Mutual fund

A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The concept of mutual fund has become popular coz of the advantages it has got..like professional fund management, low costs(transaction costs), reduction in riskliquidity, conveniance and flexibility and most importantly Portfolio diversification.Broadly Mf's r divided into Open end funds n Closed end funds. An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. mutual funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public. Mutual funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. Mutual funds invest in a variety of products, i.e. equities, debt instruments and money market instruments. Such a diversification on the one hand minimizes the probability of losses and on the other hand allows the investors to chose a fund of its own choice. At the same time allocating one's fund to several mutual funds, the investor can balance out the investments into a combination that suits his/her risk taking ability and preference for the intervals of receipts of returns. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund. Mutual funds offer choice, liquidity, and convenience, but charge fees and often require a minimum investment. Money invested in mutual funds can be redeemed either by selling the shares of a closed-end fund in the market or simply asking the fund manager for redemption in the case of an open-end fund. There are no penalties for early termination of an investment, which one may have to suffer in the case of term deposits with banks or other savings schemes.

Basic Structure
Mutual Funds are operated by Asset Management Companies (AMC) which exist in the form of a corporation, owned by its shareholders. The AMC launches new funds through the establishment of a Trust Deed, entered between the Asset Management Company and the Trustee, which in most cases is the Central Depository Company of Pakistan Limited, with due approval from the SECP under the NonBanking Finance Companies (Establishment and Regulation) Rules, 2003 (the Rules). The CDC performs the functions of the custodian and trustee, whereas the AMC can act as the registrar or can appoint an external registrar. Banking/ financial companies maybe authorized to act as distributors/ sales agents. The Board of Directors must also approve and appoint a legal advisor and auditor for legal and compliance affairs.

Key Players
At present a number of closed-end as well as open-end mutual funds are operating in Pakistan. Among the oldest are NIT and the various funds managed by Investment Corporation of Pakistan (ICP). The largest number of listed mutual funds, twenty six, are managed by the ICP. There are 11 closed-end mutual funds operating in private sector. Whereas NIT and ICP operates in public sector. There are total 37 mutual funds listed at Karachi Stock Exchange.

Types Of Mutual Funds

1.By Maturity Period: Open ended & Close ended 2.By Investment Objective: Equity, Income, Balance fund, Money market, Gilt fund, Index fund.

Schemes According To Maturity Period

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

Open-Ended Fund An open-ended Mutual fund is one that is available for subscription and repurchase on a continuous basis. These Funds do not have a

fixed maturity period. Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. Most open-end funds also sell shares to the public every business day; these shares are also priced at net asset value. A professional investment manager oversees the portfolio, buying and selling securities as appropriate. The total investment in the fund will vary based on share purchases, share redemptions and fluctuation in market valuation. Close-Ended Fund A close-ended Mutual fund has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Closed-end funds generally issue shares to the public only once, when they are created through an initial public offering. Their shares are then listed for trading on a stock exchange. Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an openend fund). Instead, they must sell their shares to another investor in the market; the price they receive may be significantly different from net asset value. It may be at a "premium" to net asset value (meaning that it is higher than net asset value) or, more commonly, at a "discount" to net asset value (meaning that it is lower than net asset value). A professional investment manager oversees the portfolio, buying and selling securities as appropriate.

Fund According To Investment Objective

A scheme can also be classified as growth fund, income fund, or balanced fund considering its investment objective. Growth / Equity Oriented Scheme The aim of growth funds is to provide capital appreciation over the medium to long- term. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. Income / Debt Oriented Scheme

The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. Balanced Fund The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. Money Market These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, commercial paper and government securities, etc. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Gilt Funds These funds invest exclusively in government securities. Government securities have no default risk. Index Funds This schemes invest in the securities in the same weightage comprising of an index. This schemes would rise or fall in accordance with the rise or fall in the index Types Of Mutual Funds In Pakistan (By Objective) Open-ended or closed-end funds can be of several types; however the most basic classifications are stock funds, income funds, hybrid funds or specialty funds. Further classifications evolve as each fund

pursues diverse investment strategies for instance: Islamic Equity Funds, Sector Funds, Global Equity Funds, High Yield Debt Funds, Aggressive Equity Funds, Income Funds, Stock Funds, Income and Money Market Funds, Hybrid Funds, Pension Funds, Islamic Funds, Specialty Funds and so on.