Also called Long Only, Index Funds
Mutual Funds are collective investments in money market instruments (equities or bonds)
They are collective investments in money market instruments, bonds, equities. The bank may run its own fund and advertise its attractions to small investors
They seek relative returns. Most concentrate on one particular area, ie small cap or a particular sector
Performance is measured relative to an index or benchmark, there objective is just to beat the index
For mutual funds this is price per share
NAV is calculated once a day based on the closing prices of the securities.
All buy and sell orders are processed at the NAV on the trade date
Investors must wait until the following day to get the trade price
A unit trust is just a special type of mutual fund. Typically fund managers will charge a small percentage fee for handling the fund and the client will meet costs like brokers commision.
These pool the money from indidivual investors and then provide a spread of risk by investing in a wide range of securities.
Unit Trusts (UK) open ended
Investment Trusts (UK) closed ended
These are collective investments, run by fund managers. They may be investments in money market instruments, equities, bonds or other instruments
Open Ended Funds
Here the fund raises, say $50m and spends it on a wide range of shares. The fund is then divided into 50m units of $1 each
Later investors can buy units from the managers or sell them back to the managers.
If investors with $5m to spend can buy the equivalent number of units, in which case the managers buy more shares increasing the fund to $55m.
If investors with holdings worth $10m sell their units back to the fund manager, the managers will have to sell part of the portfolio to buy the units back, therefore decreasing the fund to $45m.
As the portfolio gorws in value, so do the units and this is how the investors make money.
Close Ended Funds
Here the fund is a shareholding company. It raises $50m and invests the money in a portfolio of different shares.
If investors with $5m to spend buy the shares in the fund on an open market. Therefore the fund amount remains at $50m. The idea is that if the shares double in value so will the market share of the fund itself. The investors can then sell their shares and take their profit that way. The share price of the closed ended fund will reflect supply and demand as well as the underlying asset value.
Two types of fund management
Active Management - This is Active selection of specific securities with frequent reorganisation of The portfolio. This is often driven by computer models
- Passive Management - An investment is made in all the stocks in a well known index, such as the S&P 100 and then left to perform the same as the index. The argument being that statistics show that less than 50% of funds beat the index anyway and also th
Open Ended Investment Company
Similar to a unit trust but using a company rather than a trust structure.
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