Mutual Funds Report
Mutual Funds Report
Mutual Funds Report
FINAL PROJECT
MUTUAL FUNDS:
- Introduction Of Mutual Funds
- Investment Objectives
- Types of Mutual Funds
- Risk in Mutual Funds
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The first modern mutual fund was launched in the U.S. in 1924.
The oldest mutual fund still in existence is MFS’ Massachusetts Investors Trust (MITTX),
also established in 1924.
The exchange-traded fund, a modern variation, has taken the market by storm since
the Great Recession of 2007–2009.
Why Mutual funds?
Mutual funds are a popular choice among investors because they generally offer the
following features:
Professional Management
o The fund managers do the research for you. They select the securities and
monitor the performance.
Diversification or (Don’t put all your eggs in one basket)
o Mutual funds typically invest in a range of companies and industries. This helps
to lower your risk if one company fails.
Affordability
o Most mutual funds set a relatively low dollar amount for initial investment and
subsequent purchases.
Liquidity
o Mutual fund investors can easily redeem their shares at any time, for the current
net asset value (NAV) plus any redemption fees.
Open-ended Fund
These are mutual funds which continually create new units or redeem issued units on demand.
They are also called Unit Trusts. The Unit holders buy the Units of the fund or may redeem
them on a continuous basis at the prevailing Net Asset Value (NAV).
These units can be purchased and redeemed through Management Company which announces
offer and redemption prices daily.
They don’t have a limit as to how many shares can be issued, as more investor’s purchase the
funds, more shares are issued also referred to as Unit Trusts.
Close-ended Fund
These funds have a fixed number of shares like a public company and are floated through an
IPO. Once issued, they can be bought and sold at the market rates in secondary market (Stock
Exchange). The market rate is announced daily by the stock exchange.
INVESTMENT OBJECTIVES;
Funds that seek capital appreciation Mutual funds with a growth objective hold a
portfolio of company stocks with an expectation that they will grow in value over time.
Funds that seek income Funds with an income objective select securities such as bonds
and preferred stock that can provide regular income payments.
With a preservation of capital objective, it is important that an investor’s initial
investment does not lose value. Funds with this objective (e.g., money market mutual
funds) generally hold very short-term cash equivalent assets.
Funds that seek a combination of growth and income generally invest in equity
securities that pay dividends or else invest in a mix of equity securities and bonds.
EQUITY FUNDS;
The largest category is that of equity or stock funds. As the name implies,
this sort of fund invests principally in stocks. Within this group are various subcategories. Some
equity funds are named for the size of the companies they invest in: small-, mid-, or large-cap.
Others are named by their investment approach: aggressive growth, income-oriented, value,
and others. Equity funds are also categorized by whether they invest in domestic (U.S.) stocks
or foreign equities. There are so many different types of equity funds because there are many
different types of equities. A great way to understand the universe of equity funds is to use a
style box, an example of which is below. The idea here is to classify funds based on both the
size of the companies invested in (their market caps) and the growth prospects of the invested
stocks. The term value fund refers to a style of investing that looks for high-quality, low-
growth companies that are out of favor with the market. These companies are characterized
by low price-to-earnings (P/E) ratios, low price-to-book (P/B) ratios, and high dividend yields.
Conversely, spectrums are growth funds, which look to companies that have had (and are
expected to have) strong growth in earnings, sales, and cash flows. These companies typically
have high P/E ratios and do not pay dividends.
INDEX FUND;
Another group, which has become extremely popular in the last few years, falls
under the moniker "index funds." Their investment strategy is based on the belief that it is
very hard, and often expensive, to try to beat the market consistently. So, the index fund
manager buys stocks that correspond with a major market index such as the S&P 500 or the
Dow Jones Industrial Average (DJIA). This strategy requires less research from analysts and
advisors, so there are fewer expenses to eat up returns before they are passed on to
shareholders. These funds are often designed with cost-sensitive investors in mind.
BALANCE FUNDS;
INCOME FUNDS;
Income funds are named for their purpose: to provide current income on a
steady basis. These funds invest primarily in government and high-quality corporate debt,
holding these bonds until maturity in order to provide interest streams. While fund holdings
may appreciate in value, the primary objective of these funds is to provide steady cash flow to
investors. As such, the audience for these funds consists of conservative investors and retirees.
Because they produce regular income, tax-conscious investors may want to avoid these funds.
This fund gives investors a diversified portfolio of investments that cover a number of asset classes. The
asset allocation of the fund can be fixed or it can be variable within a mix of asset classes. What this
means is that it can be held to percentages that are fixed within asset classes or they can go overweight
on others depending on the conditions of the market. Some popular asset classes include stocks, bonds
and cash equivalents.
ISLAMIC MUTUAL FUNDS:
Islamic Mutual Funds are also being provided by Pakistan's leading Fund Managers and Asset
Management companies. Islamic Mutual Funds are managed in same way as of Conventional Mutual
Funds however any security investments are made into the Shariah-Compliant investments. The
demand of the Islamic Mutual Funds is growing and a very large number of Shariah-Compliant mutual
funds are available.
Market risk. The fund may incur losses due to declines in the markets in which it
invests.
Business or Issuer risk. The fund may invest in a company that goes out of business,
suffers financial problems, or otherwise does not perform as expected, especially if the
fund primarily invests in companies without an established record.
Credit risk. The fund may invest in bonds or other debt instruments from an issuer
who is unable to pay interest payments as scheduled or repay the principal.
Interest rate risk. The value of the fund’s investments in bonds or other debt
instruments may decrease if interest rates rise.
Inflation risk. The value of the fund’s investments in bonds or other debt instruments
also may not keep track with price increases from inflation.
Concentration risk. The fund may concentrate its investments in a particular
industry, sector or geographical area, which can result in a less diversified portfolio that
may be subject to greater volatility in performance than a fund that does not
concentrate its investments.
Political risk.
Potential for changes in government to impact the value of an investment. It may also
include policy changes made by governments
A fund’s past performance is not as important as you might think because past
performance does not predict future returns. But past performance can tell you how
volatile or stable a fund has been over a period of time. The more volatile the fund, the
higher the investment risk.