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Learn About Mutual Funds

MUTUAL FUND

A mutual fund is a company that pools the money of a number of investors — its unitholders – to invest in a variety of different securities.

Investments may be in stocks, bonds, money market securities or some combination of these. Those securities are professionally managed on behalf of the unitholders, and each investor holds a pro rata share of the portfolio — entitled to receive income in the form of dividend distributions, or any profits when the securities are sold, but subject to any losses in value as well.

1. How Funds Can Earn Money for You

You can earn money from your investment in following ways:

  • Dividend Payments
    A fund may earn income in the form of dividends and interest on the securities in its portfolio. The fund may pay its unitholders nearly all of the income (minus expenses) it has earned in the form of dividends.
  • Capital Gains Distributions
    The price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors.
  • Increased NAV
    If the market value of a fund’s portfolio increases after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases. The higher NAV reflects the higher value of your investment.

2. Types of Mutual Funds

There are different types of mutual funds with different objectives and levels of growth potential and investors may invest according to their target returns and risk appetite.

There are two broad categories of Mutual Fund

  • Close End Mutual Fund
    These types of Funds are no more working is Pakistan. All of the close end funds were converted into open end funds as per directive of Securities and Exchange Commission of Pakistan (“SECP”).
  • Open End Mutual Fund
    A type of entity that continuously offers its units for sale and purchase. The investments or redemption of units can be made directly from the Asset Management Company or their authorized representatives. The price of units is determined by the NAV per unit and is announced regularly with a specific validity period.

3.Basic Types of Mutual Funds According to Investment Objective

  • Equity Funds invest in shares of common stocks.
  • Index Funds an extension of Equity Funds invest with an objective to replicate the performance of the market index
  • Fixed-Income Funds invest in government or corporate securities, which offer fixed rates of return.
  • Balanced Funds invest in a combination of both stocks and bonds.
  • Money Market Funds for high stability of principal, liquidity and income.
  • Specialty/Sector Funds to diversify holdings within an industry.

4. Major Benefits of Mutual Funds

  • Professional Investment Management
  • Diversification
  • Low Cost
  • Convenience & Flexibility
  • Liquidity
  • Dividend Income and Capital Gains on Price / NAV Appreciation

5. Important Factors to Consider for Investing in Mutual Funds

Thinking about your long-term investment strategies and tolerance for risk can help you decide what type of fund is best suited for you.

But you should also consider the effect that fees and taxes will have on your returns over time.

Degrees of Risk
All funds carry some level of risk. You may lose some or all of the money you invest – your principal – because the securities held by a fund go up and down in value. Dividend or interest payments may also fluctuate as market conditions change.

Fees and Expenses
As with any business, running a mutual fund involves costs – including transaction costs, asset management services fees, and marketing and distribution expenses. Funds pass along these costs to investors by imposing fees and expenses.

Investors Fees

  • Sales Charge (Load) on Purchase
  • Purchase Fee
  • Deferred Sales Charge (Load) – on redemption of share / units
  • Redemption Fee
  • Exchange Fee – on transfer within a Funds Family
  • Account fee


Annual Fund Operating Expenses

Management Fees fees that are paid out of fund assets to the asset management company for investment portfolio management

Distribution [and/or Service] Fees paid by the fund out of fund assets to cover the costs of marketing and selling fund shares and sometimes to cover the costs of providing unitholder services. “Distribution fees” include fees to compensate distributors and others who sell fund shares and to pay for advertising, the printing and mailing of prospectuses to new investors, and the printing and mailing of sales literature.

Total Annual Fund Operating Expenses (“Expense Ratio”) — the line of the fee table that represents the total of a fund’s annual fund operating expenses, expressed as a percentage of the fund’s average net assets.

6. Sources of Information about a Mutual Fund

Prospectus
The prospectus is the fund’s selling document and contains valuable information, such as the fund’s investment objectives or goals, principal strategies for achieving those goals, principal risks of investing in the fund, fees and expenses, and past performance. The prospectus also identifies the fund’s managers and describes how to purchase and redeem fund units.

Unitholder Reports
A mutual fund also must provide unitholders with annual, semi-annual and quarterly reports at the end of the respective period. These reports contain a variety of updated financial information, a list of the fund’s portfolio securities, and other information. The information in the unitholder reports will be current as of the date of the particular report.

Other sources include Company’s Websites, Brochures, and Company Personnel etc.

7. Key Terms

NAV (Net Asset Value) — the value of the fund’s assets minus its liabilities. To calculate the NAV per unit, simply subtract the fund’s liabilities from its assets and then divide the result by the number of units outstanding.

Portfolio — an individual’s or entity’s combined holdings of stocks, bonds, or other securities and assets

Prospectus — describes the mutual fund to prospective investors. Every mutual fund has a prospectus. The prospectus contains information about the mutual fund’s costs, investment objectives, risks, and performance. You can get a prospectus from the asset management company (through its website or by phone or mail). This is the primary document for reference before launch of a fund.

Redemption Fee — a unit holder fee that some funds charge when investors redeem (or sell) mutual fund units.