Mutual Funds(MFs), Exchange

Traded Fund (ETFs), and Hedge

Fund (HFs)
Mutual Fund
 A Mutual Fund is a body corporate registered with the
Bangladesh Securities and Exchange Commission (BSEC) that
pools up the money from individual/corporate investors and
invests the same on behalf of the investors in equity shares,
Government securities, Bonds, Call money markets etc., and
distributes the profits.
 A mutual fund allows an investor to indirectly take a position in a
basket of assets.
Types of Mutual Funds (By Structure)
 Open End Mutual Fund
 Closed End Mutual Fund
Open End Mutual Fund
• An open-end fund is one that is available for subscription all
through the year. These do not have a fixed maturity. Investors
can conveniently buy and sell units at Net Asset Value ("NAV")
related prices.
• The key feature of open-end mutual fund is liquidity and an open
end mutual fund can issue unlimited shares.
• Units are bought and sold on demand at their net asset value
(NAV).
Open End Mutual Fund (cont…)

 For an open-end mutual fund, the asset value of portfolio

securities is calculated with the closing prices of the trading day.
After deducting liabilities of the fund an NAV, the price at which
an investor may buy or sell, is determined.
 It has no formal market. More specifically it is not listed in Stock
Exchange.
Closed End Mutual Fund
 A closed end mutual fund has a stipulated maturity period which
generally ranging from 5 to 15 years. The fund is open for
subscription only during a specified period. In this case ,the total
size of the fund is limited by the size of the initial offer. This
types of fund are always listed in the stock exchange for liquidity.
 It has a formal market.
Closed End Mutual Fund (cont….)

 For a closed-end fund, NAV can change throughout the trading

day based on the movement of the prices of the securities held by
the closed-end fund.
 Theoretically, asset value should be the same as the sum of the
individual securities, but closed-end funds typically trade at either
a premium or discount to NAV. This is because their prices on an
exchange are determined by supply and demand forces.
Difference between Open End and Closed End
 Open-end mutual funds issue new shares as investors add money
to the pool, and retire shares as investors redeem. These funds are
typically priced just once at the end of the trading day.
 Closed-end funds trade more similarly to stocks than open-end
funds. Closed-end funds are managed investment funds that issue
a fixed number of shares, and trade on an exchange. While a net
asset value (NAV) for the fund is calculated, the fund trades based
on investor supply and demand. Therefore, a closed-end fund may
trade at a premium or a discount to its NAV.
Mutual Funds (Based on Asset Classes)
 Money Market Funds
 Equity Funds
 Sector Funds
 Bond Funds
 International Funds
 Balanced Funds
 Index Funds
Money Market Funds
 These funds invest in money market instruments.
 The average maturity of these assets tends to be a bit more than 1
month.
Equity Funds
 Equity funds invest primarily in stock, although they may, at the
portfolio manager’s discretion, also hold fixed-income or other
types of securities.
 Stock funds are traditionally classified by their emphasis on
capital appreciation versus current income. Thus, income funds
tend to hold shares of firms with consistently high dividend
yields. Growth funds are willing to forgo current income,
focusing instead on prospects for capital gains.
Sector Funds
Sector funds concentrate on a particular industry. For example, a
broker markets dozens of “selected funds” each of which invests in
a specific industry such as biotechnology, utilities, energy, or
telecommunications.
Bond Funds
As the name suggests, these funds specialize in the fixed-income
sector. Within that sector, however, there is considerable room for
further specialization. For example, various funds will concentrate
on corporate bonds, Treasury bonds, mortgage backed securities, or
municipal (tax-free) bonds. Indeed, some municipal bond funds
invest only in bonds of a particular state (or even city!) to satisfy
the investment desires of residents of that state who wish to avoid
local as well as federal taxes on interest income. Many funds also
specialize by maturity, ranging from short-term to intermediate to
long-term, or by the credit risk of the issuer, ranging from very safe
to high-yield, or “junk,” bonds.
International Funds
Many funds have international focus. Global funds invest in
securities worldwide, including the United States. In contrast,
international funds invest in securities of firms located outside the
United States. Regional funds concentrate on a particular part of
the world, and emerging market funds invest in companies of
developing nations.
Balanced Funds
These balanced funds hold both equities and fixed-income securities in
relatively stable proportions.
Index Funds
An index fund tries to match the performance of a broad market
index. The fund buys shares in securities included in a particular
index in proportion to each security’s representation in that index.
For example, the Vanguard 500 Index Fund is a mutual fund that
replicates the composition of the Standard & Poor’s 500 stock price
index. Because the S&P 500 is a value-weighted index, the fund
buys shares in each S&P 500 company in proportion to the market
value of that company’s outstanding equity.
Costs of Investing in Mutual Funds
An individual investor choosing a mutual fund should consider
management fees and other expenses. For example-
i. Operating Expenses
ii. Front End Load
iii. Back End Load
iv. Distribution and Service Fees
Operating Expenses
 Operating expenses are the costs incurred by the mutual fund in
operating the portfolio, including administrative expenses and
advisory fees paid to the investment manager. These expenses,
usually expressed as a percentage of total assets under
management, may range from 0.2% to 2%.
 Shareholders do not receive an explicit bill for these operating
expenses; however, the expenses periodically are deducted from
the assets of the fund. Shareholders pay for these expenses
through the reduced value of the portfolio.
Front End Load
• A front-end load is a commission paid when you purchase the
shares. These charges are used primarily to pay the brokers.
• Loads effectively reduce the amount of money invested. For
example, each $1,000 paid for a fund with a 6% load results in a
sales charge of $60 and fund investment of only $940. You need
cumulative returns of 6.4% of your net investment
(60/940 = .064) just to break even.
Back End Load
 A back-end load is a fee that investors pay when selling mutual
fund units, and the fee amounts to a percentage of the value of the
share being sold.
 A back-end load can be a flat fee or can gradually decrease over
time. In the latter case, the fee percentage is highest in the first
year and decreases yearly until the specified holding period ends,
at which time it drops to zero.
Distribution and Service Fees
The Securities and Exchange Commission allows the managers of so-
called mutual funds to use fund assets to pay for distribution costs such
as advertising, promotional literature including annual reports and
prospectuses, and, most important, commissions paid to brokers who
sell the fund to investors.
Exchange Traded Funds (ETFs)

 Exchange-traded funds (ETFs) are securities that closely

resemble index funds. These investment vehicles allow investors a
convenient way to purchase a broad basket of securities in a single
transaction.
 Unlike mutual funds, an ETF trades like a common stock on a stock
exchange.
 ETFs experience price changes throughout the day as they are bought and
sold.
 ETFs typically have higher daily liquidity and lower fees than mutual
fund shares, making them an attractive alternative for individual
investors.
Difference between ETFs and MFs
 ETFs trade on exchanges, just as common stocks do, and the other side of the
trade is some other investor like you, not the fund manager. You can buy and
sell at any point during a trading session at whatever the price is at the
moment based on market conditions, not just at the end of the day, and
there’s no minimum holding period. ETFs can reflect the new market reality
faster than mutual funds can.
 Another key difference is that most ETFs are index-tracking, meaning that
they try to match the returns and price movements of an index, such as the
S&P 500, by assembling a portfolio that matches the index constituents as
closely as possible. Mutual funds can track indexes too, but most are actively
managed; in that case, the people who run them pick holdings to try to beat
the index that they judge their performance against.
Hedge Funds (HFs)
Hedge funds use pooled funds that employ numerous different
strategies to earn active return for their investors. Hedge funds may
be aggressively managed or make use
of derivatives and leverage in both domestic and international
markets with the goal of generating high returns.
 Return of MFs

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𝑅𝑎𝑡𝑒𝑜𝑓𝑅𝑒𝑡𝑢𝑟𝑛=
𝑁𝐴𝑉 0