McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Funds and Other Investment Companies CHAPTER 4.

Slides:



Advertisements
Similar presentations
4 Mutual Funds and Other Investment Companies Bodie, Kane, and Marcus
Advertisements

Chapter 8 Investment Co. indirect investment types fees objectives regulation ETFs indirect investment types fees objectives regulation ETFs.
CHAPTER 4: INVESTMENT COMPANIES.  Definition: financial intermediaries that collect funds from individual investors and invest those funds in a potentially.
Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.
FINA 2802: Investments and Portfolio Analysis Institutional Investing Dragon Yongjun Tang January 28 & February 2, 2010.
Investment companies –Financial intermediaries that collect funds form individual investors and invest those funds in a potentially wide rande of securities.
Ch. 4 Mutual funds and other investment companies
Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 4.
Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapters 4.
P.V. VISWANATH FOR A FIRST COURSE IN INVESTMENTS.
1 Chapter 15 – Mutual Funds Pool money from investors with similar objectives and purchase a diversified portfolio run by a professional manager –Shares.
13 Investing in Mutual Funds Mutual Fund = an investment vehicle offered by investment companies to those who wish to: –Pool money –Buy stocks, bonds,
1 1 Ch4 – MBA 567 Mutual Funds and Investment Companies Services of Investment Companies Types of Investment Companies Types of Mutual Funds Cost of Mutual.
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Funds and Other Investment Companies CHAPTER 4.
1 Chapter 15 – Mutual Funds Pool money from investors with similar objectives and purchase a diversified portfolio run by a professional manager –Shares.
Vicentiu Covrig 1 Mutual funds Mutual funds (see Ch. 16 Hirschey and Nofsinger)
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Funds and Other Investment Companies CHAPTER 4.
Mutual Funds and Other Investment Companies Chapter 4.
McGraw-Hill /Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Seventeen Mutual Funds.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 2004 McGraw-Hill Ryerson Ltd. Kapoor Dlabay Hughes Ahmad Prepared by Cyndi Hornby, Fanshawe College Chapter 13 Investing in Mutual Funds 13-1.
1 Investment Companies Chapter 3 Jones, Investments: Analysis and Management.
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Vicentiu Covrig 1 Mutual funds Mutual funds. Vicentiu Covrig 2 Diversification Professional management Low capital requirement Reduced transaction costs.
Investments Vicentiu Covrig 1 Mutual Funds ( chapter 4)
Bodie Kane Marcus Perrakis RyanINVESTMENTS, Fourth Canadian Edition Copyright © McGraw-Hill Ryerson Limited, 2003 Slide 4-1 Chapter 4.
Investment Companies  What are they?  Financial intermediaries that invest the funds of individual investors in securities or other assets.
Department of Banking and Finance SPRING Mutual Funds and Other Investment Companies by Asst. Prof. Sami Fethi.
© 2013 Pearson Education, Inc. All rights reserved.15-1 Chapter 15 Mutual Funds: An Easy Way to Diversify.
13-1. McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved. 13 Investing in Mutual Funds.
Mutual Funds.
Mutual Funds and Other Investment Companies Chapter 4 Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
CHAPTER 13: INVESTING IN MUTUAL FUNDS
CHAPTER 20 Investment Companies. Copyright© 2003 John Wiley and Sons, Inc. Investment Funds Purchase direct, long term, capital market securities and.
Copyright  2002 by Harcourt, Inc. All rights reserved. CHAPTER 13: INVESTING IN MUTUAL FUNDS Clip Art  2001 Microsoft Corporation. All rights reserved.
Chapter 14 Investing in Mutual Funds Copyright © 2012 Pearson Canada Inc
Indirect Investing.
Mutual Funds and Other Investment Companies Chapter 4.
PROFESSIONAL ASSET MANAGEMENT 1. Basic Categories Private Management: Clients each have a separate account {popular with institutions} Investor 1 Investor.
Vicentiu Covrig 1 Indirect Investing Indirect Investing (see Ch. 3 Jones)
©2007, The McGraw-Hill Companies, All Rights Reserved 17-1 McGraw-Hill/Irwin Chapter Seventeen Mutual Funds.
Mutual Funds. Objectives WHAT IS A MUTUAL FUND? HOW DO MUTUAL FUNDS OPERATE? HOW MUCH DOES MUTUAL FUND INVESTING COST? HOW SHOULD MUTUAL FUND PERFORMANCE.
Indirect Investing Chapter 3
Mutual Funds and Hedge Funds Chapter 4 Risk Management and Financial Institutions 2e, Chapter 4, Copyright © John C. Hull
Mutual Funds (page 76 through 85) ACE 444. Mutual Funds (Net Asset Value) Mutual fund has 10 million shares $215 million of market valuation value (end.
PROFESSIONAL ASSET MANAGEMENT. Basic Categories Private Management: Clients each have a separate account {popular with institutions} Investor 1 Investor.
INVESTMENTS Lecture 11 Investment Companies and ETFs.
Mutual Funds and Hedge Funds
Mutual Funds and Other Investment Companies Chapter 4 Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
Chapter 4 Mutual Funds and Other Investment Companies.
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Funds and Other Investment Companies CHAPTER 4.
McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Funds and Other Investment Companies CHAPTER 4.
Mutual Funds and Other Investment Companies
Essentials of Investments © 2001 The McGraw-Hill Companies, Inc. All rights reserved. Fourth Edition Irwin / McGraw-Hill Bodie Kane Marcus 1 Chapter 4.
Contemporary Investments: Chapter 4 Chapter 4 MUTUAL FUNDS What is a mutual fund and how do mutual funds operate? How much does mutual fund investing cost?
INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 4 Mutual Funds and.
3-1 Chapter 3 Charles P. Jones, Investments: Analysis and Management, Tenth Edition, John Wiley & Sons Prepared by G.D. Koppenhaver, Iowa State University.
Mutual Funds and Other Investment Companies Chapter 4 Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Mutual Funds and Other Investment Companies 4 Bodie, Kane, and.
Chapter 11 Investment Companies. Closed-end Open-end (commonly called a mutual fund)
CHAPTER 4 Investments Mutual Funds and Other Investment Companies Slides by Richard D. Johnson Copyright © 2008 by The McGraw-Hill Companies, Inc. All.
Mutual funds (see Ch. 16 Hirschey and Nofsinger)
4 Mutual Funds and Other Investment Companies Bodie, Kane, and Marcus
Mutual Funds and Other Investment Companies
Mutual Funds and Other Investment Companies
Mutual Funds and Other Investment Companies
Mutual Funds and Other Investment Companies
Chapter 3 Jones, Investments: Analysis and Management
Mutual Funds and Other Investment Companies
Mutual Funds and Other Investment Companies
Presentation transcript:

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Funds and Other Investment Companies CHAPTER 4

INVESTMENT COMPANIES

4-3 Investment Companies Investment companies are financial intermediaries that collect funds from individuals and invest those funds in a wide variety of securities and other assets. Functions include: Administration & record keeping Diversification & divisibility Professional management Reduced transaction costs

4-4 Investment Companies: Net Asset Value Net Asset Value –Used as a basis for valuation of investment company shares –Selling new shares –Redeeming existing shares Calculation: Market Value of Assets - Liabilities Shares Outstanding Shares Outstanding

TYPES OF INVESTMENT COMPANIES

4-6 Unit Trusts Pools of money fixed for the life of the fund Little active management

4-7 Managed Investment Companies: Open-End and Closed-EndOpen-End –Sold at Net Asset Value (NAV) –Number of outstanding shares changes when new shares are sold or old shares are redeemed Closed-End –Sold at premium or discount to NAV –No change in outstanding shares unless new stock is offered

4-8 Figure 4.1 Closed-End Mutual Funds

4-9 Other Investment Organizations –Commingled funds: partnerships of investors pooling their funds. –REITs: similar to closed-end fund; invests in real estate or loans secured by real estate. Equity trusts invest directly in real estate Mortgage trusts invests in mortgage and construction loans –Hedge Funds: usually structured as private partnership; escapes many SEC regulations. Typically only open to ‘wealthy’ or institutional investors. Lock-up provisions (sometimes 1 year) Compensation to manager usualy based on sharing profits.

MUTUAL FUNDS

4-11 Investment Policies Described in the prospectus Management companies manage a family of mutual funds. Some examples include: –Fidelity –Vanguard –Putnam –Dreyfus

4-12 Types of Mutual Funds Money Market: invest in commercial paper, repurchase agreements, certificates of deposit. Try to maintain NAV of $1 per share. Equity: invest in stocks Specialized Sector Bond: invest in bonds

4-13 Types of Mutual Funds Balanced Funds: Hold both equities and fixed-income securities Asset Allocation and Flexible: Change mix of equities/bonds depending on manager’s view of market. Market timing occurs. Indexed International: duh…

4-14 Table 4.1 Mutual Funds by Investment Classification

4-15 How Funds Are Sold Directly marketed: e.g. Vanguard Sales force distributed: e.g. American Funds Revenue sharing on sales force distributed funds: funds pay fee to brokerage for preferential mention –Potential conflicts of interest –It must be disclosed to the investor Financial supermarkets

COSTS OF INVESTING IN MUTUAL FUNDS

4-17 Fee Structure –Front-end load: commission or sales charge paid when you purchase the fund –Back-end load: commission or sales charge paid when you sell the fund Operating expenses: admin costs, advisory fees 12 b-1 charges –distribution costs paid by the fund –Alternative to a load Fees and performance

4-18 Example 4.1 From Text

4-19 Fees and Mutual Fund Returns

4-20 Fees and Mutual Fund Returns: An Example Initial NAV = $20 Income distributions of $.15 Capital gain distributions of $.05 Ending NAV = $20.10:

4-21 Table 4.2 Impacts of Costs on Investment Performance

4-22 Trading Scandal with Mutual Funds Late trading – allowing some investors to purchase or sell after the market closes Market timing – allowing investors to buy or sell on stale net asset values –International Net effect is to transfer value from other shareholders to privileged traders –Reduction in the rate of return of the mutual fund

4-23 Potential Reforms Strict 4:00 PM cutoff with late orders executed the following trading day Fair value pricing with net asset values being adjusted for trading in open markets Imposition of redemption fees

TAXATION OF MUTUAL FUND INCOME

4-25 Taxation of Mutual Fund Income Investor directed portfolios can be structured to take advantage of taxes while mutual funds cannot High turnover leads to tax inefficiency More disclosure on taxes was required in 2000

EXCHANGE-TRADED FUNDS

4-27 Exchange Traded Funds ETF allow investors to trade index portfolios like shares of stock Examples – SPDRs (Standard & Poor’s Depository Receipt), Diamonds (DJIA ETF), and WEBS (World Equity Benchmark Shares) Potential advantages –Trade continuously –Lower taxes –Lower costs Potential disadvantages –Price can depart (slightly) from NAV –Purchase requires payment of broker’s fee plus bid/ask spread

MUTUAL FUND INVESTMENT PERFORMANCE: A FIRST LOOK

4-29 Mutual Fund Performance Evidence shows that average mutual fund performance is generally less than broad market performance Evidence suggests that over certain horizons some persistence in positive performance –Evidence is not conclusive –Some inconsistencies

4-30 Figure 4.2 Diversified Equity Funds Versus Wilshire 5000 Index

4-31 Table 4.4 Consistency of Investment Results

INFORMATION ON MUTUAL FUNDS

4-33 Sources of Information Wiesenberger’s Investment Companies Morningstar ( Yahoo (finance.yahoo.com/funds) Investment Company Institute Popular press Investment services