Understand the basics of investing, learn how mutual funds work and access useful financial-market resources from one place.
Start with essential investment concepts, asset classes and the common risks associated with investing.
An investment is an asset or item that is purchased with the expectation that it will generate income or appreciate in the future. Investing has become important due to the following reasons:
The time value of money is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.
Investments can be packaged into a number of structures which seek to enhance, protect or maximize the behaviors and returns from the following main asset classes:
In general, the term risk refers to the probability of some undesirable event. The element of risk that troubles investors is the possibility of downside fluctuations in value and return. Following are the various types of risks associated with different investments:
All mutual funds are subject to market risks, that is, the portfolio may face a decline in prices. Generally, the fluctuation in prices is caused by general economic and market conditions, the volatility in currency or interest rates, the instability in regional or global markets.
All the instruments in a mutual fund are marked to market on daily basis, so a change in the interest rate has a subsequent effect on the value of investment. The fall in interest rates will have a positive impact on the prices of held securities.
The risk that the cash flows from an investment will not be worth as much in the future because of changes in purchasing power due to inflation. The risk of money losing its purchasing power or an increase in interest rate during the investment period may also result in reduced prices of held securities.
When there is a change in the price of one currency against another, the type of risk that arises is Currency Risk. When an investor has exposure to foreign currency or foreign-currency traded investments, the investor is likely to come across a potential risk of loss from variable foreign exchange rates.
Risk that comes from the lack of marketability of an investment that cannot be quickly bought or sold without a significant change in price.
Learn what mutual funds are, how they operate and the potential benefits and costs associated with them.
An investment vehicle that is made up of a pool of funds collected from investors for the purpose of investing in various asset classes, including stocks, bonds, money market instruments, etc.
There are two types of Mutual Funds:
A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
An open-end fund is a type of mutual fund that does not have restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell.
Since its beginning, mutual funds have been a widely held investment vehicle used by investors. Their simplicity in use along with other traits are listed below.
When one goes for mutual funds, it means that you are also choosing a professional money manager. Rather than having to thoroughly dig down and research into every investment, you have a money manager who can do the heavy lifting for you. These professional fund managers are employed by AMC who undergo careful research before choosing an investment for the mutual fund or monitor performance of the assets.
Investment diversification is easily achieved by investing through a mutual fund, irrespective of size of investment. Assets of a mutual fund are spread across a range of companies and industry which minimizes the risk of loss due to poor performance of a particular company or industry.
Mutual fund as an investment vehicle is also available for small investors who do not have significant amounts of money to invest.
Most of the funds at present are formed under an open-end structure which offers fund investors the ability to timely redeem their investments.
The performance of a mutual fund is carefully reviewed by various publications and rating agencies, making it easy for investors to compare one fund to another. As a unit holder, you are provided with regular updates, for example daily NAVs, as well as information on the fund's holdings and the fund manager's strategy.
The value of a unit of the mutual fund, known as the net asset value per share (NAV), is calculated by dividing net value of assets by the number of units issued and currently outstanding. Buying and selling into funds is done on the basis of NAV-related prices.
A mutual fund often charges an entry and/or exit fee. These are also referred to as sales loads. The proceeds of such charges or loads help the AMC market the fund and cover distribution costs.
Account holders can realize their gains by redeeming or selling their units to the asset manager. Any capital gain on investment is subject to tax based on their investment periods.
The Asset Management Company declares a payoff to the unit holder from its periodical earnings.
Payout will be subject to withholding tax according to the Income Tax Ordinance, 2001.
Tax rebate is a benefit that one obtains for an investment in an open-end mutual fund. Salaried and non-salaried individuals can claim tax rebate on their income based on the applicable rates of income tax under section 62 of the Income Tax Ordinance, 2001.
Following are the constitutive documents of a mutual fund:
Trust deed is a principal document for formation and management of the mutual fund that is executed between the AMC and the trustee. The trust deed specifies the responsibilities of the trustees and the Asset Management Company which need to be strictly adhered to by each concerned party.
An offering document of a mutual fund is a fairly comprehensive document covering at a minimum the following:
Following is the list of governing rules, regulations and ordinance for mutual fund establishment:
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