1 Mutual Funds Definition: Financial intermediary through which savers pool their monies for collective investment, primarily in publicly trades securities. A fund is “mutual” in the sense that all of its returns minus its expenses, are shared by its shareholders. Returns consist of dividends, realized and unrealized capital gains (losses) Expenses consist of advisory fee for servicing the shareholders, annual fee for distribution (12b-1)

2 Mutual Funds Vs. Individual Securities Objective is to maximize return with minimum risk Efficient Market hypothesis and undervalued securities Mean reversion in the equity market Individual securities have two main sources of risk: alpha and beta. Alpha - company specific risk usually accounts for 50%-70% of security’s price volatility; Beta - market risk accounts for 30%-50% of price volatility.

3 Recent Trends Between Funds and Securities Review household purchases of equities data Anecdotal evidence - investors are shifting toward equity Increase in Nasdaq trading volume in technology stocks Increase in online trading Increase in “Separate Accounts” or “wrap” accounts. Accounts offered by trust bank/trust dept of a commercial bank. Minimum balance was $1m; now as low as $50,000.

4 Bond Funds Vs. Individual Bonds Investors are focused on income stream To receive income, investors can buy individual bonds - T-bonds, agency bonds, corp. bonds, municipal bonds, and hold to their maturity. Receive periodic fixed interest payment and principal at maturity. Alternatively, receive income stream by buying a diversified bond mutual fund. No fixed interest payment nor an obligation to pay principal at maturity.

5 Bond Funds Vs. Individual Bonds Higher minimum requirements for individual bonds (usually $25,000; T-bonds $1,000). Lot size is usually $100,000. One $25,000 bond lacks diversification. Cost : 2% - 4% of value. Bond mutual fund minimum: As low as $1,000. Can redeem fund on any business day. Do not have to hold till maturity. Fund offers more diversification. Offer convenient services, such as monthly income payments, compared to quarterly or semi-annually for individual bonds

6 Benefits of Investing in Mutual Funds Diversification :Typically lowers  ; global fund may also lower  Professional Management: Professional qualifications (CFA); access to company executives; in house research team, wall street research. Lower Transaction Costs: Lower admn. cost, savings on record keeping, better execution of securities. Convenience: Automatic deposits/ withdrawal, tax reporting, retirement planning, educational materials.

7 Disadvantages of Investing in Mutual Funds Need to pay fees/expenses even when fund performs poorly Increased diversification may prevent the chance of “hitting the jackpot” from one security Online trading and security research on the internet have reduced the advantage of cost and research access Less control over securities portfolio and therefore timing of realized capital gains for tax purposes.

8 What Investors Need to Know? Structure and working of a typical fund Roles of various entities involved in operating a fund Fund Manager, Custodian, distributor, etc. Minimum investment requirement Fees and Expenses Services provided to the shareholders Performance measurements