21 - Chapter 21 The Mutual Fund Industry The Growth of...

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Chapter 21 The Mutual Fund Industry The Growth of Mutual Funds The First Mutual Funds Benefits of Mutual Funds Ownership of Mutual Funds Mutual Fund Structure Open-versus Closed-end Mutual Funds Organizational Structure Case: Calculating a Mutual Fund’s Net Asset Value Investment Objective Classes Equity Funds Bond Funds Hybrid Funds Money Market Funds Index Funds Fee Structure of Investment Funds Regulation of Mutual Funds Hedge Funds Mini Case: The Long Term Capital Debacle Conflicts of Interest in the Mutual Fund Industry Sources of Conflicts of Interest Mutual Fund Abuses Conflicts of Interest: Many Mutual Funds Are Caught Ignoring Ethical Standard Government Response to Abuses Conflicts of Interest: SEC Survey Reports Mutual Fund Abuses Widespread ± Overview and Teaching Tips Mutual funds have grown rapidly over the last two decades. Their growth has been partly fueled by increases in the number of investors who are responsible for managing their own retirement. The increased liquidity and diversification they provide, among other factors, have also been important. There are currently over 8100 separate mutual funds with $7.1 trillion in net assets. Mutual funds can be organized as either open or closed end funds. Closed end funds issue stock in the fund at an initial offering and do not accept additional funds. Most new funds are organized as open end funds and issue additional shares when new money is received. The net asset value (NAV) of the shares is computed each day. All trades conducted that day are at the NAV.
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120 Mishkin/Eakins • Financial Markets and Institutions, Sixth Edition The primary classes of mutual funds are stock funds, bond funds, hybrid funds, and money market funds. Stock and bond funds can be either actively managed by investment managers or can be structured as index funds that mimic the behavior of some index, such as the S&P 500. Hedge funds attempt to earn returns by trading on deviations between historical security relationships and current market conditions. These funds are not available to small investors. The mutual fund industry has been subject to widely publicized scandals for violating SEC regulations and internal policy. Most abuses centered on market timing and late trading by investors receiving privileged treatment in exchange for large deposits with the funds. Conflicts of interest created by fee structures that reward investment managers more for total assets than for returns are partly responsible.
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21 - Chapter 21 The Mutual Fund Industry The Growth of...

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