Mutual Funds
Post on 06-Dec-2015
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What are Mutual Funds? Mutual funds are a type of investment that takes money from many investors and uses it to make investments based on a stated investment objective. Each shareholder in the mutual fund participates proportionally (based upon the number of shares owned) in the gain or loss of the fund.
Types of Mutual Fund There are basically two types of Mutual Funds:
Open-Ended Mutual Funds
Closed-Ended Mutual Funds
Open ended Mutual fund These are mutual funds which continually create new units or redeem issued units on demand. They are also called Unit Trusts. The Unit holders buy the Units of the fund or may redeem them on a continuous basis at the prevailing Net Asset Value (NAV). These units can be purchased and redeemed through Management Company which announces offer and redemption prices daily.
Closed Ended Mutual Fund These funds have a fixed number of shares like a public company and are floated through an IPO. Once issued, they can be bought and sold at the market rates in secondary market (Stock Exchange). The market rate is announced daily by the stock exchange.
Major Market Players
National Investment Trust Ltd.
JS ABAMCO Ltd.
Arif Habib Investment Management Ltd.
Al Meezan Investment management Ltd.
Atlas Asset Management Ltd.
UBL Fund Managers Ltd.
Why do People Invest in Mutual Funds?
Mutual funds offer investors an affordable way to diversify their investment portfolios.
Mutual funds allow investors the opportunity to have a financial stake in many different types of investments.
These investments include: stocks, bonds, money markets, real estate, commodities, etc…
Individually, an investor may be able to own stock in a few companies, a few bonds, and have money in a money market account. Participation in a mutual fund, however, allows the investor to have much greater exposure to each of these asset classes.
Continued Most mutual funds are professionally managed by an investment expert known as a portfolio manager.
This individual makes all of the buying and selling decisions for the fund.
There are thousands of different mutual funds in Pakistan.
This provides investors with many options to help them achieve their investment objectives.
Basic Mutual Fund Categories
Mutual Funds can be divided into four basic categories based upon the funds investment objective.
These categories are:
1. Money Market Mutual Funds
2. Stock Mutual Funds
3. Index Funds
4. Bond Mutual Funds
Money Market Mutual Funds
This is the most conservative type of mutual fund.
The goal is to maintain the $1 value of its shares while providing income.
Invests in high-quality, short-term securities such as certificates of deposit, Treasury Bills, and Treasury Notes.
MMMF’s are an appropriate place for savings.
These funds have typically offered higher interest rates than bank savings accounts.
Stock Mutual Funds Type of fund that invests in stocks. These funds are also known as equity funds. There are many different types of stock mutual funds.
Some of the most common include:Large-cap funds, mid-cap funds, small-cap funds, income funds, growth funds, value funds, blend funds, international funds, and sector funds.
Index Funds Index funds invest in securities to mirror a market index, such as the KSE 100. An index fund buys and sells securities in a manner that mirrors the composition of the selected index. The fund's performance tracks the underlying index's performance
Bond Mutual Funds Type of mutual fund that invests in bonds.
There are different types of bond mutual funds.
Typically, bond mutual funds have the objective of providing stable income with minimal risk.
Mutual Fund Advantages Broad diversification
◦ Diversified stock funds hold large and small company stocks broadly spread across industries and economic sectors
◦ Diversified bond funds hold bonds with different maturities, coupon, and credit quality
Ability to retain professional investment management at a reasonable cost
Investor convenience Many offer “fund family”
Simplicity: Most investors do not have the knowledge, time or resources to build their own portfolio of stocks and bonds. . Stock investors often have extensive often have extensive knowledge with fundamental analysis or technical knowledge with fundamental analysis or technical analysis. However, buying shares of a mutual fund analysis. However, buying shares of a mutual fund enables an investor to own a professionally managed, diverse portfolio with little or no knowledge of investing concepts and strategies.
Accessibility:
With as little as $1,000 an investor can get started investing with mutual funds. However, the beginning investor can easily find easy tips about how to buy mutual funds online or in bookstores and get started investing within minutes or just a few hours
As you grow your portfolio of mutual funds, you will want to diversify into various mutual fund categories and types. You can invest in mutual funds that cover the main asset classes (stocks, bonds, cash) and various sub-categories or you can even venture into specialized areas, such as sector funds or precious metals funds.
Perhaps the greatest benefit of all is that investors can save countless hours of time, energy and frustration involved with the research and analysis required to find quality investments to hold in a portfolio. Mutual funds enable investors to do more of the things in life they enjoy rather than spending time and energy on investment matters.
Mutual Fund Disadvantages
High management fees and sales commissions◦ No-load funds
Volatility can be significant Diversification doesn’t protect investors from the
risk of loss from an overall decline in financial markets
Mutual fund regulation doesn’t eliminate the risk of an investment falling in value
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