|
Types of Mutual Funds.
Following are the two types of Mutual Funds.
1. Closed-End Funds: Closed end fund has a fixed pool of money means it does not sell additional shares of its own stock after the Initial Public Offering. Therefore, their capitalizations are fixed unless a new public offering is made. The shares of a close-end fund trade in the secondary markets like Stock Exchange. To buy and sell the shares of closed-end fund, investor use their brokers paying current sell price plus brokerage commissions.
1. Open-End Funds: Open-end fund’s pool of money is not fixed. It continues to sell shares (units) to investors after the initial sale of shares that starts the fund. The capitalization of an Open-end fund is continually changing-that is, it is open ended- as new investors cash in by selling their shares back to the company.
Benefits of Investing Through Mutual Funds
1. Benefit of Collective Strength:
Mutual Funds allow investors to benefit from collective strength of a group or pool.
1. Benefit of Investment Professional Services:
An average investor is not well versed with the capital markets or may not have access to adequate information to invest successfully or may not have the time to acquire information and analyze it. By investing through mutual funds the investor is able to acquire the services of a team of professional dedicated to the investment business whose cost is spread over the entire pool and thus is at a very low cost for the investor.
1. Benefit of Diversification:
An average investor will normally invest small amounts of money and cannot achieve an adequate level of diversification. An investor of even a small amount in a mutual fund will achieve immediate diversification by becoming part owner of the entire portfolio of a mutual fund.
1. Benefit of very small amount investment opportunity:
An investor who wishes to invest very small amounts, even Rs 5,000/- can do so by investing in mutual fund. The same amount of Rs 5,000/- will not be entertained by any broker in the capital markets which are normally the exclusive domain of the rich and wealthy people.
1. Benefit of Multiple Savings:
If an investor wishes to build up savings of small amounts every month, he does not have to wait to first build up large enough amounts to invest meaningfully. By investing every month in a mutual fund, the investor can make the monthly savings earn and grow as these are accumulated.
1. Benefit of match of Risk taking ability with Investment Opportunity:
Most investors have their own unique risk taking ability. Retired persons will normally have a low risk taking ability. On the other hand younger persons with adequate resources are normally able to take higher risk and should be able to benefit from higher potential rewards. Mutual funds offer different investment styles. Some Mutual fund invest in Stock Market, some invest in debt securities and some in money market. An investor may choose a combination of them according to his risk taking ability.
1. Benefit of Liquidity:
Money invested in mutual funds can be redeemed at any time. There are no penalties for early termination of the investment, which one may have to suffer in the case of term deposits with banks or other savings schemes.
1. Benefit of Less Volatility:
By investing in diversified assets, mutual funds are generally less volatile than the average equities portfolio of an individual investor.
i) Benefit of Regulation Protection:
If one invests in mutual fund he is protected by the government enforced regulation of mutual funds. Securities & Exchange Commission of Pakistan (SECP) is the regulator of mutual funds and is very stringent in issuing licenses to fund management companies. The SECP also carries out continuous monitoring of mutual funds through report that the mutual funds have to file with the SECP on the regular basis.
1. Benefit of protection through Trustee:
In case of unit trust schemes the trustee, who has to be qualified under the law to act as such, offers additional protection by having complete custody over the assets of the mutual fund. The trustee ensures that the fund manager takes the investment decisions within the defined investment policy of the mutual fund. Banks and Central Depository Companies (CDC), approved by SECP, can act as trustees.
Important Concepts:
a. Net Asset Value (NAV):
Net assets are the excess of assets over liabilities of the funds. Net Asset Value (NAV) means per unit value of the funds arrived at by dividing the net assets by the number of units outstanding.
b. Sales Load:
It means the sales and processing charge or commission not exceeding five percent of the offer price. Management company may apply different levels of sales load for different plans.
c. Front End Load:
It means the sales and processing charges as described sales load payable to the management company which is included in the offer price of units.
d. Back End Load:
It means processing charges, not exceeding one eighth of the one percent of redemption price, deducted by the management company from the NAV in determining the redemption price.
e. Redemption Price:
It is the amount to be paid to the relevant holder of a unit upon redemption of that unit.
f. Transaction Costs:
It means the cost incurred or estimated by the management company to cover the costs related to the investing or disinvesting activity of the fund’s portfolio. Such costs may be added to the NAV for determining the offer price of units or be deducted from the NAV in determining the redemption price. The management company may apply transaction costs while determining offer or redemption prices, without consulting the trustee provided the difference between the offer price and the redemption price does not exceed five percent.
g. Re-Investment of Dividend:
Dividends shall be automatically reinvested in additional units, however a unit holder may instruct the management company in writing not to re-invest the future dividends to which he will be entitled. In such a case future dividends shall be paid by way of transfer to his designated bank account. Offer price for the units to be issued will be the NAV on the close f the period for which the dividend is being distributed after appropriation of the income of that year.
MCBAMC as an Asset Management and Investment Advisory Company:
MCB Asset Management Company Limited is an asset management and investment advisory company managing both open and closed end mutual funds. The company is registered with the Securities Exchange Commission of Pakistan (SECP) and regulated under the Non-Banking Finance Companies (NBFC) Rules 2003.
Investment Opportunities for MCB AMC :
1. Benefits of return available from investment in spread transactions:
These are the transactions aimed at earning a spread in the price of shares resulting from the timing difference between ready and future settlement. The buying in the ready settlement market, and the setting in the future settlement market.
2. Investment in short maturity reverse repurchase transactions:
Under the repurchase transactions, an agreement is made between a borrower and a lender (typically institutions) to sell and repurchase government securities. The borrower initiates a repurchase agreement to sell securities to a lender and agreeing to repurchase these securities at a pre-specified price on a stated date. The effective interest rate is given by the difference between the price and the sale price. The maturity of repurchase agreement is very short. Here at the lender’s end reverse repurchase agreement is done.
3. Investment in Debt Securities, Money Market Instruments and CFS:
Debt securities include bonds, TFCs etc. which provides fixed rate on investment but the floating rate TFCs adjust their rate of return according to change in market interest rate.
Money market instruments include treasury bills, certificates of deposits, commercial papers etc. As the risk of debt securities increases with the length of its remaining life, money market instruments are less risky because these are short maturity transactions as compared to debt securities and will come up for reinvestment frequently.
Continuous Funding System (CFS) provides also a god return rate on investments.
|