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The Financial Services Industry: Mutual Funds

Mutual funds pool money from individuals and companies to invest in diversified portfolios. The largest type are open-end funds that continuously issue and redeem shares based on net asset value. Mutual funds generated economies of scale and boomed in the 1990s as stock values rose and they provided a low-cost alternative. They are regulated primarily by the SEC to protect small investors through disclosure requirements and anti-fraud laws.

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Essam Al Bakry
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467 views18 pages

The Financial Services Industry: Mutual Funds

Mutual funds pool money from individuals and companies to invest in diversified portfolios. The largest type are open-end funds that continuously issue and redeem shares based on net asset value. Mutual funds generated economies of scale and boomed in the 1990s as stock values rose and they provided a low-cost alternative. They are regulated primarily by the SEC to protect small investors through disclosure requirements and anti-fraud laws.

Uploaded by

Essam Al Bakry
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT or read online on Scribd
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The Financial

Services Industry

Mutual Funds
Mutual Funds: Definition
 Mutual funds are financial intermediaries
that pool the financial resources of
individuals and companies and invest in
diversified portfolios of assets.

2
Introduction:
 Open-end: this is the major type of mutual
funds.
- It continuously stands ready to sell new
shares to investors and to redeem
outstanding shares on demand at their fair
market value.
- These funds provide opportunities for
small investors to invest in financial
securities and diversify risk.
3
Introduction:
 Mutual funds are able to generate greater
economies of scale by incurring lower
transaction costs and commissions.
 Due to the sharp increase in the value of
financial securities and the availability of a
low-cost alternative (Mutual funds), these
funds boomed in size and customers in
1990’s

4
Historical Trends:
 A large expansion took place in terms of
the funds size, structure, and customers
base.
 Many Commercial bank noticed this
opportunity and started purchasing Mutual
fund companies.
 Banks share of mutual funds reached 14%
by 1997
 By size, Mutual funds are the 2nd most
important FI group
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Size, structure and composition
 First
mutual fund: Boston, 1924.
 Slow growth, initially.
 Advent of money market mutual funds, 1972.
 Regulation Q.
 Total assets in stock and bond mutual funds:
 1940: $0.4 billion.
 1990: $568.5 billion

 2000: $5,120.0 billion.

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Types of Mutual Funds
 Long-term funds (71.0% of assets, 2000)
 Bond and income funds.
- Comprised of fixed-income securities
 Equity funds.

- Comprised of common and preferred stocks


 Hybrid
 Short-term funds (29.0% of assets, 2000)
 Taxable and tax-exempt MMMFs
 Generally higher returns than bank deposits
but uninsured.
7
Importance of Different Mutual
Funds Types
Shares of Different types of Mutual Funds

100%

80%

60% MMMF
Bond & Income
40%
Equity Funds
20%

0%
1985 1990 1997
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Overview of Mutual Funds
 Objectives (and adherence to stated
objectives), rates of return and risk
characteristics vary.
 Examples:
 Aggressive growth funds
 Growth funds
 Precious metals
 World

9
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).

10
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 (Real State Investment Trust).
 May trade at premium or discount.

 Load versus no-load funds.

11
Mutual Fund Costs
 Two types of fees:
 Sales loads
 Generally, negative effect on performance
outweighs benefits
 Fund operating expenses
 Management fee
 12b-1 fees

12
Mutual Fund Share Quotes
 Quotes include:
Fund name, Objective, Minimum
investment required, Asset size,
Maximum initial and exit sales charges,
Annual expenses, NAV, Dividends ,
Quarterly earnings,
One-through five-year rating (A through
E).
13
Balance Sheet and Trends
 Money Market Funds
 Key assets are short-term securities (consistent
with deposit-like nature)
 2000: $1,303.9 billion (71.9% of total assets)
 Many
have share values fixed at $1 and adjust
number of shares owned by the investor.

14
Balance Sheet and Trends
 Long-term Funds
 Stocks comprise over 72.8 % of asset
portfolios in 2000.
 Shift to U.S. Treasuries, municipal bonds etc.
when equity markets not performing as well.

15
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.

16
Legislation
 Securities Act 1933, 1934
 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.
17
Global Issues
 Worldwide growth in mutual fund
investment not as great as in the U.S.
 $1,626 trillion in 1992 to $4,833 trillion in 2000
 200% growth compared to 340% in U.S.
 Largerreturns in U.S.stock markets
 Greatest development in countries with most
developed markets
 Opportunities from declining Japanese
markets
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