Mutual Funds Chapter 4

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

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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

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Overview of Mutual Funds

• Objectives, rates of return, and risk
  characteristics vary.
• Examples
• Aggressive growth funds
• Growth funds
• Precious metals
• International
• Ginnie Mae

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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).

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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.

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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.

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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.

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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.

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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.