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Lecture 22 - Mutual funds - Financial Markets and...

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1 Financial Markets and Institutions Mutual Funds Mishkin&Eakins 6 th ed. Ch. 21. pp. 537-554
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2 Overview What is a mutual fund (MF)? Example MF structure, MF types MF prospectus and shareholder report MF pricing Hedge funds
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3 Mutual Funds Mutual funds pool the resources of many small investors by selling them shares and using the proceeds to buy securities Investor 1 Investor 2 Investor n Mutual fund Security 1 Security 2 Security m
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4 Mutual Fund Structure Closed-end fund (origins): similar to stocks Fixed number of shares Shares have a value and are tradable (but not redeemable) Price is subject to NAV (see below) and demand/supply Big advantage for MF manager: no liquidity risk Open-end fund (most common today) Investors are free to buy and sell shares at any time The value of the share is calculated as the total value of assets divided by the number of outstanding shares
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5 Types of Mutual Funds Equity funds: Capital appreciation funds : seek capital gains, little interest for dividends (high risk) Total return funds : combination of dividends and capital gain (less risky) Industry/geographic equity funds : invest in a given industry (e.g., energy) and/or geographic area (e.g., Europe). World equity funds : allows for international diversification (adds currency risk though).
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6 Types of Mutual Funds Bond funds: Strategic income bonds funds : corporate bonds with higher risk and returns Government bonds funds : close to risk free. Lower returns.
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7 Types of Mutual Funds Hybrid funds: Combines stocks and bonds.
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