Funds 1. Growth Funds 2. Capital Appreciation Funds 3. Growth and Income Funds 4. International and Global Funds 5. Specialty Funds 6. Index Funds 7. Fund of Fund

  14. Types of Bond Mutual Funds 1. Income Funds 2. Tax-Free Funds 3. High-Yield (Junk) Bond Funds 4. International and Global Bond Funds 5. Others

  15. Money Market Funds (MMFs) • Allow check-writing with restrictions on the number of checks written per month. • Low level credit risk and interest rate risk.

  16. Exhibit 23.8 Composition of Taxable Money Market Fund Assets in Aggregate Source: 2007 Mutual Fund Fact Book.

  17. Exhibit 23.6 Distribution of Aggregate Mutual Fund Assets Source: 2007 Mutual Fund Fact Book.

  18. Mutual Funds Performance a. Change in Market Conditions b. Change in Sector Conditions c. Change in Management Abilities Questions: Do you believe that most fund managers have investment skills?

  19. Hedge Fund Characteristics a. 9000 hedge funds b. $2 trillion c. invest in derivative securities, short selling, use borrowed funds to invest. d. Hedge Fund Fees ( 1-2% management fee over fund asset and 20% incentive fees over the return) e. registered with SEC.

  20. Real Estate Investment Trust (REIT) • REIT is a closed-end mutual fund that invests in real estate or mortgages. It generate income fro shareholders by passing through rents on real estate or interest payments on mortgages. Most REITs can be sold on stock exchanges.

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