OPERATIONS OF MUTUAL FUND

Presented To: Sir Ameen

Presented By:M Zishan Hyder 55272Fuzail Kaleem

HISTORY OF MUTUAL FUNDS

The first mutual fund was established in Europe.

A Dutch merchant Adriaan van Ketwich created the first mutual fund in 1774. “Eendragt Maakt Magt”, which meant “Unity Creates Strength”.

First mutual fund outside the Netherlands was the Foreign & Colonial Government Trust, which was established in London in 1868.

HISTORY OF MUTUAL FUNDS

Mutual funds were introduced into the United States in the 1890s. They became popular during the 1920s..

In year 1924, the first open-end fund “Massachusetts Investors’ Trust of Boston” was the formed.

ICP offered a series of closed end funds in 1966, these were later privatized in 2000.

OPERATIONS OF MUTUAL FUND

Board of DirectorsA management investment company (mutual fund company) has a CEO, a team of officers and a board of directors.

SponsorThe principal underwriter of a mutual fund is called a distributor, or more commonly, the sponsor.

OPERATIONS OF MUTUAL FUND

CustodianThe custodian is responsible for the possession of the securities purchased by the investment company for its portfolio.

Investment AdvisorThe board of directors hires an investment advisor to invest the cash and securities held in the fund's portfolio, implement the objectives outlined by the board.

OPERATIONS OF MUTUAL FUND

Transfer AgentThe mutual fund contracts with a transfer agent to issue, redeem and cancel fund shares, handle the distribution of dividend and capital gains to shareholders, and send out trade confirmations

DealersAs mentioned before, the sponsor usually distributes shares of the mutual fund through dealers.

Restrictions on Mutual Fund Operations

Selling securities short Buying securities on margin Participating in joint investment or

trading accounts Distributing its own securities, except

through a sponsor

Affiliated and Interested Parties

An affiliated person is someone who controls an investment company's operations in any way.

An interested person includes those individuals who have a relationship with an affiliated person that the SEC deems influential in matters of fund operation. These people would include immediate family members of affiliated parties, legal counselors, broker-dealers, and so on.

PROS AND CONS OF MUTUAL FUNDS

Diversification . Securities from hundreds or even thousands of issuers it reduces the risk of loss.

Professional Management . Expertise to manage and reinvest interest or dividend income, or to investigate thousands of securities. Access to extensive research, market information, and skilled securities traders.

PROS AND CONS OF MUTUAL FUNDS

Liquidity . Mutual fund can be bought and sold on any business day, so investors have easy access to their money. Many individual securities can also be bought and sold readily, others aren't widely traded. (CE & IC)

Convenience . Mutual funds offer services that make investing easier. Mail, telephone, or the Internet. Automatic investments into a fund or automatic transfers from a fund to your bank account.

PROS AND CONS OF MUTUAL FUNDS

Tax Free Return The stock dividend from mutual funds are exempt from tax. Cash dividend taxable

No Guarantees. Unlike bank deposits, principal and returns are not guaranteed.

Diversification “Penalty." Diversification reduces the risk of loss, it also limits the potential for making a killing in the market.

MUTUAL FUNDS STRUCTURES

Open End – continuously offer and redeem their units to the investors.

Closed End – one time issuance of certificates and then are traded in the secondary market.

Investment Company – one time

issuance of shares and then are traded in the secondary market.

LEGAL STRUCTURE

Open end and closed end funds are established through a trust deed as a trust under the trust act 1888.

Investment Company is established as a limited liability company.

Operated by two parties i.e. fund manager and the trustee or custodian.

CDC - largest trustee of mutual funds in Pakistan with almost 90% of the market share.

SECP through NBFC Regulations 2008 regulates the mutual fund industry.

PARTIES TO MUTUAL FUND

Fund Manager Manage the assets of the mutual fund. Maintenance of financial and other records and documents. Maintenance of the record of unit or certificate holders. Receipt and processing of investment and redemption

applications.

Trustee Hold all the property mutual fund for the unit or certificate

holder. Settlement of transaction entered into by the fund manager. Ensure the methodology and procedures adopted by the

fund manager in calculating the value of units are adequate.

MUTUAL FUND TYPES IN PAKISTAN

Equity Fund Balanced Fund Asset Allocation Fund Fund of Funds Capital Protected / Guaranteed Fund

MUTUAL FUND TYPES IN PAKISTAN

Index Fund Money Market Fund Income Fund Aggressive Fixed Income Fund Islamic Funds

TAX STRUCTURE

Income Tax Ordinance, 2001 Income of mutual fund is exempt subject

to distribution of ninety percent of accounting income reduced by capital gains realized or unrealized.

Mutual funds are also exempt from withholding tax and capital gains tax.

TAX STRUCTURE

Investor will be taxed on cash dividend @ 10% stock dividend exempt.

Investors have to pay capital gains tax if units, certificates or shares are redeemed/sold before one year.

Investors also get rebate on income tax on their investment in mutual funds.

CONCLUSION

A mutual fund brings together a group of people and invests their money in stocks, bonds, and other securities.

The advantages of mutuals are professional management, diversification, economies of scale, simplicity and liquidity.

The disadvantages of mutuals are high costs, over-diversification, possible tax consequences, and the inability of management to guarantee a superior return.

CONCLUSION

There are many, many types of mutual funds. You can classify funds based on asset class, investing strategy, region, etc.

Mutual funds have lots of costs. Costs can be broken down into ongoing fees

(represented by the expense ratio) and transaction fees (loads).

The biggest problems with mutual funds are their costs and fees.

Mutual funds are easy to buy and sell. You can either buy them directly from the fund company or through a third party.