BUS 362 Financial Institutions and Markets

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BUS 362 Financial Institutions and
Markets
Week 14: Financial Institutions: Mutual Funds &
Venture Capital
Assoc. Prof. Hülya Hazar
Faculty of Economics and Administrative Sciences, Department of
Business Administration
[email protected]
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Financial Institutions and Markets
1. Mutual Funds
2. Venture Capital
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Financial Institutions and Markets
Mutual Funds
• Resource: pool the resources of many small investors
• How: by selling shares of the mutual fund to the investors
• Where: using the proceeds to buy securities.
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Financial Institutions and Markets
Principal benefits of mutual funds
• Liquidity intermediation:
• investors can quickly convert investments into cash.
• Denomination intermediation:
• investors can participate in equity and debt offerings that,
individually, require more capital than they possess.
• Diversification:
• investors immediately realize the benefits of
diversification even for small investments
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Financial Institutions and Markets
Principal benefits of mutual funds
• Cost advantages:
• the mutual fund can negotiate lower transaction fees than
would be available to the individual investor.
• Managerial expertise:
• many investors prefer to rely on professional money
managers to select their investments.
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Financial Institutions and Markets
Mutual Fund Organization
• The shareholders, or owners, of the mutual fund are the
investors.
• The board of directors oversees the fund’s activities, hires
the investment advisor, an underwriter, etc., to manage the
day to day operations of the fund.
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Financial Institutions and Markets
• Financial institutions usually offer a number of different types
of mutual funds.
• Investors may buy or redeem shares at any point, where the
price is determined by the net asset value of the fund.
• Net Asset Value (NAV): Total value of the mutual fund’s
stocks, bonds, cash, and other assets minus any
liabilities such as accrued fees, divided by the number of
shares outstanding
• Fees are charged by mutual funds’ administration
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Financial Institutions and Markets
Primary classes of mutual funds available to investors:
• Stock (equity) funds
• Bond funds
• Hybrid funds
• Money market funds
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Financial Institutions and Markets
Stock Funds
• Other than investing in common equity, the stated objective
of any particular fund can vary dramatically.
• Capital Appreciation Funds seek rapid increase in share
price, not being concerned about dividends.
• Total Return Funds seek a balance of current income and
capital appreciation.
• World Equity Funds invest primarily in foreign firms.
• Other types in Value, Growth, a particular
industry, etc.
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Financial Institutions and Markets
Bond Funds
• Invest primarily in bonds
• Government bonds:
• issued by the Treasury
• bears risk-free interest rate
• Corporate bonds:
• issued by corporations
• higher interest rate
• for investors seeking a high level of income
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Financial Institutions and Markets
Hybrid Funds
• Combine stocks and bonds into a single fund.
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Financial Institutions and Markets
Money Market Mutual Funds
• invest only in money market securities
• the securities in the money market are short term with high
liquidity; therefore, they are close to being money.
• money market instruments:
• Treasury Bills
• Repurchase Agreements
• Negotiable Certificates of Deposit
• Commercial Paper
• Banker’s Acceptance
• Eurodollars
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Financial Institutions and Markets
Hedge Funds
• A special type of mutual fund
• Different from typical mutual funds, as follows:
• High minimum investment, averaging around $1 million
• Long-term commitment of funds is required
• High fees: typically 1% of assets plus 20% of profits
• Highly levered
• Little current regulation
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Financial Institutions and Markets
Conflicts of Interest in the Mutual Fund Industry
• Investor confidence in the stability and integrity of the mutual
fund industry is critical.
• However, the control on the part of fund management may
lead to abuses.
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Financial Institutions and Markets
Venture Capital
• Definition:
1.
The investment carries high risks.
2.
The investment is innovative, and has potential for growth and
expansion.
3.
One of the shareholders should be a venture capital company.
4.
It is a medium or long term funding until the company can sell
its stocks in the capital markets.
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Financial Institutions and Markets
The stages of venture capital
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Creation of a pool: Finding investors to fund the business.
2.
Investment of the capital: Choosing the sector to invest,
management and sources of funds, and planning the investment.
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Growth: The venture capital firm provides funding as a shareholder.
Also, it provides management support and act like a financial
intermediary for the growth of the firm.
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Exiting from the investment: The company’s economic growth
reaches to the point that its shares can be sold in the stock market.
The venture capital company sells its shares. The difference between
the amount of funding and the income received from the sale of the
shares is the profit of the venture capital firm.
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Financial Institutions and Markets
Advantages
• It is a long term funding.
• Small to medium size companies can find this type of
funding.
• New investments are financed.
• Professional management support is received.
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Subjects Covered
1. Mutual Funds
2. Venture Capital
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References
Readings:
Chapters 20 and 22
Reference Book:
Mishkin, Frederic S. Financial Markets and Institutions. Eighth Edition.
UK: Pearson, 2016.
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Financial Institutions and Markets
See you next week…
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