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MUTUAL FUNDS
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Marijana Ćurak - University of Split, Faculty of Economics
Academic year 2014/2015
10/23/2014
International Week – New Frontiers in Finance and Accounting 2014
University of Economics in Katowice
Course: Financial Institutions
These lecture slides are based on the
book:
Mishkin F. S., Eakins, S. G. (2012), Financial
Markets + Institutions, Addison Wesley
10/23/2014
Marijana Ćurak - University of Split, Faculty of Economics
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AGENDA
Benefits of mutual funds
Mutual fund structure
Investment objective classes
Fee structure of investment funds
Review points
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TOP TEN MUTUAL FUNDS IN 2013
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Marijana Ćurak - University of Split, Faculty of Economics
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Family
Retail Net Assets
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Fidelity Investments
$984,173,589,258
2
Vanguard Group
$962,331,327,507
3
American Fund
$956,584,547,987
4
Franklin Templeton
Investments
$377,385,331,414
5
T. Rowe Price & Co.
$345,725,591,811
6
Columbia Management
$167,493,529,444
7
Dodge & Cox
$126,826,526,974
8
OppenheimerFund
$125,473,946,434
9
John Hancock Fund
$119,789,419,458
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Pacific Investment
Management Co.
$118,411,876,036
Source:
http://education.howthemarketworks.com/mutual-funds/mutual-funds-
intermediate/largest-mutual-fund-families/
(Accessed: October 13, 2014)
MUTUAL FUNDS
Financial intermediaries that pool the
resources of many small investors by
selling them shares in the fund and using
the proceeds to buy securities
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BENEFITS OF MUTUAL FUNDS
Liquidity
intermediation
Denomination
intermediation
Diversification
Cost
advantages
Managerial
expertise
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LIQUIDITY INTERMEDIATION
Investors can convert their investments
into cash quickly and at a low cost
Mutual funds allow investors to buy and
redeem at any time and in any amount
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DENOMINATION INTERMEDIATION
It allows small investors access to
securities they would be unable to
purchase without the mutual funds
By pooling money, mutual funds can
purchase securities in large denominations
on behalf of investors
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DIVERSIFICATION
Small investors buying stocks individually
may find it difficult to acquire enough
securities in enough different industries to
capture benefit of diversification
Mutual funds provide a low-cost way to
diversify into various securities
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COST ADVANTAGE
Mutual funds negotiate much lower
transaction fees than are available to
individual investors
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MANAGERIAL EXPERTISE
Professional money managers
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MUTUAL FUNDS STRUCTURE
Mutual funds are structured in two ways:
Closed-end fund
Open-end fund
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CLOSE-END FUNDS (1)
A fixed number of nonredeemable shares are
sold at an initial offering and are then traded in
the over-the-counter market like common stock
Once shares have been sold, the fund cannot
take in any more investment money
Thus, to grow the fund managers must start a
whole new fund
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CLOSE-END FUNDS (2)
Investors cannot make withdrawals
The only way investors have of getting
money out of their investment in the fund
is to sell shares
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OPEN-END MUTUAL FUNDS (1)
Investors can contribute to an open-end
fund at any time
The fund simply increases the number of
shares outstanding
The fund agrees to buy back shares from
investors at any time
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OPEN-END MUTUAL FUNDS (2)
Because the fund agrees to redeem shares at
any time, the investment is very liquid
The open-end structure allows mutual funds to
grow unchecked
As long as investors want to put money into the
fund, it can expand to accommodate them
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OPEN-END MUTUAL FUNDS (3)
Each day the fund’s net asset value is
computed based on the number of shares
outstanding and the net assets of the fund
All shares bought and sold that day re
traded at the same net asset value
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NET ASSET VALUE
It is the total value of the mutual fund’s
stocks, bonds, cash, and other assets
minus any liabilities such as fees, divided
by the number of shares outstanding
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INVESTMENT OBJECTIVE CLASSES
Four primary classes of mutual funds are
available to investors:
Stock funds (equity funds)
Bond funds
Hybrid funds
Money market funds
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STOCK FUNDS (EQUITY FUNDS)
They seek rapid capital appreciation
(increase in share prices) and are not
concerned with dividends
Many of these funds are relatively risky n
that the fund managers are attempting to
select companies incurring rapid growth
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BOND FUNDS
Less riskier than stock funds
They invest in corporate bonds,
goverment bonds and municipal bonds
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HYBRID FUNDS
They combine stock and bonds into one
fund
The idea is to provide an investment that
diversifies across different types of
securities as well as across different
issuers of a particular type of security
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MONEY MARKET MUTUAL FUNDS
MMMFs are open-end investment funds that
invest only in money market securities
Most funds do not charge investors any fee for
purchasing or redeeming shares
The funds usually require a minimum initial
investment
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INDEX FUNDS
They contain the stocks in an index
The stock are held in a proportion such that changes to
the fund value closely match changes to the index level
The funds do not require managers to choose securities.
As a result, these funds tend to have lower fees than
other actively managed funds.
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FEE STRUCTURE (1)
The purpose of loads is to provide
compensation for sales brokers
Load funds
Front-end load
The fee is charged when the funds are deposited
Deferred load
The fee is charged when funds are taken out
(usually a declining fee over five years)
The motivation for this fee is to discourage early
withdrawal of deposits
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FEE STRUCTURE (2)
No-load funds
The funds that do not charge a direct load
Most no-load funds can be purchased directly
by individual investors, and no middleman is
required
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FEE STRUCTURE (3)
The usual fees charged by mutual funds
are the following:
A contingent deferred sales charge imposed
at the time of redemption is an alternative
way to compensate financial professionals for
their services
A redemption fee is back-end charge for
redeeming shares
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FEE STRUCTURE (4)
A exchange fee – may be charged when
transferring money from one fund to
another within the same fund family
An account maintenance fee is charged by
some funds to maintain low balance
accounts
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REVIEW POINTS (1)
Mutual funds provide liquidity
intermediation, denomnation
intermediation, diversification, cost
advantages and managerail expertise
Mutual funds can be organized as either
open- or closed-end funds
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REVIEW POINTS (2)
The primary classes of mutual funds are
stock funds, bond funds, hybrid funds and
money market funds
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REFERENCES AND SOURCE OF DATA
Mishkin F. S., Eakins, S. G. (2012), Financial
Markets + Institutions, Addison Wesley, p. 528-
550.
http://education.howthemarketworks.com/mutu
al-funds/mutual-funds-intermediate/largest-
mutual-fund-families/
(Accessed: October 13,
2014)
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