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Unit 23 Mutual Funds

Unit 23 Mutual Funds. What is MF?. I. Introduction of MF.

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Unit 23 Mutual Funds

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  1. Unit 23 Mutual Funds

  2. What is MF?

  3. I. Introduction of MF • Definition of MF-MF is financial intermediary that pool the financial resources of individuals and companies and invest those resources in diversified portfolios of assets. Most MFs are open-end (开放型) MFs, and Some are close-end (封闭型) MFs. • Advantages of MF: (a) it provide opportunities for small investors to invest in financial securities and diversify risks; (b) it enjoys economies of scale by incurring lower transaction costs and commissions. • Current situation of MF in US: Total assets invested in MF increased from $ 0.4 billion in 1940 to $2,637.4 billion in 1996.

  4. II. Historical Trend • The first MF began in Boston in 1924. • From 1970s to now, MF becomes the second most important financial intermediary group in US as measured by asset size. In terms of asset size, MF is larger than the life insurance industry, but smaller than the commercial banking industry.

  5. Long-term MFs (a) Bond and fixed income funds (债券及固定收益基金) (b) Equity funds (股票基金) Short-term MFs (a) Taxable money market mutual funds (缴税货币市场基金) (b) Tax-exempt money market mutual funds (免税货币市场基金) III. Types of MFs

  6. IV. Investors’ Return From MF Ownership • The return for the investor from investing in MF shares (基金份额) reflects 3 aspects of the underlying portfolio （原生资产组合）of MF assets: (a) the portfolio earns incomes and dividends on those assets; (b) it experiences capital gains when the MF sells the assets at price higher than the buying price; (c) capital appreciation in the underlying values (原生价值) of its assets adds to the value of MF shares.

  7. How does MF work?

  8. V. Two Examples of NAV Calculations • Calculations of NAV (基金净值) of an open-end MF: Today, a MF contains 1,000 shares（股份）of Sears, Roebuck currently trading at $56, 2,000 shares of Mobil Oil currently trading at $70.25, and 1,500 shares of Household International currently trading at $120.5. The fund has 15,000 shares（份额）outstanding held by investors. Thus, today, the fund’s NAV is calculated as NAV= (1000 X 56 + 2000 X 70.25 + 1500 X 120.5) ÷ 15000 = $25.15 If next month Sears’ shares increase to $62, Mobil shares increase to $ 78, and Household International’s shares increase to $150, the NAV (assuming the same number of investors) would increase to NAV= (1000 X 62 + 2000 X 78 + 1500 X 150) ÷ 15000 = $29.53

  9. Calculation of NAV of an open-end MF when the number of investors increase: Consider the fact in Example 1, but suppose that today 1,000 additional investors buy the MF at the current NAV of $25.15. This means that the fund manager has $25,150 additional funds to invest. Suppose that the fund manager decides to use the additional funds to buy additional shares of Sears. At today’s market price, the fund manager can buy 449 additional shares ($25150/$56) of Sears. Thus its new portfolio of shares has 1,449 in Sears, 2,000 in Mobil, and 1,500 in Household International. At the end of the month, the NAV of the portfolio: NAV = (1449 X 62 + 2000 X 78 + 1500 X 150) ÷ 16000 = $29.62

  10. Notes: A comparison of the NAVs between Example 1 and Example 2 indicates that the additional investors enabled the fund to gain higher NAV at the end of the month than had the number of investors remained static.

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