Financial Markets, Banking, and Monetary Policy

CHAPTER 18 Mutual Funds

WHAT YOU WILL LEARN IN THIS CHAPTER

• How mutual funds have become second in size only to commercial banks.
• The difference between open-end, closed-end, and exchange-traded funds.
• How the industry is regulated.
• Why open-end funds are dominated by large mutual fund complexes offering a variety of different investment products.
• Why large-cap equity funds have become a popular product of both open-end and exchange-traded funds (ETFs).
• How open-end fund shares are priced and traded.
• What is meant by money market mutual funds “breaking the buck” and why the pricing of money market mutual funds has prompted financial stability concerns.
• Why ETFs have been growing faster than other funds in recent years.
• What is the specialized role of closed-end funds.
• How mutual funds are involved in the transmission of monetary policy.

BACKGROUND

In just a couple of decades, the mutual fund sector transformed from being a small, backwater financial industry to becoming a big gorilla in financial markets. During the 1970s, assets of mutual funds were below $100 billion and there were fewer than 10 million shareholder accounts. A decade later, industry assets had soared to $1 trillion and the number of accounts exceeded 60 million. As we entered the new millennium, mutual fund assets had jumped to $7 trillion and the number of accounts reached nearly 250 million. The odds are decent that you currently are an investor in mutual funds. Indeed, you may own shares in more than ...