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Subject:
BUSINESS FINANCE
Submitted By:
Amir Shahzad
Submitted To:
Date:
15-11-2011
Mutual Funds
A mutual fund is a collective investment scheme, which specializes in investing a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. A fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus. One of the main advantages of funds is that they give small investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which would be quite difficult (if not impossible) to create with a small amount of capital. The income earned through these investments and the capital appreciations realized are shared by its unit holders in proportion to the number of units owned by them. Open-ended fund units are issued and can typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share whereas closed-end funds are listed on the stock exchanges and can be freely traded. Types of Mutual Funds (By Structure) Funds can be open-ended funds or closed-end funds depending on their structure. Open-ended Funds These funds are in a continuous process of issuing shares/ units on demand and redeeming shares/ units on demand. The shares/ units do not trade on a market. The number of shares/ units outstanding varies each time the net asset valuation calculation is carried out, which is daily for most open-ended funds. Closed-end Funds Closed-end funds issue a specific number of shares. Their capitalization is fixed. The shares are not redeemable, but are readily transferable and traded on either a stock exchange or the overthe-counter market. The price of a closed-end fund share fluctuates based on investor supply and demand. Closed-end funds are not required to redeem shares and have managed portfolios. Types of Mutual Funds (By Objective) Open-ended or closed-end funds can be of several types; however the most basic classifications are stock funds, income funds, hybrid funds or specialty funds. Further classifications evolve as each fund pursues diverse investment strategies for instance: Islamic Equity Funds, Sector Funds, Global Equity Funds, High Yield Debt Funds, Aggressive Equity Funds, Income Funds and so on. 1. Money Market Funds The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your principal. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD). 2. Income Funds A type of mutual fund that emphasizes current income, either on a monthly or quarterly basis, as divergent from targeting capital appreciation. These funds hold a variety of government, municipal and corporate debt obligations, preffered stock, money market instruments and dividend paying stocks.
3. Hybrid Funds Hybrid funds invest in both bonds and stocks or in convertible securities. Balanced funds, asset allocation funds, target date or target risk funds and lifecycle or lifestyle funds are all types of hybrid funds. Hybrid funds may be structured as funds of funds, meaning that they invest by buying shares in other mutual funds that invest in securities. Most fund of funds invest in affiliated funds (meaning mutual funds managed by the same fund sponsor), although some invest in unaffiliated funds (meaning those managed by other fund sponsors) or in a combination of the two. i. Balanced Fund Mutual funds that combine investments in shares, shortterm and longterm bonds in pursuit of income gains and capital appreciation while avoiding excessive risk. These are also called hybrid funds. The idea behind this concept is to provide investors with a single mutual fund that combines inco me and growth objectives, by investing in both stocks and bonds. Due to diversification, these funds are less volatile with moderate correlation with market. ii. Assets Allocation Funds This type of mutual fund invests in a variety of securities in multiple asset classes with the object ive of carrying out asset allocation typically by itself. The rationale is to provide investors with s uitably diversified holdings and consistent returns. Generally, asset allocation funds are less volat ile usually with correlation of almost 1 with the market. 4. Specialty Funds This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don't necessarily belong to the categories we've described so far. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy. 5. Sector funds Sector funds are targeted at specific sectors of the economy such as financial, technology, health, etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have to accept that your sector may tank. 6. Global/International Funds An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere around the world, including your home country 7. Islamic Funds A type of fund which entirely invests in Shariah compliant instruments. Islamic funds exist in almost all the forms discussed earlier. Each fund invests in its respective areas of interest keeping in view the rules of Shariah compliance. The volatility of each kind of Islamic fund depends on its category and also the relationship with the market in which it operates.
Basic Structure
Mutual Funds are operated by Asset Management Companies (AMC) which exists in the form of a corporation, owned by its shareholders. The AMC launches new funds through the establishment of a Trust Deed, entered between the Asset Management Company and the Trustee, which in most cases is the Central Depository Company of Pakistan Limited, with due approval from the SECP under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (the Rules). The CDC performs the functions of the custodian and trustee, whereas the AMC can act as the registrar or can appoint an external registrar. Banking/ financial companies maybe authorized to act as distributors/ sales agents. The Board of Directors must also approve and appoint a legal advisor and auditor for legal and compliance affairs.
1. Liquidity
Liquidity gives the investor the ability to readily access his money in an investment. Fund shares are liquid investments that can be sold on any business day. Funds are required by law to buy, or redeem, shares each business day. The price per share at which you can redeem shares is known as the funds net asset value (NAV). NAV is the current market value of all the funds assets, minus liabilities, divided by the total number of outstanding shares.
2. Diversification
Funds allow investors to diversify their investment portfolio automatically by holding a wide variety of securities. Moreover, since the assets are pooled with other investors, a fund allows greater diversification at a fraction of the cost than would otherwise be probable for a single investor portfolio.
3. Variety
The fund industry in Pakistan is still in a development phase, yet it offers investors a wide variety of fund types to choose from, depending on their investment objectives. Fund types include pure equity, money market or debt funds or hybrid funds like fixed and variable asset allocation funds or benchmark funds which pursue a certain index. These categories continue to grow as the investor needs become more complex.
1. Credit Risk
Potential that an investment (specifically fixed-income securities) will go down when assigned a negative rating (downgraded) by a reputable credit rating service.
2. Default Risk
Risk associated with an issuer of a debt instrument that may not have the financial ability to meet regular interest payments or is incapable of repaying the debt at maturity.
4. Interest Risk
Risk resulting from increased interest rates in the market place, that the income earned from an original investment will not be worth as much as the going market rates.
5. Liquidity Risk
Risk inability to sell a security reasonably quickly at the prevailing market price or convert an asset into cash as quickly as possible.
6. Political Risk
Risk potential for changes in government to impact the value of an investment. It may also include policy changes made by governments.
Category
Money Market Income Islamic income Equity Aggressive Fixed Income Index Tracker Equity Islamic Equity Islamic Capital Protected Fund Islamic Money Market Islamic Equity Islamic Income Islamic Income Equity Money Market Aggressive Fixed Income Islamic Asset Allocation Asset Allocation Fund Money Market Asset Allocation IncomeJanuary Equity Islamic Income Income Income Balanced Capital Protected Money Market Aggressive Fixed Income Income Islamic Asset Allocation Equity Equity Equity
JS Investments Limited
JS Aggressive Asset Allocation JS Aggressive Income Fund JS Cash Fund JS Fund of Funds JS Income Fund JS Islamic Fund JS KSE 30 Index Fund JS Large Cap Fund JS Principal Secure Fund 1 Unit Trust of Pakistan
Category
Equity Islamic Balanced Fund Fund of Funds Balanced Equity Equity Equity Balanced Income Equity Equity Equity Equity equity
JS Investments Limited
JS Growth Fund JS Value Fund Limited