1. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-1 McGraw-Hill/Irwin Chapter Seventeen Mutual Funds

2. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-2 McGraw-Hill/Irwin Mutual Funds Overview Mutual funds are financial intermediaries Enjoy economies of scale Shareholder services At year-end 2004, more than 8,800 mutual funds held total assets of $8.11 trillion Mutual funds are financial intermediaries Enjoy economies of scale Shareholder services At year-end 2004, more than 8,800 mutual funds held total assets of $8.11 trillion

3. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-3 McGraw-Hill/Irwin Historical Trends First mutual fund established in 1924 Advent of money market mutual funds in 1972 as investors looked for ways to earn market rates on short-term funds Tax-exempt money market mutual funds introduced in 1979 Special-purpose equity, bond, emerging market, and derivative funds exploded on the scene during the 1990’s bull market First mutual fund established in 1924 Advent of money market mutual funds in 1972 as investors looked for ways to earn market rates on short-term funds Tax-exempt money market mutual funds introduced in 1979 Special-purpose equity, bond, emerging market, and derivative funds exploded on the scene during the 1990’s bull market

4. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-4 McGraw-Hill/Irwin Growth of the Mutual Fund Market

5. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-5 McGraw-Hill/Irwin Financial Assets of Major Financial Intermediaries, 1990 and 2004 ($Tns)

6. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-6 McGraw-Hill/Irwin Types of Mutual Funds Long Term –Equity funds –Bond funds –Hybrid funds Short Term –Money market mutual funds Long Term –Equity funds –Bond funds –Hybrid funds Short Term –Money market mutual funds

7. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-7 McGraw-Hill/Irwin Number of Mutual Funds, 1980, 1990, 2004

8. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-8 McGraw-Hill/Irwin Mutual Fund Prospectuses and Objectives Regulations require mutual fund managers to specify the investment objectives of their funds in a prospectus The prospectus includes a list of the securities that the fund holds and the investment objectives As of 1998, SEC requires key sections of a fund prospectus to be written in ‘plain’ English Regulations require mutual fund managers to specify the investment objectives of their funds in a prospectus The prospectus includes a list of the securities that the fund holds and the investment objectives As of 1998, SEC requires key sections of a fund prospectus to be written in ‘plain’ English

9. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-9 McGraw-Hill/Irwin Investor Returns from Mutual Fund Ownership The return for the investor reflects three aspects of the underlying portfolio of mutual fund assets –portfolio earns income and dividends on those assets –experiences capital gains sells an asset at a higher price –capital appreciation in the underlying values of its existing assets adds to the value of mutual fund shares Daily marking to market NAV The return for the investor reflects three aspects of the underlying portfolio of mutual fund assets –portfolio earns income and dividends on those assets –experiences capital gains sells an asset at a higher price –capital appreciation in the underlying values of its existing assets adds to the value of mutual fund shares Daily marking to market NAV

10. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-10 McGraw-Hill/Irwin Calculation of NAV; Classes of Funds Calculation of NAV on an Open-End Mutual Fund NAV = Total market value of assets under management Number of mutual fund shares outstanding Open-end mutual fund Closed-end investment companies REIT Calculation of NAV on an Open-End Mutual Fund NAV = Total market value of assets under management Number of mutual fund shares outstanding Open-end mutual fund Closed-end investment companies REIT

11. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-11 McGraw-Hill/Irwin Mutual Fund Costs Mutual funds charge shareholders a price or fee Two types of fees are incurred by investors –Load versus No-load Funds Load fund No-load fund –Fund Operating Expenses Mutual funds charge shareholders a price or fee Two types of fees are incurred by investors –Load versus No-load Funds Load fund No-load fund –Fund Operating Expenses

12. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-12 McGraw-Hill/Irwin Assets in MMMFs, 2004 (in $B)

13. ©2007, The McGraw-Hill Companies, All Rights Reserved 17-13 McGraw-Hill/Irwin Regulation This industry is heavily regulated to protect investors SEC is the primary regulator –Securities Act of 1933 –Securities Exchange Act of 1934 –Investment Advisers Act and Investment Company Act of 1940 –Insider Trading and Securities Fraud Enforcement Act of 1988 –Market Reform Act of 1990 NSMIA of 1996 This industry is heavily regulated to protect investors SEC is the primary regulator –Securities Act of 1933 –Securities Exchange Act of 1934 –Investment Advisers Act and Investment Company Act of 1940 –Insider Trading and Securities Fraud Enforcement Act of 1988 –Market Reform Act of 1990 NSMIA of 1996