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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

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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

1

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

10

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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Marijana Ćurak - University of Split, Faculty of Economics

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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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Marijana Ćurak - University of Split, Faculty of Economics

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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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Marijana Ćurak - University of Split, Faculty of Economics

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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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Marijana Ćurak - University of Split, Faculty of Economics

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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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Marijana Ćurak - University of Split, Faculty of Economics

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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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Marijana Ćurak - University of Split, Faculty of Economics

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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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Marijana Ćurak - University of Split, Faculty of Economics

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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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Marijana Ćurak - University of Split, Faculty of Economics

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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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Marijana Ćurak - University of Split, Faculty of Economics

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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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