Definition of Mutual Fund
Content
Mutual Fund in Egypt
Sarah Ahmed
Hany
- Business Group-
Zayed
Definition of Mutual Fund:
An investment program funded by shareholders that trade in diversified holdings and is
professionally managed.
Mutual funds are pools of money that are managed by an investment company. They offer
investors a variety of goals, depending on the fund and its investment charter. Some funds,
for example, seek to generate income on a regular basis. Others seek to preserve an
investor’s money. Still others seek to invest in companies that are growing at a rapid pace.
Mutual funds history:
Historians are uncertain of the origins of investment funds; some cite the closed-end
investment companies launched in the Netherlands in 1822 by King William 1st of the
Netherlands. He was credited with starting such a fund in 1822 and yet some even say that
the King got the idea from a Dutch merchant named Adriaan van Ketwich whose investment
trust was created in 1774. Similar pooled fund investment vehicles were started in
Switzerland in mid-1849, followed by Scotland in the 1880s.
The first modern mutual fund came up in the US in 1924 and there were more than 700
funds that existed in the US just before the Great Depression.
In Egypt, the establishment of the first mutual fund was achieved in the last decade of the
past century.
Mutual fund classification:
Mutual fund classification criteria are the factors used to categorize mutual fund. There are
many criteria that are commonly used to classify the various types of mutual portfolios by
what is generally referred to as type or category. These include six types:
a. Trading shares (Closed - end fund and open-end fund )
b. Components (Stock funds , bond funds and money market funds)
c. Style (objectives) (see that later)
d. Capitalization (size)(large-cap, mid-cap and micro-cap).
e. Sector or industry
f. Geographic coverage (local, international and emerging market)
Objectives of mutual fund:
A mutual fund has many objectives which include:
a. Growth funds seek high rates of return from capital gains where they undertake
significant risks in order to earn these gain.
b. Income funds seek both cash dividend income and, capital gains and, as a result, are
less risky than growth funds.
c. Income and growth funds want to earn primarily cash dividends and, to a lesser extent,
capital gains
d. Balanced funds claim to be in pursuit of income, growth and stability
Risk of mutual fund:
The sources of mutual fund risk are:
a. Business risk.
b. Financial risk.
c. Liquidity risk.
d. Exchange rate risk.
e. Country risk.
However, a mutual fund has two types of risks:
a. Systemic risk: The variability of returns that is due to macroeconomic factors that affect
all risky assets. Because it affects all risky assets, it cannot be eliminated by diversification
(Reilly and Brown, 2003).
b. Unsystematic risk: Risk that is unique to an asset, derived from its particular
characteristics. It can be eliminated in a diversified portfolio (Reilly and Brown, 2003).
Performance measures of mutual fund
Evaluating the performance of mutual funds in general, mainly related to the determination
of the success of the portfolio manager to achieve balance between the different rates of
return and acceptable levels of risk.
Thus, evaluating the performance of mutual funds does not mean only measure return on
these funds, but also means measuring the levels of risk associated with those returns
during a certain time.
There are many methodologies to measure the performance of mutual funds1, Since 1965
Treynor, Sharpe were the first researchers whom evaluate fund performance (Treynor, 1965
and Sharpe, 1966), some of these methods are:
1-Treynor ratio
2-Sharpe ratio
Sources:
1.
www.ca-egypt.com/English/General/MF_Performance.aspx
2.
www.citibank.com/egypt/consumer/mutual.htm
3.
www.egx.com.eg
4.
www.egx.com.eg/english/funds.aspx
5.
www.barchart.com/funds/ytd.php
Sarah Ahmed
Hany
- Business Group-
Zayed
Definition of Mutual Fund:
An investment program funded by shareholders that trade in diversified holdings and is
professionally managed.
Mutual funds are pools of money that are managed by an investment company. They offer
investors a variety of goals, depending on the fund and its investment charter. Some funds,
for example, seek to generate income on a regular basis. Others seek to preserve an
investor’s money. Still others seek to invest in companies that are growing at a rapid pace.
Mutual funds history:
Historians are uncertain of the origins of investment funds; some cite the closed-end
investment companies launched in the Netherlands in 1822 by King William 1st of the
Netherlands. He was credited with starting such a fund in 1822 and yet some even say that
the King got the idea from a Dutch merchant named Adriaan van Ketwich whose investment
trust was created in 1774. Similar pooled fund investment vehicles were started in
Switzerland in mid-1849, followed by Scotland in the 1880s.
The first modern mutual fund came up in the US in 1924 and there were more than 700
funds that existed in the US just before the Great Depression.
In Egypt, the establishment of the first mutual fund was achieved in the last decade of the
past century.
Mutual fund classification:
Mutual fund classification criteria are the factors used to categorize mutual fund. There are
many criteria that are commonly used to classify the various types of mutual portfolios by
what is generally referred to as type or category. These include six types:
a. Trading shares (Closed - end fund and open-end fund )
b. Components (Stock funds , bond funds and money market funds)
c. Style (objectives) (see that later)
d. Capitalization (size)(large-cap, mid-cap and micro-cap).
e. Sector or industry
f. Geographic coverage (local, international and emerging market)
Objectives of mutual fund:
A mutual fund has many objectives which include:
a. Growth funds seek high rates of return from capital gains where they undertake
significant risks in order to earn these gain.
b. Income funds seek both cash dividend income and, capital gains and, as a result, are
less risky than growth funds.
c. Income and growth funds want to earn primarily cash dividends and, to a lesser extent,
capital gains
d. Balanced funds claim to be in pursuit of income, growth and stability
Risk of mutual fund:
The sources of mutual fund risk are:
a. Business risk.
b. Financial risk.
c. Liquidity risk.
d. Exchange rate risk.
e. Country risk.
However, a mutual fund has two types of risks:
a. Systemic risk: The variability of returns that is due to macroeconomic factors that affect
all risky assets. Because it affects all risky assets, it cannot be eliminated by diversification
(Reilly and Brown, 2003).
b. Unsystematic risk: Risk that is unique to an asset, derived from its particular
characteristics. It can be eliminated in a diversified portfolio (Reilly and Brown, 2003).
Performance measures of mutual fund
Evaluating the performance of mutual funds in general, mainly related to the determination
of the success of the portfolio manager to achieve balance between the different rates of
return and acceptable levels of risk.
Thus, evaluating the performance of mutual funds does not mean only measure return on
these funds, but also means measuring the levels of risk associated with those returns
during a certain time.
There are many methodologies to measure the performance of mutual funds1, Since 1965
Treynor, Sharpe were the first researchers whom evaluate fund performance (Treynor, 1965
and Sharpe, 1966), some of these methods are:
1-Treynor ratio
2-Sharpe ratio
Sources:
1.
www.ca-egypt.com/English/General/MF_Performance.aspx
2.
www.citibank.com/egypt/consumer/mutual.htm
3.
www.egx.com.eg
4.
www.egx.com.eg/english/funds.aspx
5.
www.barchart.com/funds/ytd.php
