MUTUAL FUNDS, WEEK 7
Chapters 1.4, 4, and 24.7; Homework: 4-2, 4, 5, 6, 10, 12, 16, 18.
MUTUAL FUND OBJECTIVES—FACTS VERSUS REALITY
WHY FUNDS DON’T DELIVER; 7 REASONS AND THEIR CON-
TYPES OF FUNDS & CHARACTERISTICS:
CLOSED END vs. OPEN
CALCULATE NET ASSET VALUES
BUT FIRST A COMMENT ABOUT---
In Chapter 1.4, your text discusses briefly the concept of financial intermediation
in the context of mutual funds.
This is a very important concept which merits
Mutual funds created a way by which people with modest wealth could obtain a
well diversified portfolio.
There is no question that funds greatly assisted the
growth in such retirement programs as IRAs and 401-Ks.
But they performed another significant development as well years earlier:
In the 1960s you could buy Treasury Bills directly from the Federal Reserve in
multiples of $1,000.
Because banks and S/Ls had interest rate ceilings placed upon
them by the Federal Government, when inflation began and interest rates rose,
people withdrew their deposits from banks and S/Ls and began buying T-Bills.
Because there was no such thing as a money market mutual fund then, I was forced
to teach my clients how to subscribe to the Federal Reserve to buy T-bills.
Rather than fight inflation, the Lyndon Johnson administration directed the minim-
um bid for T-bills to be raised to $10,000, although you could continue to buy
notes and bonds for $1,000.
Later, when interest rates fell, the minimum was
lowered to return to $1,000.
Ultimately, during the Carter administration, interest
rates rose and the $10K minimum bid was reinstated, but only for T-bills.
That single act created the money market mutual fund industry.
The $10K minim-
um bid for T-bills created a financial
, and the money market
fund created a financial
, ultimately creating havoc in the banks.