Slide 1Chapter OutlineChapter Outline (cont’d)Background on Mutual FundsBackground on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Computing the NAVBackground on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Background on Mutual Funds (cont’d)Stock Mutual Fund CategoriesStock Mutual Fund Categories (cont’d)Stock Mutual Fund Categories (cont’d)Bond Fund CategoriesBond Fund Categories (cont’d)Performance of Mutual FundsPerformance of Mutual Funds (cont’d)Performance of Mutual Funds (cont’d)Performance of Mutual Funds (cont’d)Money Market FundsMoney Market Funds (cont’d)Hedge Funds1Chapter 23Mutual Fund Operations2Chapter OutlineBackground on mutual fundsStock mutual fund categoriesBond fund categoriesGrowth and size of mutual fundsPerformance of mutual fundsMutual fund scandals3Chapter Outline (cont’d)Money market fundsHedge fundsReal estate investment trustsInteraction with other financial institutionsUse of financial marketsGlobalization through mutual funds4Background on Mutual FundsMutual funds:Serve as a financial intermediary by pooling investments by individual investors and using the funds to accommodate financing needs by governments and corporations in the primary marketFrequently invest in securities in the secondary marketProvide an important service for individuals who wish to invest funds and diversifyOffer liquidity if they are willing to repurchase an investor’s shares upon requestOffer various different services, such as transfers between funds and check-writing privileges5Background on Mutual Funds (cont’d)A mutual fund hires portfolio managers to invest in a portfolio of securities that satisfies the desires of investorsThe portfolio composition is adjusted in response to changing economic conditionsThe board of directors:Monitors managementEstablishes proceduresEnsures that the fund is properly serving its shareholdersUnder new SEC rules, a majority of board members must be outsiders6Types of fundsOpen-end funds:Are open to investment from investors at any timeAllow investors to purchase or redeem shares at any timeHave a constantly changing number of sharesMaintain some cash in case redemptions exceed investmentsConsist of many different categories to satisfy investors’ investment needsBackground on Mutual Funds (cont’d)7Types of funds (cont’d)Closed-end funds:Do not repurchase shares they sellRequire investors to sell the shares on a stock exchangeHave a constant number of outstanding sharesHave an asset size that is about 1/40th of the asset size of open-end fundsFocus primarily on bonds and other debt securitiesBackground on Mutual Funds (cont’d)8Types of funds (cont’d)Exchange-traded funds:Are designed to mimic particular stock indexes and are traded on a stock exchangeDiffer from open-end funds in that their shares are traded on an exchange, and their share price changes throughout the dayConsist of a fixed number of sharesAre not actively managedHave become very popular in recent yearsTypically do not have capital gains and losses that must be distributed to shareholdersBackground on Mutual Funds (cont’d)9Types of funds (cont’d)Hedge funds:Sell shares to wealthy individuals and financial institutions and use the proceeds to invest in securitiesDiffer from open-end funds because:They require a much larger initial investmentThey may not always accept additional investments or accommodate redemptionThey are unregulated and provide very limited information to prospective investorsThey invest in a wide variety of investments to achieve high returnsBackground on Mutual Funds (cont’d)10Comparison to depository institutionsMutual funds repackage the proceeds from individuals to make various types of investmentsInvesting in mutual funds represents partial ownershipInvestors share the gains or losses generated by the fundBackground on Mutual Funds (cont’d)11Information contained in a prospectusThe minimum amount of investment requiredThe investment objectiveThe return on the fund over the past year, the past three years, and the past five yearsThe exposure of the fund to various types of riskThe services offered by the fundThe fees incurred by the find that are passed on to investorsBackground on Mutual Funds (cont’d)12Estimating the net asset valueThe net asset value (NAV) of a mutual fund indicates the value per shareEstimated each day by determining the market value of all securities comprising the fund, adding interest or dividends, and subtracting expenses, then dividing by the number of shares outstandingBackground on Mutual Funds (cont’d)13Computing the NAVPhilly Mutual Fund has 50 million shares issued to its investors. It used the proceeds to buy stock in 100 different firms. These shares have a market value of $100 million. In addition, Philly incurred $7,000 in expenses today and collected interest and dividends totaling $5,000. What is the net asset value per share?$2.00000/50,000,0$99,998,00,000,000$7,000)/50-$5,000000($100,000,shares of rfund/numbe of value Marketvalue asset Net14Distributions to shareholdersMutual funds generate returns to shareholders in three ways:They pass on earned income as dividend paymentsThey distribute capital gains resulting from the sale of securities within the fundMutual fund share price appreciationMutual fund classificationsStock mutual funds, bond mutual funds, or money market mutual funds (see next slide)Background on Mutual Funds (cont’d)15Background on Mutual Funds (cont’d)Distribution of Investment in Mutual Funds50%27%6%17%Stock FundsMoney Market FundsHybrid FundsBond Funds16Expenses incurred by shareholdersMutual funds pass their expenses on to their shareholdersExpenses can be compared among mutual funds by comparing the expense ratioEqual to annual expenses per share divided by the NAVThe higher the expense ratio,