What is a mutual fund?

• What is the yield of the mutual fund?
• What are the pillars of mutual fund?
• What is the mutual fund fee?

A mutual fund is a financial institution that invests financial resources received from investors in various portfolios of securities. These funds allow investors to invest in a diverse set of securities with their small capital and minimize the risk of their transactions.

In fact, the professional managers of these funds, on behalf of the fund’s investors, with the knowledge and experience they have in the field of investment, form a diverse portfolio of all types of securities and try to create the highest return for the mutual fund and reduce risk. Reduce transactions. Today, mutual funds are one of the most attractive investment tools.

Mutual fund concepts and terms

In this section, we describe the most important common terms in investment funds:

1. investment unit

In the stock market, the trading volume is calculated based on the number of shares bought and sold. While in investment funds, the volume of transactions is based on the purchase and sale of investment units. For example, if the price of each unit of the fund is equal to 10,000 Tomans, you must pay 1000,000 Tomans to the fund to buy 100 units.

2. Issuance of investment units

When the investor intends to buy the investment units of the fund, he must submit a request for unit issuance to the fund manager. Then, by presenting other documents and paying the money, the fund manager issues the unit to the investor. In fact, in investment funds, the concept of buying and issuing are placed together.

3. Cancellation of investment unit

When the investor intends to sell the investment units of the fund, he must submit the unit cancellation request to the fund manager, so that the fund manager, after receiving the necessary forms and documents, cancels the unit and deposits the funds related to the cancellation of the units to the investor’s account. slow In other words, in investment funds, the concept of cancellation and sale are placed together.

4. Net Asset Value (NAV)

To calculate the mutual fund’s net asset value, you must subtract the fund’s liabilities from its assets and divide by the number of fund units. This amount is not fixed and will change on a daily basis by changing any of the parameters of fund units, fund liabilities and fund assets. In stock trading, the buying and selling criterion is the stock’s daily price, while in investment funds, the basis of trading is the fund’s NAV.

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5. underwriting

Before forming the fund and in order to collect financial resources, those who intend to invest in the fund can complete the subscription forms and submit them to the fund manager along with other documents. In this case, through subscription, they bought each unit of the fund at its nominal price and invested in the fund. It should be noted that after forming the fund, you should buy each unit of it at the daily price, which is determined based on the value of the fund’s assets.

The pillars of mutual investment fund

For the formation of any joint investment fund, the articles of association are defined, which help to improve the performance of the fund by providing executive and supervisory conditions. These elements are:

1. fund assembly

The fund assembly is the most important pillar of the fund and becomes official when the holders of at least half plus one premium investment unit who have the right to vote attend it. The fund assembly is responsible for appointing the manager, trustee, guarantor and auditor. Also, he is obliged to introduce these elements to the stock exchange organization for approval.

2. fund manager

The fund manager is actually the executive pillar of the fund who has expertise in the capital market and must provide all the anticipated reports and obtained information to the custodian, auditor and stock exchange organization. Also, it should inform the public about the information mentioned in the notification section of the statute through the fund’s website. The fund manager introduces a group of at least three people under the title of investment managers to make the necessary investment decisions on his behalf.

3. Trustee of the fund

The trustee of the fund is elected by the fund’s assembly and is known as the fund’s supervisory body. The identity of the trustee can be seen in the prospectus and website of each fund. One of the most important duties of the fund trustee is to introduce the auditor to the fund assembly, monitor the performance of the manager and guarantor, and approve the bank accounts opened by the manager. The custodian also follows up on any lawsuit filed by the investors against the fund.

4. fund guarantor

The guarantor of the fund is also chosen by the assembly and introduced to the public through a letter of hope. The issue of guarantee in the fund is raised when there is not enough cash available for payment in case of cancellation of fund units. The presence of a guarantor in investment funds is optional, and today, due to the low probability of liquidity problems and the costs imposed on investors due to the appointment of a guarantor, there is no liquidity guarantor.

5. auditor

Among the other supervisory elements of the fund is the auditor, who is introduced by the trustee and among the auditor institutions that are approved by the stock exchange organization. The time period of the auditor’s mission is determined by the fund’s assembly, and after that, he will be required to assume and perform the responsibilities listed in the statute.

6. Fund brokers

In order to carry out activities related to the purchase and sale of securities, fund managers seek help from brokers who are approved by the Securities and Exchange Organization, who, in addition to their usual duties, must also perform the duties assigned to them in the statutes.

History of investment funds in Iran and the world

The activity of investment funds began in 1882, at the same time as the establishment of the first investment company by “William I”. But the first investment fund that started its activity in the form of today’s investment funds was established in 1924 in Boston, America. The performance of these funds has been quite successful since then and their number has always been on the rise.

Today, more than 80 million people in America have invested in these funds, and many people prefer investing in mutual funds to investing directly in the stock market. Iran is no exception to this rule. The history of investment funds in Iran also goes back to the end of 2006, when at this point in time, 7 investment funds subscribed to start their activities from April and May of 2016.

How much return is mutual fund?

Based on the studies, the performance of investment funds is affected by 6 factors, which are:

• The rate of growth in the value of the fund’s assets
• Liquidity in the fund
• The amount of issuance of investment units of the fund
• The cancellation rate of fund investment units
• Amount of ownership of fund units by natural and legal persons
• Capital market index growth rate

The above-mentioned items have an effect on the yield of the fund; Therefore, if you intend to invest in investment funds, you should compare the funds available in the market based on the above criteria in order to make the best choice in terms of yield.

 

Mutual fund features

The following are the most important features of mutual funds:

1. A good alternative to buying shares directly

People who are not familiar with the stock market can buy mutual fund units. In this case, the companies purchased by the fund are known as the owners of the shares; Therefore, each of them shares in the profits and losses resulting from price fluctuations of the securities in the fund’s portfolios in proportion to their share of the fund.

2. Economies of scale

If you are planning to enter the stock market and your capital is low, it is definitely not profitable for you to pay for hiring experts or using analytical software for higher returns. But by investing in mutual fund, you can benefit from these benefits and facilities with minimum cost. On the other hand, by collecting small capitals, fund managers can provide extensive financial resources for investing in a diverse set of securities, and by reducing the risk of transactions, create the highest returns for fund investors.

3. The motivation of fund management to increase the value of assets

The structure of investment funds is such that the interests of fund members and managers are directly related to the growth of the value of the fund’s assets. This makes fund managers more motivated to form the best investment portfolio and try to increase the value of fund assets.

Comparison of mutual funds

To compare the performance of mutual funds, we suggest the following methods:

1. Check the volatility of mutual funds with the help of NAV charts. A chart with an upward trend and less fluctuations is desirable.

2. Check the fund’s asset mix. The more diversified the fund’s assets, the lower the investment risk.

3. Get help from financial advisors; Because these people are able to analyze the risk and return of funds.

◊  Be sure to read this article: What is an investment fund and what are its types?

Mutual fund fees and expenses

In general, mutual fund fees and expenses can be defined in the following three formats:

1. Arkan’s fee

It is the expenses that are paid as fees to the executive and supervisory bodies of investment funds. These expenses are paid directly from the fund’s assets.

2. Periodic fees

These are expenses that are paid from the fund’s assets periodically and include the following:

• Auditor fee
• Establishment and settlement fee
• The cost of meetings and membership in the club
• other costs

3. Issuance and cancellation fees

These are costs that depend on the time and amount of issuance and cancellation of fund units. Unlike the above, these costs are directly imposed on the investor, who can minimize this cost by choosing the right investment method (preventing issuance and emotional cancellations).

Mechanism for monitoring mutual investment funds

Mutual investment funds are monitored in two ways:

The internal supervision that is the responsibility of the fund manager and the most important of them include the following:

• Monitoring the execution process, receipts and payments
• Monitoring the performance of brokers
• Supervising the trustee and auditor

External supervision, which is the responsibility of the Securities and Exchange Organization, is carried out in the following two ways:

• With the help of software
• By visiting in person

Where does mutual fund profit come from?

The profit of mutual funds is obtained in the following three ways:

1. Mutual funds usually distribute the profits from the purchase and sale of stocks or the interest earned from the bonds among the investors annually.

2. As the value of stocks or other securities in the fund increases, the net value of the fund’s assets increases, and investors can sell their assets at a higher profit. Usually, funds allow investors to increase the amount of their assets in the fund instead of receiving interest.

3. Sometimes, investment funds earn a profit by selling securities whose price has increased, and most of the funds divide this profit among investors.

How is mutual fund interest calculated?

The profit of mutual investment funds depends on the annual dividends, the change in the total value of the fund’s assets and the cost of the initial investment.

 What are the steps of investing in mutual funds?

To invest in investment funds, you must first see the list of funds along with their address and contact information by visiting reliable sites. After choosing the desired fund, you must complete the necessary forms and documents online or in person and submit them to the fund manager.

After you request to issue the unit and pay the money, the fund manager is obliged to issue the investment units to you after confirming the documents. Please note that if you invest in funds before they start operating, you buy each unit through subscription and at a nominal price. On the other hand, if you issue a request to issue a unit after the start of the fund’s activity, you must buy each fund unit at the daily price, which depends on the value of the fund’s assets on the day.

Types of mutual funds

1. Fixed income fund

Fixed income funds allocate at least 70% of their assets to buy fixed income bonds. By investing in a diversified portfolio of fixed income bonds, bank deposits and a small amount of stocks, these funds are suitable for those who are risk averse and need current income. The interest payments of these funds are made in predetermined periods, which are usually one or three months. Kian Fixed Income Investment Fund is one of the reliable fixed income funds that has yielded 3.259% since its establishment.

◊  Be sure to read this article: Familiarity with fixed income fund, its advantages and disadvantages

2. Stock investment fund

Stock investment funds invest at least 70% of their capital in stocks. These funds are highly influenced by stock market fluctuations and investing in them is high risk. Investing in mutual funds is attractive for people who want to invest in the stock market but do not have enough time for this. The yield of these funds is higher than fixed income funds; Especially when the stock market is in a favorable situation. Avai Saham Kian and Anga Saham Kian investment funds are among the safe stock funds that have had acceptable returns since the beginning of their establishment.

3. Mixed investment fund

These funds allocate a maximum of 60% of their capital to investing in stocks and a minimum of 40% to fixed income bonds. The amount of risk and yield of these funds is between fixed income and equity investment funds. Mixed investment funds have higher returns due to having stocks in their asset portfolio, on the other hand, due to the presence of fixed income bonds in their asset portfolio, they reduce investment risk. Many of these funds have a guarantee of liquidity and are recommended to those who accept moderate risk.

4. Investment fund in gold

Many people buy gold and coins to preserve the value of their capital, but they always face risks such as gold and coins being lost or stolen. With the help of gold investment fund, you no longer need to keep coins and gold. Also, you can invest in coins and gold with a small capital and whenever you need cash, get your capital at the daily price of coins or gold.

These funds must invest at least 70% of their assets in gold coin commodity deposit certificates, a maximum of 20% in gold-based derivatives and the rest in fixed income securities. In fact, these funds are an alternative to buying physical gold. Among the most reliable investment funds in gold, we can mention the Kian Gold Investment Fund, which has achieved a return of more than 619% since the end of 2016.

5. exchange traded fund (ETF)

ETF investment fund is a type of investment fund that consists of various assets. These assets include all kinds of securities and physical assets. The basic difference between these funds and other mutual investment funds is that the trading of ETF units is similar to stock trading; This means that the units of this fund can be traded during trading days. Therefore, the amount of supply and demand and the conditions of the stock market affect the price of the units of these funds. On the other hand, buying and selling units of these funds in the market helps their liquidity until the guarantor element is removed from these funds and a new element called the market operator provides liquidity in these funds.

6. Project investment fund

Project investment funds are funds that, by collecting small funds, provide the necessary financial resources to launch projects that have economic justification. These projects include industrial, mining, petrochemical and oil projects.

7. Bold investment fund

The purpose of forming these funds is to provide financial resources to invest in small businesses that have high growth potential. In fact, these funds finance entrepreneurs and small companies. Investing in these funds is considered a high-risk investment and will bring high returns if the business is successful.

8. Charity investment fund

These funds are formed with specific charitable purposes such as supporting sports activities and orphaned children. The financial resources collected through these funds are invested in the sectors listed in the prospectus and the profit is used for charitable purposes. Of course, investors can also consider a part of the profits from the investment for themselves.

9. Exclusive market management investment fund

It is one of the types of specialized funds that are formed in order to balance the market and increase liquidity. In fact, this type of mutual fund protects the stock price of that company against extreme market fluctuations by managing the shares of a stock company belonging to a specific industry.

10. An index investment fund

These funds invest funds collected from investors in such a way that it performs exactly the same as one of the capital market indices (usually the aggregate index). For example, if a share makes up 3% of an index, the fund manager allocates 3% of the fund’s assets to buy that share according to that index.

◊  Be sure to read this article: All about index mutual funds

 

11. Land and building investment funds

Investing in land and housing is one of the attractive methods of investment that requires a lot of capital and providing this capital is not an easy task. Land and building investment funds help you participate in huge construction projects with small investments and benefit from the profits from these projects.

Mutual fund benefits

Among the most important advantages of investment funds, the following can be mentioned:

1. Professional management

Investment fund managers are completely professional and are experts in the capital market. They are fully familiar with the software available in the market, and this makes them the best asset portfolio for the fund. Investment funds, according to the financial resources at their disposal, are able to hire such managers to bring the most returns to the fund investors.

2. High liquidity

One of the most important features of any investment is liquidity. Due to the existence of a guarantor in investment funds, the risk of liquidity is reduced and the investor can request the cancellation of any number of units of his investment fund at any time he decides, and after deducting the costs, he can redeem his capital according to the day’s price. To receive the net value of the fund’s assets in cash.

3. Diversifying the portfolio of assets

The arrangement of the portfolio of each type of investment fund is in accordance with the rules that govern them. On the other hand, considering the financial resources that these funds have, they will be able to form diverse portfolios of all kinds of securities and in this way, minimize the investment risk.

4. Ease of investment

Investing in these funds does not require special knowledge and skills, and you can easily buy or sell the units of these funds.

5. Supervision of institutions and high financial security

Due to the high creditworthiness of the listed companies and the supervision of the Securities and Exchange Organization on all transactions of capital market funds and companies, the risk of capital default has reached zero.

6. The existence of various funds for different groups

Due to the existence of various investment funds in the market, each investor can choose a fund that is in line with their taste and financial strategy. For example, if you are risk averse, invest in fixed income mutual funds.

7. Saving time

To have a successful performance in the stock market, you must spend enough time to analyze the market and important news. While investing in mutual fund, you can save your time.

8. Capital flexibility

By buying investment fund units, you can participate in a large investment even with your small capital.

Disadvantages of investment funds

The most important disadvantages of investment funds are:

1. Conflict of interest

The professional management of the mutual fund, while it is considered as one of the advantages of the fund, is also considered as one of its disadvantages. Because it may sometimes take decisions for its own interests that do not contribute to the return of investors.

2. A lot of variety

Suppose that one of the assets of the asset portfolio purchased by the fund has created a high profit for the fund, but due to high diversification, it only forms a small part of the fund’s portfolio; This makes the yield of the fund not change much.

Frequently asked questions about mutual funds

1. What is the mechanism of mutual funds?

A mutual fund collects micro capital from investors and with the help of the large capital obtained, it takes advantage of the benefits of a larger scale investment. In fact, the fund manager, on behalf of the investors, invests the collected capital in a variety of securities to bring them more returns with less risk.

2. What is the range of powers of mutual funds?

The powers of the joint investment fund are limited to the framework of the trust letter and the fund’s statutes, and the fund managers must manage the investment based on the assigned powers.

3. What is the difference between ETF and mutual funds?

Mutual fund units can be traded only at the end of the trading day and after calculating the NAV. While ETF units are bought and sold during the trading day, similar to stocks. Therefore, the liquidity of ETF is more than investment funds. Another advantage of ETFs is the tax exemption of investing in these types of funds.

4. How much of our capital should we allocate to investment funds?

It totally depends on your taste and trading strategy. If you want to buy and sell stocks but don’t have enough time and knowledge for this, you can invest in mutual funds or mutual funds. If you are interested in low risk transactions, fixed income fund is the best option for your investment. In general, many stock market traders allocate part of their capital to investment funds that have a brilliant history, and in this way, reduce the risk of their trading portfolio.

Conclusion

Mutual funds are one of the important capital market mechanisms that make market conditions more favorable for beginner investors in terms of risk and return. Today, in the financial markets of the world, instead of buying and selling shares directly, they invest in these funds in order to benefit from the knowledge and experience of professional managers to increase the return on their capital. In fact, the managers of this fund provide a large financial resource by collecting small capitals and reduce the risk of transactions by forming a diverse portfolio of securities. In this article, we tried to introduce the types of investment funds along with their advantages and disadvantages. You can invest in all types of these funds based on your taste and trading strategy and minimize the risk of your transactions.