Chapter 17 Mutual Funds and Hedge Funds
Chapter 17
1. Why are mutual funds popular with individual investors?
Able to enjoy economies of scale by incurring lower transaction costs and commissions. Provide opportunities for small investors to invest in a liquid and diversified portfolio of financial securities.
2. What is the purpose of index funds? How does this differ from other equity mutual funds? Why are index funds growing in popularity? Index funds are funds in which managers buy securities in proportions similar to those included in a specified major index. Index funds involve little research or management, which results in lower management fees and higher returns than actively managed funds. Actively managed funds turn over their holdings rapidly.
3. How are money market mutual funds similar to and different from bank deposits?
Both investments are relatively safe and earn short-term returns. The major difference is that the interest-bearing deposits (below 100,000) are fully insured by the FDIC but because of bank regulatory costs (reserve requirements, capital adequacy requirements, deposit insurance premiums) generally offer lower returns than on insured MMMFs. Net gain in switching to MMMfs is higher return in exchange for loss of FDIC insurance coverage.
4. What are the four main categories of mutual fund trading abuses mentioned in the text? Explain the problem with each.
Market timing: short-term trading of mutual funds that seeks to take advantage of short-term discrepancies between the price of a mutual fund’s shares and out-of-date values on the securities in the fund’s portfolio. Such as buying Asian mutual fund that closed low but expects to rebound the next day, well a US investor can buy the low mutual fund and sell high the next day
Late trading: investors were able to buy or sell mutual fund shares long after the price had been set at 4:00 p.m. Eastern time each day. Some are allowed as late as 9p.m. to change or cancel order after markets close.
1. Why are mutual funds popular with individual investors?
Able to enjoy economies of scale by incurring lower transaction costs and commissions. Provide opportunities for small investors to invest in a liquid and diversified portfolio of financial securities.
2. What is the purpose of index funds? How does this differ from other equity mutual funds? Why are index funds growing in popularity? Index funds are funds in which managers buy securities in proportions similar to those included in a specified major index. Index funds involve little research or management, which results in lower management fees and higher returns than actively managed funds. Actively managed funds turn over their holdings rapidly.
3. How are money market mutual funds similar to and different from bank deposits?
Both investments are relatively safe and earn short-term returns. The major difference is that the interest-bearing deposits (below 100,000) are fully insured by the FDIC but because of bank regulatory costs (reserve requirements, capital adequacy requirements, deposit insurance premiums) generally offer lower returns than on insured MMMFs. Net gain in switching to MMMfs is higher return in exchange for loss of FDIC insurance coverage.
4. What are the four main categories of mutual fund trading abuses mentioned in the text? Explain the problem with each.
Market timing: short-term trading of mutual funds that seeks to take advantage of short-term discrepancies between the price of a mutual fund’s shares and out-of-date values on the securities in the fund’s portfolio. Such as buying Asian mutual fund that closed low but expects to rebound the next day, well a US investor can buy the low mutual fund and sell high the next day
Late trading: investors were able to buy or sell mutual fund shares long after the price had been set at 4:00 p.m. Eastern time each day. Some are allowed as late as 9p.m. to change or cancel order after markets close.