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Mutual Funds

Defination

Mutual fund can be defined as "Institutions that sell shares of a commonly owned pool of money to the public". "A pool of money setup for the purpose of investing in financial instruments according to its objective."

TYPES OF MUTUAL FUND

There are two major types of Mutual Fund, which can be categorized as follows: 1)Open-end Mutual Fund/Schemes 2)Close-end Mutual Fund

Open-end Mutual Fund

An open-end fund does not have a fixed pool of money. It gives the investors an option to redeem and buy units at any time from the fund. The fund is set up as a trust, with an independent trustee, who has custody over the assets of the trust. Each share of the trust is called a unit and the fund itself is called a unit trust. The fund manager continuously allows investors to join or leave the fund on the basis of NAV (Net Asset Value). However, the fund manager may have a small charge called "load" added to the selling price or deducted from the redemption price of the units so as to cover distribution costs. Fund Managers can conveniently buy and sell units at Net Assets Value (NAV) related prices, which are declared on a predetermined basis. The portfolio (pool) of investments of the unit trust is evaluated daily, weekly and monthly basis by Fund Manager. Some of the open-ended schemes that are major market players are NIT and UTP

Close-end Mutual fund

A closed-end fund is a mutual fund that has a fixed pool of money, which is collected when the fund is set up. The fund is set up as an investment company with a certain amount of capital (pool of money). The fund manger invests the pool in the capital markets (normally shares of other companies). An investor wishing to participate in the mutual fund, buys shares of the investment company at the time of its initial public offer or, as in the case of any other company, the investor may buy shares of the investment company subsequently from the stock market, at the prevailing market price. When the investor wishes to disinvest, he has to sell his shares of the investment company through the stock exchange at the prevailing price. As in the case of any other company, the price of the shares of the investment company (closed-end mutual fund) in the stock market will be determined by the supply and demand for such shares, which may be higher or lower (normally lower) than the net asset value (true value of the investment portfolio) of the investment company

Rules Governing Mutual Funds in Pakistan

There are two rules governing mutual funds in Pakistan, which are

1.Investment Companies and Investment Advisors' Rules, 1971. (Which govern closed-end mutual funds) 2.Asset Management Companies Rules, 1995. (Which govern open-ended mutual funds)

HOW OPEN-END MUTUAL FUND WORKS

The NAV price of a mutual fund is its portfolio's total market value divided by its number of units outstanding. Current unit holders would be indifferent whether an investor leaves or join the fund as the entry into and exit from the fund would always be at the NAV prices. For example, the net market value of the fund is Rs 100 and the total number of units outstanding is 10, so the NAV price comes out at Rs 10 per unit. If one unit out of Rs 10 is redeemed, the remaining Rs 90 of the fund will be divided now over 9 units, leaving the NAV per unit unchanged at Rs 10. Similarly, if a new investor join the fund, he will be issued, say, a new unit at Rs 10, to take the total fund size to Rs 110, leaving the NAV per unit unchanged at Rs 10, but now divided over 11 units.

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