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MUTUAL FUNDS BY waqas hassan
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4. Mutual funds:
A company/corporation that pools money from many
investors and invest the money in securities such
as stocks, bonds and short term debts.
The combine holdings of a mutual fund are known
as its portfolio.
Investors who buy shares in mutual funds become
entitled to ownership in the fund and the income
it generates.
5. Stock market crash……
History of mutual funds:
An integral part of financial activity in American life.
Mind boggling one third of the families in the United States
invest in mutual funds.
From 1980-2008 worth of mutual funds grew from $134
billion to $ 9 trillion.
The first kind of unit trust was formed in England in 1868.
In 1924 unit investment trust was established in US.
Around that time open ended and closed ended become
popular.
Market crash in 1929.
Congress in US initiated SEC study and report on the
function and activities of investment trust and investment
companies.
Report found outright thefts.
Congress decided to enhance disclosure scheme of securities
Act of 1933 and to regulate operation of funds.
6. The first mutual fund scandal 1960
Reasons:
Duplicity of advisory fee.
Measure like amendment of section 12(d/1) of investment company Act was pursued which obligated
investment advisor to have reasonable fee and governing the investment by the investing companies.
Money market mutual fund surfaced in 1970’s.
The second scandal: 2003-2009
Reasons
Improper trading activities, undisclosed compensation arrangement related to brokers in distribution.
High fee and expenses.
Improper sales practices.
7. Steps taken:
Mutual fund would disclose the portfolio holding for the whole
month on the funds website.
Funds must acquaint SEC regarding portfolio holdings
and certain other information on monthly basis.
Dodd-frank Act: July 2010
Bounties for “whistle-blowers”.
Short form prospectus revealing information about the
fund objectives, nature, goal etc.
8. Mutual funds in Pakistan
In Pakistan mutual funds were introduced in 1962.Initially public offering of “National
Investment Trust” were offered which is an open ended mutual fund.
In 1966 another fund known as Investment Corporation of Pakistan was established. It
offered a series of closed ended mutual fund.
In 1994 -1995 more funds were lunched in private sector.
Rules :
There are two rules which govern mutual funds in Pakistan ,these are:
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1. Investment companies and investment advisor’s rule 1971
(govern close ended mutual funds).
1. Asset management companies rule 1995
(govern open ended mutual funds)
9. Reasons for low success of mutual funds in Pakistan
Controlled by public sector initially.
Lack of awareness.
Education.
Distribution ineptitude.
Low saving by the people for investment.
Structure of mutual funds/key players:
Sponsor:
Akin to promoter of the company
Contribution of minimum 40% of net worth of AMC
Posses a sound financial report over 5 years period
Establishes the fund
Gets it register with SECP
Appoints board of directors
10. Board of directors:
Care takers of share holder’s money.
2/3 of the BODs shall be independent
persons not associated with the sponsor.
Ensures whether the system, process
and personnel are in place.
Resolve unit /share holders’ grievances.
Appoints AMC and custodian and ensure
all the activities are in accordance with
the SECP regulation.
Custodian:
Holds the fund securities in safe keeping.
All mutual funds use a qualified bank
custodian.
Asset management company/investment advisor:
Floats investment schemes only after receiving prior approval from BOD’s
and SECP.
Make the required disclosure to the investors in area such as calculation of
NAV and re-purchase price.
Must maintain a minimum worth Rupees 10 crore at all times.
Cannot act as a trustee/BOD of any other mutual fund.
11. Distributor or underwriter:
Mutual funds usually distributes their share
through underwriter who continuously offer
new shares to the public.
Transfer agent:
Employed ,by mutual fund for record
keeping.
Calculating and disbursing dividend, tax
information.
Independent public accountant:
They certify fund’s financial statements.
12. Types of mutual fund On the basis of structure
A. Open ended fund
Typically called mutual funds which continuously offer new shares to investor unless
a fund become too large.
It has no secondary market
By law they are required to redeem outstanding shares at any time upon a share
holder request on a price based upon ‘net asset value’
The investor could buy only the shares through the fund or its outlet and not in an
open market.
Examples of Open Ended Mutual Funds
National Investment Trust (NIT) in public sector
Pakistan Stock Market Fund (PSM)
Pakistan Income Fund (PIF)
Unit Trust of Pakistan (UTP)
UTP Islamic Fund
United Money Market Fund (UMMF)
Dawood Money Market Funds (DMMF)
Atlas Income Fund (AIF)
Meezan Islamic Fund (MIF)
13. CLOSEED END FUNDS:
Are open initially for 45 days during IPO.
A fund where fixed number of shares are issued on
exchange or over the counter.
Exchange determines the price of share.
Example of closed end funds:
Asian Stocks Fund
First Capital Mutual Fund
Golden Arrow Stock Fund
Investec Mutual Fund
Pakistan Premier Fund
Pakistan Capital Mkt Fund
Prudential Stock Fund
Safeway Mutual Fund
Tri-Star Mutual Fund
Difference B/W open and closed end funds:
The main difference is that in closed end mutual funds
they are exchanged in open market like other
common shares.
While open end mutual market fund sell their share to
investors and stand ready to buy back their share only
through the fund, and its shares could not be
exchanged on exchange. Open ended funds doesn’t
have shares limit where as closed ended funds have
limited number of shares.
14. Categories of mutual funds:
SECP the regulator has categorized the scheme of mutual fund as under:
1). Equity scheme:
An equity scheme or equity fund is a fund that invests in equities more commonly
known as stocks. The objectives of an equities fund is long term growth through
capital appreciation.
Although dividends and capital gain realized are also source of revenue of a Mutual
fund.
2). Fixed income funds:
These funds invests in the area that pay a fixed rate of return like government
bonds, corporate bond etc.
They aim to have money coming to their fund on a regular basis ,mostly through the
interest that the fund earns.
15. 3). Balanced scheme:
These funds provide investors with a single mutual fund that invest in both stocks
and debt instruments and with this diversification aimed at providing investors
with growth through investments in stocks and income from investment through
debt instruments.
4). Asset allocation fund:
These funds may invest in assets in any type of securities at any time in order to
diversify its assets across multiple type of securities and investments style
available in market.
5). Fund of fund scheme:
Fund of fund are those funds which invest in other mutual funds. The fund
operate in diverse portfolio of equity, balanced fixed income and money market
funds.
17. 7). Money market scheme:
Money market fund are the safest and the
most stable of all of the different type of
mutual funds.
These funds invest in short term debts
instruments such as T-bills , commercial
papers.
18. Other funds
Diversified funds:
A fund which invest funds in diverse sector of economy
i.e. in various sectors.
Sector funds:
A fund which invest in a particular sector such as health or technology
etc.
Domestic funds:
These funds mobilize resources from a particular geographical locality.
Market is limited to the boundaries of the nation in which the funds operates.
Gilt funds:
Those funds which only invest in central and state government securities.
Offshore funds:
These funds attract outside investors and also invest in security abroad e.g.
Zaffar and associates trust
19. Myths about mutual funds:
Mutual funds invest only in shares
Mutual funds are prone to very high risk trade
Mutual funds are very new in financial markets
Mutual funds are not reliable, people rarely invest in
them
The good thing about mutual funds that you don’t
have to pay attention to them.
20. Advantages of mutual funds:
Low risk
Professional management of investment
Low cost of investment
Diversification
Various type of schemes
Scope of good returns
Easy liquidity
Tax benefits
Provides transparency