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.

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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.
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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

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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.
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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

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

 Load versus no-load funds.

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

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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).
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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.

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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.

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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
 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.
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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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