FIN 433
Investment companies
Mutual funds
– A mutual fund is an investment vehicle that is made up of a
pool of funds collected from many investors for the purpose of
investing in securities such as stocks, bonds, money market
instruments and similar assets.
[source: [Link]]
Investment companies
Mutual funds
–Mutual funds are operated by money managers, who invest the
fund's capital and attempt to produce capital gains and income
for the fund's investors.
– A mutual fund's portfolio is structured and maintained to
match the investment objectives stated in its prospectus.
[source: [Link]]
Investment companies
Mutual funds
– Mutual funds offer a way for small investors to diversify when
they could not do so on their own with the purchases of
individual stocks.
– Like depository institutions, mutual funds repackage proceeds
from individuals to make investments.
Investment companies
Mutual funds
– Mutual funds adhere to a variety of government regulations
– Bangladesh Securities and Exchange Commission (BSEC) regulates
– Funds must register and provide a prospectus to investors
– Fund must distribute at least 70 percent of total net profit as
dividends
Investment companies
Information contained in a prospectus
– The minimum amount of investment required
– The investment objective of the fund
– The exposure of the fund to various types of risk
– Services the fund offers
– The fees incurred and passed on to investors
Click here for the prospectus of Seventh ICB Unit Fund
Investment companies
Estimating the net asset value
– Net asset value is the value per share
– Estimated daily
– Determine the market value of all the securities in the fund
– Any interest or dividends added in
– Expenses subtracted
– Divide by the number of shares
Investment companies
Estimating the net asset value
– Calculate the NAV
– Total market value of shares today = $500,020,000
– Interest and dividends today = $10,000
– Expenses incurred today = $30,000
– Number of shares = 20,000,000
Investment companies
Estimating the net asset value
– Calculate the NAV
– Total market value of shares today = $500,020,000
– Interest and dividends today = $10,000
– Expenses incurred today = $30,000
– Number of shares = 20,000,000
– Market value of fund = $500,000,000
– Number of shares = 20,000,000
– Net asset value = market value of fund / # of shares
= $500,000,000 / 20,000,000
= $25 per share
Investment companies
Mutual funds
Returns to stockholders can take three forms
1. Any earned income from dividend or coupon payments as a
dividend
2. The capital gains from the sale of securities in the fund
3. Mutual fund price appreciation
As market price goes up, NAV increase
Shareholders benefit if they sell shares
Investment companies
Open-end mutual funds
– Shares continue to be sold to the public at Net Asset Value
(NAV) after initial sale that capitalizes the company
– Shares may be sold back to company at Net Asset Value
– Company size constantly changes
Investment companies
Closed-end mutual funds
– No additional shares sold after initial public offering
– Share prices determined and traded in a secondary market
– Price may not equal Net Asset Value of the shares
Mutual funds
Mutual fund categories
– Money market mutual funds invest in portfolio of money
market securities
– Commercial paper important investment
– Average maturity limit: 90 days
– Investors pay a management fee but not a sales or redemption
charge (load)
Mutual funds
Mutual fund categories
– Equity, bond, and income mutual funds invest in portfolio of
securities consistent with the objectives of the fund
– Objectives set by the company’s board
– Disclosure of objectives to investors
Mutual funds
Mutual fund categories
– Equity funds have most of their assets in equity funds rather
than bond or income funds
– Most equity funds are either:
– Value funds, which invest in undervalued stocks as determined by
fundamental financial analysis
– Growth funds, which invest in stocks of firms expected to show future
rapid earnings growth
Cost considerations
Load vs. No-load funds
– “Load” funds charge a front-end fee to cover the costs of selling
the fund to investors
– “No-load” funds do not charge this fee.
– No-load funds are purchased at NAV directly from the
investment company
– No sales force expense to cover
– Investors must seek out funds
Performance
– Reported on a regular basis in the popular press
– Measured over a given time period as a percent of initial
investment
– Total returns include reinvested dividends and capital gains
– Average annual return reflects the mean compound growth rate of
investment over a given time period
Performance
– Both investors and managers closely monitor performance as
modeled by the equation below
PERF= f ( MKT, SECTOR, MANAB)
Where:
PERF = Performance
MKT = General stock market conditions
SECTOR = Conditions in the sector the fund focuses on
MANAB = The ability of the fund’s management
Mutual funds in Bangladesh
– The sector is in a nascent stage
– Only a few dozen mutual funds currently listed with the DSE
– Major asset management firms with funds under management:
Race, ICB AMCL, ICB, LR Global, AIMS, VIPB, AT capital, SEML,
Vanguard
