CHAPTER 20 The Mutual Fund Industry 537

SUMMARY
1. Mutual funds have grown rapidly over the past two Stock and bond funds can be either actively managed
decades. The growth has been partly fueled by the by investment managers or structured as index funds
increase in the number of investors who are responsible that contain the securities in some index, such as the
for managing their own retirement. Increased liquidity S&P 500.
and diversification, among other factors, have also been 4. Hedge funds attempt to earn returns by trading on
important. There are currently about 7,500 separate deviations between historical relationships among
mutual funds with over $13 trillion in net assets. securities' prices and current market conditions.
2. Mutual funds can be organized as either open- or closed- 5. The mutual fund industry has been subject to
end funds. Closed-end funds issue stock in the fund at widely publicized scandals for violating SEC regu-
an initial offering and do not accept additional funds. lations and internal policy. Most abuses centered
Most new funds are organized as open-end funds and on market timing and late trading by investors
issue additional shares when new money is received. receiving privileged treatment in exchange for
The net asset value (NAV) of the shares is computed large deposits with the funds. Conflicts of interest
each day. All trades conducted that day are at the NAV. created by fee structures that reward investment
3. The primary classes of mutual funds are stock funds, managers more for total assets than for returns are
bond funds, hybrid funds, and money market funds. partly responsible.

KEY TERMS
closed-end funds, p. 520 hedge funds, p. 530 no-load funds, p. 528
deferred load, p. 528 load funds, p. 528 open-end fund, p. 520
diversification, p. 517 net asset value (NAV), p. 521

QUESTIONS
1. What features of mutual funds and the investment are 25 years old and starting to save for your retire-
environment have led to mutual funds’ rapid growth ment? Which option would you choose if you are 55
in the past two decades? and are starting to save for your retirement?
2. Suppose that you can deposit at most $300 per month 8. Considering the evolution of mutual funds fees over
for your savings and that you want to buy securities that the past 20 years, would you say that competition
are available only in large denominations. What benefit among mutual funds has been a good thing or not?
of mutual funds would be particularly attractive to you? 9. What distinguishes the investing strategies of hedge
3. After reading Chapter 6, William realizes that there is funds from those of mutual funds?
no point in paying fees to mutual fund managers for 10. What prompted the growth of money market mutual
them to choose which stock or securities to buy for funds?
him. However, after carefully reviewing his decision,
11. Recall that under the provisions of the Dodd-Frank
he decides to buy shares in a mutual fund. Could you
Act of 2010, systemically important financial institu-
explain the reasons behind his final decision?
tions (SIFIs) are required to maintain capital reserves
4. What was the role of hedge funds in the global finan- (potentially up to 8% of the fund’s assets). Explain
cial crisis of 2007–2009? the impact on mutual funds’ performance if they are
5. Discuss why a mutual fund family may find it ben- designated as SIFIs.
eficial to offer 50 or 60 different stock mutual funds. 12. What is the primary source of the conflict of interest
6. How does an index fund differ from an actively man- between shareholders and investment managers?
aged fund? 13. Distinguish between mutual fund investments and
7. Suppose a mutual fund advertises a yearly return investments in shares on the stock market.
of 12%, for which it charges an upfront fee (a per- 14. Compare the performance of mutual funds to a
centage of your initial investment). Another fund savings account.
advertises the same return, but it charges a 3% fee
15. What regulatory changes have been adopted or are
each year. Assuming both funds can achieve the 12%
being considered to deal with abuses in the mutual
advertised return, which one would you choose if you
fund industry?

www.rasabourse.com