Stocks Bonds Cash Total value of assets Liabilities Net worth Outstanding shares $35,000,000 $15,000,000 $3,000,000 $53,000,000 –$800,000 $52,200,000 15 million




The Growth of Mutual Funds Mutual Fund Structure Investment Objective Classes Fee Structure of Investment Funds Regulation of Mutual Funds Hedge Funds Conflicts of Interest in the Mutual Fund Industry
NAV = $52,200,000/15,000,000 = $3.48
Mutual Fund Structure

Closed-End Funds: a fixed number of nonredeemable shares are sold through an initial offering and are then traded in the OTC market. Price for the shares is determined by the net asset value and supply and demand forces. Open-End Funds: investors may buy or redeem shares at any point, where the price is determined by the net asset value of the fund.
The Revenue Act of 1936 established guidelines for the taxation of mutual funds. The Investment Company Act of 1940 governs the structure mutual funds.


Laws Related to Mutual Funds

The Securities Act of 1933 requires that all investments sold to the public, including mutual funds, be registered with the Securities and Exchange Commission (SEC) and that they provide prospective investors with a prospectus that discloses essential facts about the investment.
1.
Disadvantages

The disadvantages of mutual funds include:



Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize

Growth of Mutual Funds in U.S.

Ownership in mutual funds has changed dramatically over the last 20 years

In 1980, only 5.7% of households held mutual fund shares In the beginning of 2010, that number was 45%


Vanguard
Fidelity American Funds (Capital Research & Management) Black Rock PIMCO Franklin Templeton JPMorgan Chase State Street Global Advisors


T. Rowe Price
Federated Investors
Calculating a Mutual Fund’s Net Asset Value

Net Asset Value (NAV) Definition: Total value of the mutual fund’s stocks, bonds, cash, and other assets minus any liabiivided by the number of shares outstanding
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We study why mutual funds have become so popular, the various types of mutual funds, their regulation, and scandals in the mutual fund industry. Topics include:

The Securities and Exchange Act of 1934 requires that issuers of securities, including mutual funds, report regularly to their investors; this act also created the SEC, which is the principal regulator of mutual funds.

Growth of Mutual Funds in U.S.

Assets held by mutual funds have grown by over 17.5% per year for the last 20 years, reaching over $10 trillion. 25% of the retirement market and almost 45% of all U.S. households hold stock via mutual funds.
Growth of Mutual Funds
Growth of Mutual Funds (a)
Growth of Mutual Funds (b)
Mutual Fund Structure

Investment companies usually offer a number of different types of mutual funds (called complexes).
Financial Markets and Institutions:
Mutual Funds and Hedge Funds
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Suppose you wanted to start savings for retirement, but you can only afford to invest $100 / month. How do you develop a diversified portfolio?

Assets under management, number of funds, and number of accounts all have increased substantially The next four slides show the time series of these trends.
Mutual Funds

A mutual fund is a professionally-managed collective investment vehicle that pools money from many investors by selling them shares and then uses the funds to invest in securities according to prespecified investment objective and approach in its prospectus. Investors, like shareholders of a company, take the loss and gain proportional to their investment.
Mutual Fund Structure: the Organization


In U.S., the price is set once a day at 4:00 PM eastern time

Exchange-Traded Funds (ETFs): combine characteristics of both closed-end and open-end funds.
Growth of Mutual Funds in U.S.

The first mutual fund similar to the funds of today was introduced in Boston in 1824.
The stock market crash of 1929 set the mutual fund industry back because small investors avoided stocks and distrusted mutual funds. Congress passed a series of acts regulating the securities markets in general and mutual funds in particular.