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Mutual Funds


A fund is 'mutual' in the sense that all of its returns minus its ... Increase in Nasdaq trading volume in 1999- technology stocks. Increase in online trading ... – PowerPoint PPT presentation

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Title: Mutual Funds

Mutual Funds
  • Definition Financial intermediary through which
    savers pool their monies for collective
    investment, primarily in publicly trades
  • A fund is mutual in the sense that all of its
    returns minus its expenses, are shared by its
  • Returns consist of dividends, realized and
    unrealized capital gains (losses)
  • Expenses consist of advisory fee for servicing
    the shareholders, annual fee for distribution

Mutual Funds Vs. Individual Securities
  • Objective is to maximize return with minimum
  • Efficient Market hypothesis and undervalued
  • Mean reversion in the equity market
  • Individual securities have two main sources of
    risk alpha and beta.
  • Alpha - company specific risk usually accounts
    for 50-70 of securitys price volatility
  • Beta - market risk accounts for 30-50 of price

Recent Trends Between Funds and Securities
  • Review household purchases of equities data
  • Anecdotal evidence - investors are shifting
    toward equity
  • Increase in Nasdaq trading volume in 1999-
    technology stocks
  • Increase in online trading
  • Increase in Separate Accounts or wrap
  • Accounts offered by trust bank/trust dept of a
    commercial bank. Minimum balance was 1m now as
    low as 50,000.

Bond Funds Vs. Individual Bonds
  • Investors are focused on income stream
  • To receive income, investors can buy individual
    bonds - T-bonds, agency bonds, corp. bonds,
    municipal bonds, and hold to their maturity.
    Receive periodic fixed interest payment and
    principal at maturity.
  • Alternatively, receive income stream by buying a
    diversified bond mutual fund. No fixed interest
    payment nor an obligation to pay principal at

Bond Funds Vs. Individual Bonds
  • Higher minimum requirements for individual bonds
    (usually 25,000 T-bonds 1,000). Lot size is
    usually 100,000. One 25,000 bond lacks
  • Cost 2 - 4 of value.
  • Bond mutual fund minimum As low as 1,000. Can
    redeem fund on any business day. Do not have to
    hold till maturity.
  • Fund offers more diversification. Offer
    convenient services, such as monthly income
    payments, compared to quarterly or semi-annually
    for individual bonds

Benefits of Investing in Mutual Funds
  • Diversification Typically lowers ? global fund
    may also lower ?
  • Professional Management Professional
    qualifications (CFA) access to company
    executives in house research team, wall street
  • Lower Transaction Costs Lower admn. cost,
    savings on record keeping, better execution of
  • Convenience Automatic deposits/ withdrawal, tax
    reporting, retirement planning, educational

Disadvantages of Investing in Mutual Funds
  • Need to pay fees/expenses even when fund performs
  • Increased diversification may prevent the chance
    of hitting the jackpot from one security
  • Online trading and security research on the
    internet have reduced the advantage of cost and
    research access
  • Less control over securities portfolio and
    therefore timing of realized capital gains for
    tax purposes.

What Investors Need to Know?
  • Structure and working of a typical fund
  • Roles of various entities involved in operating a
  • Fund Manager, Custodian, distributor, etc.
  • Minimum investment requirement
  • Fees and Expenses
  • Services provided to the shareholders
  • Performance measurements