MUTUAL FUNDS

TEAM MEMBER

AATAM 13027

ABBAS MANDVIWALA 13210

ATHER AHMED 11344

SHAYAN JAFFERANI 11820

MUHAMMAD ZUBAIR 14772

Introduction

• A mutual fund is a pool of money belonging to a group of investors interested to funds manager hired by the group.

• The fund manager invests money on behalf of the investor. Each investor owns shares, which represent a portion of the holdings of the fund.

 • A mutual fund is a type of professionally managed 

collective investment scheme that pools money from many investors to purchase securities

• They are sometimes referred to as "investment companies" or "registered investment companies.“

•  Hedge funds are not considered a type of mutual fund.

 

You can make money from a mutual fund in three ways: 

1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of the income it receives over the year to fund owners in the form of a distribution. 

2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution. 

3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit. 

HISTORY OF MUTUAL FUNDS• 1774: The first mutual funds were established in Europe. One researcher

credits a Dutch merchant with creating the first mutual fund• 1868: first mutual fund outside Netherlands Foreign & Colonial

Government Trust in London.• 1890: introduced in united states for the first time• 1924: The first open-end mutual fund with redeemable shares was

established by the  Massachusetts Investors Trust• 1929: Stock market crashed • 1934: the Securities and Exchange Commission act• 1950-1970: growth in market and 360 funds with $48 billion in assets• 1976: The first retail index fund, First Index Investment Trust, was formed

by The Vanguard Group.

• 1980 -1990: a bull market for both stocks and bonds, new product introductions

•  2003: the mutual fund industry was involved in a scandal involving unequal treatment of fund shareholder this prompted further regulation

• 2011: there were over 14,000 mutual funds in the United States with combined assets of $13 trillion.

TOP MUTUAL FUNDS

• Vanguard• Fidelity • American Funds (Capital Research)• Black Rock• PIMCO• Franklin Templeton• JPMorgan Chase• State Street Global Advisors• T. Rowe Price• Federated Investors

TYPES OF MUTUAL FUNDS

Open-End Mutual Funds• Redemption is determined by net asset value after adjusting

redemption fee.

• : # of shares issued solely depends on investor demand.

• Bought and sold directly through the investment company (not an

exchange).

• It is Open to the Public.

TYPES OF MUTUAL FUNDSClose-End Mutual Funds

• Issues a fixed number of shares at a given point in time

• Collect money from investors through and IPO and use this money to invest in securities.

• # of securities are fixed at the time of IPO.

• When the market price exceeds its NAV, selling at a premium, otherwise, selling at a discount (closed-end funds typically sell at a discount).

NET ASSET VALUE• Net asset value (NAV) is the value of the assets held by a mutual

fund, divided by the number of shares. • NAV: per share value of a mutual fund’s investment holding.

Example

A mutual fund has $100 mil in assets and $3 mil in short term liabilities. 10.765 mil shares outstanding. What is the NAV?

Solution

($100 mil - $3 mil) / 10.765 mil = $9.0107 per share

gOutstandin Shares of #

sLiabilitie Portfolio Assets of ValueMarket NAV

OTHER TYPES OF MUTUAL FUNDS

• Money Market Fund• Income Funds• Income and Growth Funds• Balanced Funds• Growth Funds• Index Funds• Sector Funds• Specialized Funds• Islamic Funds

1. Money Market fund

• A money market fund is an open-ended mutual fund that invests in short-term debt securities such as Treasury bills.

• Money market funds are widely regarded as being as safe as bank deposits yet providing a higher yield.

• Highly liquid, basic and conservative.• Low return as low risk.• Equal or higher to banks earnings.

2. INCOME FUNDS

• An income fund is a mutual fund whose goal is to provide an income from investments.

• Income funds are more accurately called equity income funds.• Typically these hold stocks with a good history of paying

dividends. In fact, a typical income fund holds both stocks and bonds, to gain some of the strengths of both.

• The point in any case is that the investor is more interested in income than capital gains, perhaps with the intention the fund will never be sold.

3. GROWTH & INCOME FUNDS• A mutual fund that has a dual strategy of capital appreciation

(growth) and current income generation through dividends or interest payments.

• This is done by investing primarily in the common stock of companies that have had not only increasing share value, but also a solid record of paying dividends.

• Growth and income funds are popular among investors with moderate (but not excessive) appetites for risk

4. BALANCED FUNDS

• Fund’s that has three investment objectives: conserve the investors’ principal, pay steady income and promote long-term growth of both principal and income

• It’s a mutual fund that consists of a combination of common stock, preferred stock, bonds, and short-term bonds.

• Such diversified holdings ensure that these funds will manage downturns in the stock market without too much of a loss.

• Balanced funds will usually increase less than an all-stock fund during a bull market

5. GROWTH FUNDS• A diversified portfolio of stocks that has capital appreciation as its

primary goal, with little or no dividend payouts.• Portfolio companies would mainly consist of companies with above-

average growth in earnings that reinvest their earnings into expansion, acquisitions, and/or research and development.

• They offer higher potential capital appreciation but usually at above-average risk.

• Growth funds are more volatile than funds in the value and blend categories.

• Companies in this portfolio are in an expansion phase and are not expected to pay dividends.

• Investing in growth funds requires a tolerance for risk and a holding period with a time horizon of five to 10 years.

6. INDEX FUNDS

• A type of mutual fund with a portfolio constructed to match or track the components of a stock market, such as the Karachi stock exchange (KSE100).

• An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.

7. SECTOR FUNDS

• A closed-end fund that invests solely in businesses that operate in a particular industry or sector of the economy.

• As the holdings of this type of fund are in the same industry, there is a natural lack of diversification associated with these funds..

• These funds tend to increase substantially in price when there is an increased demand for the product or service offering provided by the businesses in which the funds invest.

• On the other hand, if there is a downturn in the specific sector in which a sector fund invests, the fund will often face heavy losses

as a result of the lack of diversification in its holdings.

8. SPECIALIZED FUNDS

• A mutual fund investing primarily in the securities of a particular industry, sector, type of security or geographic region.

• Because of the lack of diversification, specialized funds are higher risk but potentially higher reward than most other types of mutual funds. also called specialty fund.

• Resemble with sector fund.• The major difference is the type of securities that make up the

fund's portfolio. For example, the portfolio may consist of common stocks only, foreign securities only, bonds only, new stock issues only, over - the - counter securities only.

9. ISLAMIC FUNDS

• This form of investment is made in different instruments to be in line with the Islamic Shariah Rules.

• The Fund is generally to be governed by an Islamic Shariah Board.

• There is a purification process that needs to be followed, as some of the money lying in reserve may gain interest, which is not desirable in case of Islamic investments.

RISKS IN MUTUAL FUND INVESTING

There are various risk level of the various types of mutual funds.

• Low Level Risks• Moderate level Risks• High Level Risks• Measuring Risks

FIGURES• LOW-LEVEL RISK

CONSERVATIVE PORTFOLIO • 50% Government. Treasury Bill Funds

50% Money Market Funds•  • MODERATE-LEVEL RISK

CAUTIOUSLY AGGRESSIVE PORTFOLIO •

40% Growth & Income Funds30% Government. Bond Funds20% Growth Funds10% Index Funds

•  • HIGH-LEVEL RISK

AGGRESSIVE PORTFOLIO •

25% Aggressive Growth Funds25% International Funds25% Sector Funds15% High Yield Bond Funds

MUTUAL FUNDS IN PAKISTAN

• In Pakistan, open-end mutual funds were introduced in 1962.

• In 1966, closed-end mutual funds were introduced.

• Following are the list of Pakistan's largest 10 mutual fund providers:

1. Al-Meezan Mutual Fund2. Asian Stocks Fund 3. Atlas Fund of Funds 4. Dominion Stock Fund

5. First Capital Investment ltd Mutual Fund 6. First Dawood Fund7. Golden Arrow8. Meezan Balanced Fund

9. JS Growth Fund10. Pakistan Premier Fund

Advantages of Mutual Funds

1. Mutual Funds Offer Diversification.

2. Mutual Funds are Professionally Managed.

3. Mutual Funds Come in Many Varieties.

4. Mutual Funds Have Low Minimums.

5. Investing and Withdrawals with Mutual Funds.

6. Mutual Funds Offer Reinvestment.

7. Mutual Funds Offer Transparency.

8. Mutual Funds Are Liquid.

9. Mutual Funds Have Audited Track Records.

10.Safety of Investing in Mutual Funds.

Disadvantages of Mutual Funds

1. Professional Management

2. Dilution

3. Capital Gain Tax

4. Cost