LESSON 1
01/26/2025
INTRODUCTION
TO MUTUAL
FUNDS
prepared by MRBN
Today's
Highlight
1 Definition of Mutual
Fund
2 Structure of Mutual
Fund
3 Understanding how mutual funds
work
4 Classification of Mutual
Funds
5 Common Types of Mutual
Funds
Today's
Highlight
6 Characteristics of Mutual
Funds
Advantages and
7 Disadvantages of Mutual
Funds
8 History of Mutual
Funds
9 Evolution of Mutual Funds
Industry
Regulatory Framework for
10
Mutual Funds
Most of the people put their money in the bank. It
is their sole strategy of weathering emergencies
and meeting their future needs. Savings in bank
may not be enough to buy the so called “financial
security”. To put it simply, financial security
means having enough money to fund your
lifestyle, as well as work toward your financial
goals. Those financial goals may include
retirement, education, income protection, and
important life milestones. Fortunately, there are
other ways to make money grow aside from
saving. And one of the best solutions is to invest
in mutual funds.
Investing in mutual funds provides an easy way to
participate in the stock market and other
investment markets. Anyone with a stable income
or extra cash can start doing it. But before you
start investing in mutual funds, you should know
first the basics of mutual fund investment.
Definition of Mutual
Funds
Mutual Funds are pools of money collected
from many investors for the purpose of
investing in stocks, bonds, or other securities.
Mutual funds are owned by a group of
investors and managed by professionals. In
other words, a mutual fund is a collection of
securities owned by a group of investors and
managed by a fund manager.
• Common pool of funds contributed by investors
and
invested in accordance to the objectives.
• Investments are held in a trust of which the
investors
alone are the joint beneficial owners.
• Trustees oversee the management by
investment manager.
Structure of Mutual
Funds
Definition of Mutual
Funds
Sponsors
o The sponsor of a mutual fund establishes the
fund and registers the fund with the SEC before the
security can be sold. The sponsor is also known as
the fund underwriter.
o The sponsor is the promoter of the mutual fund.
The sponsor brings in capital and creates a mutual
fund trust and sets up the AMC.
Trustees
o is a holding service who has administrative
power for managing the money, property or assets
used in mutual funds. The trustee can be an
individual person, member of the board of directors,
and appointed company or a bank.
Definition of Mutual
Funds
Trustees
o An individual or organization which holds or
manages and invests assets for the benefit of
retirement fund members.
o A Trustee is a person who acts as a custodian for
the assets held within a Trust. He or she is
responsible for managing and administering the
finances of a Trust per the instructions given. Often,
the person who creates the Trust is the Trustee until
they can no longer fill the role due to incapacitation
or death.
o A trustee can be an individual, such as a family
member, friend, or trusted advisor (e.g., lawyer or
accountant) or an institution, such as a bank or
Definition of Mutual
Funds
Investors
• Mutual funds are ideal for investors who either lack
large sums for investment, or for those who neither
have the inclination nor the time to research the
market, yet want to grow their wealth. The money
collected in mutual funds is invested by professional
fund managers in line with the scheme's stated
objective.
Asset Management Company (AMC)
• investment manager of the mutual fund who is
appointed by the trustees
• Trustees and AMC enter into an investment
management agreement.
• AMC of one mutual fund cannot be an AMC or trustee
of another fund.
• AMCs cannot engage in any business other than that of
Understanding How
Mutual Funds Work
When you purchase a mutual fund, you
are pooling money with other
investors. The money pooled together
by you and other investors are
managed by a fund manager who
invests in financial assets such as
stocks, bonds, etc. The mutual fund is
managed on a daily basis. Below is a
diagram of how mutual funds work:
Understanding How
Mutual Funds Work
Understanding How
Mutual Funds Work
Classification of
Mutual Funds
Classification of
Mutual Funds
Classification - Based on Structure
Open Ended Funds
o No fixed maturity date
o Accept continuous sale and re-purchase requests
o Transactions are NAV-based
o Unit capital is not fixed
Closed Ended Funds
o Run for a specific period
o Offered in a New Fund Offer (NFO) but are closed for further purchases after
NFO
o Unit capital is kept constant
Interval Funds
o Variant of closed-ended funds
o Becomes open-ended at specific intervals
Classification of
Mutual Funds
Classification - Based on Investment Objective
Debt Funds
o Invest in short and long term debt instruments (bonds)
o Aim to provide regular income
Equity Funds
o Invest in equity securities (stocks)
o Aim to provide growth and capital appreciation over long term
Hybrid Funds
o Invest in a combination of equity and debt securities (stocks and
bonds)
o Proportion of equity and debt may vary
o Aim to provide for both income and capital appreciation.
Classification of
Mutual Funds
Classification - Based on Investment Style
Passive Funds
o Replicate a market index
o Invest in same securities and in same proportion as that of index
o No active selection of any stock / sector
o Expenses are lower
o Portfolio is modified every time index composition changes.
Active Funds
oInvests in securities and sectors that may offer a better return than the
index
oActively manage the allocation to market securities and cash
oMay perform better or worse than the market index
oIncur a higher cost than passive funds
Common Types of
Mutual Funds
1. Money Market Funds
Money market funds invest in short-term
fixed-income securities. Examples of short-
term fixed-income securities would be
government bonds, Treasury bills,
commercial paper, and certificates of
deposit. These types of funds are generally
a safer investment but with a lower
potential return than other mutual funds.
2. Fixed Income Funds
Fixed income funds buy investments that
pay a fixed rate of return. This type of
mutual fund focuses on getting returns
Common Types of
Mutual Funds
3. Equity Funds
Equity funds invest in stocks. Furthermore,
there are different types of equity funds
such as funds that specialize in growth
stocks, value stocks, large-cap stocks, mid-
cap stocks, small-cap stocks, or a
combination of these stocks.
4. Balanced Funds
Balanced funds invest in a mix of equities
and fixed-income securities – typically in a
40% equity 60% fixed income ratio. The
aim of these funds is to generate higher
returns but also mitigate risk through
Common Types of
Mutual Funds
5. Index Funds
Index funds aim to track the performance
of a specific index. For example, the S&P,
or TSX. Index funds follow the index and go
up when the index goes up and goes down
when the index goes down. Index funds are
popular as they typically require a lower
management fee compared to other funds
(due to the manager not needing to do as
much research).
6. Specialty Funds
Specialty funds focus on a very small part
of a market such as energy,
Characteristics of
Mutual Funds
• SEC-registered investment
companies
An investment firm which is
registered
with the SEC and complies with
certain stated legal requirements.
• Mobilizing Small Savings
It is a trust that pools the savings
of a
number of investors who share a
common financial goal. It collects the
savings from the small investors,
invest them in government and other
corporate securities and earn income
Characteristics of
Mutual Funds
• Investment Avenue
There are different ways that you
can invest your money. This is one of
the attractive features that mutual
funds have to offer.
• Professional Management
Mutual funds are managed by full-
time, professional fund managers
who have the expertise, experience,
and resources to actively buy, sell,
and manage investments. The fund
managers do the research, select the
securities and monitor the
performance all for the benefits of
the investors.
Characteristics of
Mutual Funds
• Diversified Investment
The saying “ do not put all your
eggs in one basket” perfectly fits
mutual funds as spreading
investment across multiple securities
and asset categories lowers risk.
Mutual funds are inherently
diversified.
• Better Liquidity
Mutual Fund investors can easily
redeem their shares at any time, for
the current net asset value (NAV)
plus any redemption fees. Also, funds
can be withdrawn or redeemed to
Characteristics of
Mutual Funds
• Reduced Risk
Mutual funds can help investors
access the financial market's growth
opportunities.
Low-risk mutual funds are those
investment options that carry
minimal risk and a stable return
assurance.
• Investment Protection
An investor protection fund may
compensate investors for losses in
the event of the bankruptcy of an
investment dealer or a mutual fund
dealer. It does not cover losses
resulting from the changing market
Characteristics of
Mutual Funds
• Switching Facility
Switching of funds means moving
the money from an investment
scheme to another investment
scheme.
Mutual fund switching refers to
transitioning between debt and
equity funds or from regular to direct
mutual fund plans to manage risk or
enhance returns. Essentially, it
involves moving from one mutual
fund scheme to another when the
current scheme underperforms.
Characteristics of
Mutual Funds
• Tax Benefit
With a long-term investment in
mutual funds, you can pay less taxes
due to their high tax efficiency. In
mutual fund, you can also get income
tax deductions by investing in
specific funds while earning high
returns.
• Low Transaction Cost
Because a mutual fund buys and
sells large amounts of securities at a
time, its transaction costs are lower
than what an individual would pay for
securities transactions. A mutual fund
can invest in certain assets or take
Characteristics of
Mutual Funds
Mutual funds are also affordable
for every earning individual. You need
to pay a small amount, known as the
expense ratio, to your fund houses to
invest in mutual funds and the costs
are less than other managed funds.
• Economic Development
There is an increase in capital
goods, labor force, technology, and
human capital can all contribute to
economic growth. Mutual funds offer
diversification or access to a wider
variety of investments than an
individual investor could afford to
buy. Investing with a group offers
Advantages of Mutual
Funds
There are several key benefits to
investing in a mutual fund:
1. Professional Management
Mutual funds are actively managed
by a
professional who constantly
monitors the
fund’s portfolio. In addition, the
manager
can devote more time selecting
investments than a retail investor
would.
2. Investment Diversification
Mutual funds allow for investment
Advantages of Mutual
Funds
3. Liquidity
Mutual funds possess high liquidity.
In
general, you are able to sell your
mutual
funds within a short period of time if
needed.
4. Transparency
Mutual funds are subject to industry
regulations meant to ensure
accountability
and fairness for investors.
Advantages of Mutual
Funds
5. Affordability
Mutual fund as an investment vehicle
is also
available for small investors who do
not
have significant amounts of money to
invest.
6. Flexibility to Invest in Smaller
Amount
The most important benefit is its
flexible
nature. Investors need not put in a
huge
Advantages of Mutual
Funds
7. Lower Cost
In a Mutual Fund, funds are collected from
many investors, and then the same is used to
purchase securities. These funds are however
invested in assets which therefore helps one
save on transaction and other costs as
compared to a single transaction. The savings
are passed on to the investors as lower costs
of investing in Mutual Funds.
8. Accessibility - Mutual Funds are Easy to
Buy
Mutual Funds are easily accessible and you
can start investing and buy mutual funds
from anywhere in the world. This makes
Disadvantages of
Mutual Funds
There are important disadvantages to
consider when investing in a mutual fund:
1. Management Fees and Operating
Expenses
Mutual funds typically charge a high MER
(management fee and operating
expenses). This
would lower the overall return. For
example, if
the mutual fund posted a 1-year return of
10%,
the MER would lower this return.
Disadvantages of
Mutual Funds
2. Loss of Control
Since mutual funds are managed by a
manager,
there is a loss of control when investing
in a
mutual fund. Remember that you are
giving
someone else your money to manage to
when
investing in a mutual fund.
3. Poor Performance
Mutual fund returns are not guaranteed.
In fact,
Disadvantages of
Mutual Funds
4. Dilution
Due to dilution, it is not recommended to
invest in too many Mutual Funds at the
same time. Diversification, although saves
an investor from major losses, also restricts
one from making a higher profit.
5. Cost to Manage the Mutual Fund scheme
Market Analysts or Fund Managers
manage and operate the mutual funds.
These Fund Managers work for the fund
houses that manage huge investments
every day. This requires a lot of efficiencies,
expertise, and experience in the subject
Disadvantages of
Mutual Funds
6. Risk
Investments in mutual funds are subject to
market risk. The risk of losses faced by all
types of securities in the financial markets
cannot be reduced by diversification.
Market risks may occur due to many macro
and microeconomic factors. For example,
equity mutual funds are subject to volatility
risk owing to fluctuations in the stock
market whereas debt mutual funds are
subject to interest rate risk which is caused
by fluctuations in the interest rates and so
on.
Disadvantages of
Mutual Funds
7. Over-Diversification
In the quest to diversify your investments,
you may invest in mutual funds, which
invest in a vast number of stocks, leading
to over-diversification. Not all the stocks of
a portfolio would deliver high returns all
the time. You may end up investing in two
mutual funds holding similar portfolios
which may then lead to over-diversification.
It is advisable to study the mutual fund
portfolio before you invest.
HISTORY AND EVOLUTION OF MUTUAL FUNDS
Mutual funds didn't really capture Subhamoy Das, in his economics
the attention of American investors textbook "Perspectives on Financial
until the 1980s and 1990s, when Services," traces an early
investors in them hit record highs appearance of the mutual fund to
and realized incredible returns. They Dutch merchant Adriaan van
are now mainstream investments Ketwich, who created an investment
and form the core of individual trust in 1774. "Van Ketwich probably
retirement accounts. However, the believed that diversification would
idea of pooling assets for investment appeal to investors with minimal
purposes has been around for capital. The name of van Ketwich's
centuries. fund, Eendragt Maakt Magt,
translates into 'unity creates
The First Mutual Funds strength,'" the book explains.
Historians are uncertain of the Other examples followed, including
origins of investment funds, an investment trust launched in
although many look to the Dutch as Switzerland in 1849 and similar
the early innovators who created the vehicles formed in Scotland in the
HISTORY AND EVOLUTION OF MUTUAL
FUNDS
Regulatory Framework for
Mutual Fund
Philippine Regulation of Mutual Funds
• Investment Company Act (ICA) or Republic
Act (RA) 2629 governs the creation,
regulation, licensing and monitoring of
investment companies such as mutual
funds in the Philippines.
• Securities and Exchange Commission (SEC)
- is the regulatory agency in charge of
ensuring
that registered investment companies
comply
with the provisions of the ICA
- also ensures that 7 these companies
adhere
to other relevant laws such as the
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