Tutorial 4: Unit trust/Mutual fund

1. Discuss FOUR(4) attraction of mutual funds

Firstly, they are very convenient. It is because they are easy to buy and easy to
understand. They typically have low minimum investments and they are traded only
once per day at the closing net asset value (NAV).

Secondly, they have a dividend reinvestment. As dividends and other interest income
sources are declared for the fund, they can be used to purchase additional shares in the
mutual fund, therefore helping our investment grow.

Thirdly, it is safe to invest in mutual funds. Reduced portfolio risk is achieved through the
use of diversification, as most mutual funds will invest in anywhere from 50 to 200
different securities.

Lastly, they have professional management. When we buy a mutual fund, we pay a
management fee as part of our expense ratio, which is used to hire a professional
portfolio manager who buys and sells stocks, bonds, etc. This is a relatively small price
to pay for getting professional help in the management of an investment portfolio.

2. Differentiate between a load fund and a no-load fund

Load fund is a mutual fund that charges a commission when shares are bought. This
charge could be a percentage of the amount we are investing in, or it can be a flat fee,
depending on the mutual fund provider. It is typically sold through a broker.

No-load fund is a mutual fund that does not charge a commission when shares are
bought or sold. This absence of fees occurs because the shares are distributed directly
by the investment company, instead of going through a secondary party. The cost
savings tend to give investors a head start in achieving superior rates of return.

3. Explain the differences of open-end fund, and close-end fund

Open-end fund is the investors buy and sell shares directly with the mutual fund
company without a secondary market. Fund can issue an unlimited number of shares as
investors contribute new money to the fund. Purchase and selling price is determined by
the Net Asset Value (NAV) of the fund. All purchases and sales are completed at the
end of the day after the stock markets have closed.

Close-end fund is sell shares in the fund only at the initial offering. Its subsequent trades
are done in a secondary market, similar to the common stock market. It has a limited
number of shares. Investment advisor doesn’t have to worry about cash inflow or
outflows. Market price of the fund’s shares is determined by supply and demand and
 may not equal net asset value. Generally sell at premium or discount (usually discount)
to NAV.

4. Briefly explain how is the net asset value for a mutual fund calculated.

NAV= value of all securities/total shares outstanding. The NAV calculation is important
because it tells us how much one share of the fund should be worth.

5. Explain the exchange traded fund.

Exchange traded fund is a basket of securities, often designed to track a specific market
index. It is similar to index mutual funds, but it can be purchased or sold on a stock
exchange like what regular stock can. The investors can buy and sell ETPs any time of
the day during operating hours.

ETFs provide lower average costs and fewer broker commissions because the investor
only needs to make one time transaction to buy all the stocks held in ETP portfolio.
Besides, ETFs have low management expenses due to limited trading by investment
advisors. ETFs also have low turnover, which can help to avoid taxes until it is sold.

6. Explain the concept of Real Estate Investment Trust, and how investors can profit
from the investment in REITs.

Real Estate Investment Trust refers to the closed-end investment company that invests
in mortgages and various types of real estate investment. It allows individuals to invest in
large-scale and income-producing real estate. It can help the investor to diversify the
investment portfolio through investing in more than one real estate asset, therefore the
risk is lower.

It can provide two types of profit to investors which are high dividend and capital
appreciation potential. The REITs will lease space and collect rents on the properties,
then distribute that income as dividends to the investors. Besides, investors can get
capital gains if the REIT sells the assets.

7. A retiree who wish to preserve his capital from depreciation due to the inflation
factor. Propose a fund that suitable to the investor above.

Equity-income fund emphasizes current income and capital preservation. It focuses on

high current income with some long-term capital appreciation.it invests in high-yielding
common stocks, convertible securities or preferred stocks and blue chip or other high-
grade securities. Equity-income fund is typically less price volatility than overall stock
market and less risky investments for relatively conservative investors looking for
 moderate growth. If the rate of return is growing faster than the inflation rate, the
investment will not be affected by inflation factor.

8. A just married couple is planning to invest in the market to reduce the current
income burden and to generate sufficient fund for their children's education fund
after 20 years. Suggest a fund that might be suitable for the investors above.

The just married couple plans to have sufficient education funds for their children after
20 years and the funds should also help them to reduce the current income burden. I
propose them to invest in growth-and-income funds. The features of growth and income
fund is to seek both long term growth and current income, with primary emphasis on
capital gains. Its focus is on long term capital appreciation with some high income to
provide limited stability that fulfill the requirement of the couple to generate enough funds
in 20 years period. The funds also invest in blend of commons stocks and fixed income
securities, with up to 90% in common stocks that can help them to release current
income burden. These funds are moderate risk investments for investors who can
tolerate moderate price volatility.

9. In Malaysia, it is difficult for a retail investor to invest in the bond market due to its
high minimum funds required. Explain the way for retail investor to invest in the
bond market.

Retail investors can buy bonds through the secondary market as it is common practice
for institutional investors to buy these bonds and then break them down into smaller
parcels for sale.

10. "Not only investing in foreign currency involve exchange rate risk, invest in the
funds also involve exchange rate risk". Justify the above statement.

Investing in foreign currency involves exchange rate risk is potential rise or fall of the
cost, profit, cash flow or market value of an enterprise due to fluctuations in exchange
rates. Investing in the funds also involves exchange rate risk that are investment
products and involve risks. It is not equivalent to a fixed deposit. Exchange rate risk is
the risk that a business financial performance or financial position will be impacted by
changes in the exchange rates between currencies.

11. Explain the factors that investor concern while comparing mutual funds.

Fund’s investment performance

Investors will measure the performance such as return of the mutual fund to decide whether to
invest in which mutual funds. It is enable to judge the investment behavior of a fund and to
appraise its performance in relation to the mutual fund.
Tax efficiency
Some of the mutual funds are charged by some taxes. Depending on how long your fund has
held its assets, the income you receive from a mutual fund may be taxed as ordinary income or
capital gains. This can be a source of confusion because not all capital gains distributions are
taxed at the capital gains rate.

Fee structure
All funds come with some costs and fees such as managerial and operational charges as
mutual funds are schemes managed by professional individuals.

How particular fund fits into your portfolio

Investors will check the risk level of the mutual funds and compare the risk between each
mutual funds. Therefore, investor will decide to invest in mutual funds based on high risk high
return and low risk low return.

Investment skills of fund managers

It is advised that investors check the qualifications and experience of the fund managers, what
funds they have managed and how those funds have performed, etc. Investor should know if
the fund managers could deliver the results outperforming the benchmark indices or matching
them before deciding to invest in a fund managed by a particular fund manager.