Mutual Fund - Banking - Lecture Slides, Slides of Banking and Finance

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MUTUAL FUND

 are financial intermediaries that pool the resources of many small investors by selling them shares and using the proceeds to buy securities. 

ADVANTAGES OF M UTUAL FUNDS

 Diversification

 Risk reduction by diversifying the portfolio of securities.

 Economies of Scale

 Volume discounts on brokerage commissions and lower transaction costs in purchasing securities.

 Liquidity

 Allowable to convert into cash at any time.

 Simplicity

 Buying a mutual fund is easy!

M UTUAL FUNDS GROWTH

 Large increase in their market share since 1980.

 Specialize in debt instruments which first

appeared in 1970s.

 before 1970, mutual funds invested almost solely

in common stocks.

 80% of mutual funds are held primarily by

households.

 In 1960, only 6% of household held mutual funds

shares.

 In recent years, 6% has been increased to around

CONCERNS ABOUT SOVEREIGN WEALTH FUNDS

 Sovereign Wealth Funds:

• 1 st^ concern: the size of these funds increases.
• 2 nd^ concern: Using these investments for political

purposes.

• 3 rd^ concern: Lack of transparency. This is why

organizations like the International Monetary Fund

(IMF) and the Organization for Economic Co-

operation and Development (OECD) proposed

rules to increase the amount of informations.

STRUCTURE OF M UTUAL FUNDS

 Open-end Fund: can be redeemed at any time

at a price that is tied to the asset value of the

fund.

 Closed-end Fund: is a publicly traded

investment company that raises a fixed amount

of capital through an initial public offering

(IPO). The fund is then structured, listed and

traded like a stock on a stock exchange.

M ONEY M ARKET M UTUAL FUNDS

o An open-end mutual funds which invests

only in money markets.

 These funds invest in short term (one day to

one year) debt obligations such as Treasury

bills, certificates of deposit, and commercial

paper.

Writing checks on the fund’s account is

allowed.

 The biggest risk is that inflation will outpace

the funds’ returns.

GOVERNMENT INVOLVEMENT IN FINANCIAL

I NTERMEDIATION

 In two basic ways

 1) Setting up Federal credit agencies that directly engage in financial intermediation

 2) Supplying government guarantees for private loans

FEDERAL CREDIT AGENCIES

 Was created in order to Promote Residential housing, the government has created a number of government agencies that provide funds directly or indirectly to the mortgage market.

GOVERNMENT INVOLVEMENT IN AGRICULTURE

 The Farm Credit System(Farm Credit Banks, various farm credit associations)

 Federal Agricultural Mortgage Corporation issue securities and then use the proceeds to make loans to farmers.

M ORAL HAZARD PROBLEM

 Government backing of GSE debt led to banking crises in the 1980s and the early 1990s.

 Reason was government in effect guarantees GSE debt, market discipline to limit excessive risk taking by GSEs is quite weak.

V ENTURE C APITAL F UNDS

 A venture capital fund make investment in new start-up business, often in technology industry. Most venture capital funds have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. Venture capital firms are very important in driving the economic growth in recent years because they have funded so many successful hi- tech firms like APPLE and Microsoft.

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P RIVATE E QUITY

Private equity is money invested in companies that are not publicly traded on a stock exchange nor invested as part of buyouts of publicly traded companies in order to make them private companies. Private equity fund is a pooled investment vehicle used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. Private equity funds includes:

venture capital funds Capital buyout funds

S UMMARY

 Both venture capital and capital buyout funds have been highly profitable. Venture capital funds make investments in start ups, and capital buyout funds make investments in established companies, often taking publicly traded firms private.

FINANCE COMPANIES

 Acquire funds by issuing commercial paper or stocks and bonds or borrowing from banks.  They use the proceeds to make loans that are particularly well suited to consumer and business needs.  They borrow in large amounts and lend in small amounts. Different from banking institutions which collect deposits in small amounts and then often make large loans.  They lend to many of the same customers that borrow from banks but they are unregulated compared to commercial banks and thrift institutions.  There are regulations on the amount they can loan to individual consumers and the terms of debt contract.  No restrictions on how they pursue branching, the assets they hold, or how they raise their funds.  This is why they can tailor their loans to customer needs better than banking institutions.