Companies

Definition: Investment companies are

financial intermediaries that sell
shares to the public and invest the
proceeds in a diversified portfolio of
securities. Each share sold represents
a proportional interest in the portfolio
of
securities
managed
by
the
investment company on behalf of its
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shareholders.

Types of investment
companies/funds
1. Open-end funds: These are the portfolios of
securities such as stocks, bonds and money
market instruments. Features of this fund are
instruments in this fund own a pro rata share of
the overall portfolio, managers actively manages
the portfolio and value of each share of the
portfolio is called net asset value (NAV) per share
that equals the market value of the portfolio minus
amount of liabilities divided by the number of
shares owned by the mutual fund investors. For
example a mutual fund contains 5 million shares
outstanding thats portfolio value is Tk.200 million
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and liabilities of Tk.100 million. So NAV is Tk.20.

Types of investment
companies/funds
2. Closed-end fund: This is limited number
of shares issued by an investment company
through an underwriter where after initial
issue there are no sales or purchase of fund
shares by the fund company. The price of
the share is determined by the supply and
demand in the market. Net asset value per
share is calculated by dividing the difference
between value of the portfolio and amount
of liabilities by number of shares in the fund.
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Types of investment
companies/funds
3. Unit trust:
In this fund a limited number of unit
certificates are issued by the investment
company that are not tradable in the
secondary market that is held by the
trustee until they are redeemed by the
issuer. It has fixed termination date and
investors know that the portfolio
consists of specific securities.
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Islamic Unit Trust

The contract for sharing of capital between the
shareholders to carry on business with a view to
making profits that will subsequently be shared
among them is known as Islamic unit trust. In this
trust fund, partners are the unit holders, the fund
that is contributed by them is the capital and the
investment activity that is being undertaken by the
fund is the subject matter of the business. The profit
is represented by the dividends paid to each of the
unit holders while the application to buy the unit is
the offer and acceptance is the authentication by
the manager on the sale of the unit by the fund 5-5

Open-end fund vs Closed-end

fund
1. The number of shares of an open-end fund varies
because the fund sponsor will sell new shares to
investors and buy existing shares from shareholders,
whereas closed-end funds have a constant number of
shares outstanding.
2. For changing number of shares in open-end fund net
asset value per share is considered as price of the
share, whereas price per share of closed-end fund is
determined through demand and supply of shares.
3. No premium or discount in case of open-end fund
but there may be premium or discount in case of
closed-end fund.
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Fund sales charges

Commission and fees paid by the
investor to the broker for trading shares
in the fund are known as sales charge.
The fund requires charge for trading is
known as load fund and the fund does
not require charge is known as no-load
fund. This sales charge may be imposed
at the time of purchase that is called
front-end loan and at the time of sale or
redeem that is called back-end load.
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Annual operating
expenses
The expenses deducted by the
fund sponsor from the investors
or fund holders account balance
each
year
for
maintaining
account,
giving
investment
advice and other services are
known as operating expense. For
example, service charge or excise
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duty.

Economic motivation for

fund
1. Risk reduction via diversification
2. Lower cost of contracting and
processing information
3. Professional portfolio management
4. Liquidity
5. Variety
6. Payments mechanism
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Types of funds by investment

objective
1.
2.
3.
4.
5.
6.
7.

Stock fund
Bond fund
Money market fund
Asset allocation fund
Hybrid fund
Balanced fund
Convertible bond fund
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Taxation of mutual
funds
mutual funds must distribute at least 90% of their
net investment income earned exclusive of
realized gains or losses to shareholders to be
considered a regulated investment company and
thus not to be required to pay taxes at the fund
level prior to distributions to shareholders. Taxes
are paid on distributions only at the investor level,
not the fund level. Mutual fund investors have no
control over the size of these distributions and as a
result, the timing and amount of the taxes paid on
their fund holdings is largely out of their control.
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Regulation of fund
It means what type of fund can be issued by a particular
investment company at what level for what amount and
how the issue process will be dealt, how the issued
funds will be managed and how the fund holder will be
distributed part of profit as benefit. For ensuring these,
funds are regulated according to following laws:

1. Securities Act
2. Investment Company Act
3. Investment Advisors Act
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Structure of fund
1. Board of directors
2. Investment advisor
3. Distributor or broker/dealer
4. Other service providers such as
independent public accountant,
custodian and transfer agent.

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Exchange Traded
Funds
Exchange traded funds consists of investment
companies that are similar to mutual funds but trade
like stocks on an exchange. When they are introduced,
then they are similar to closed-end funds, which have
very small premium or discounts from their net asset
value. In this fund, it is the investment advisors
responsibility to maintain the portfolio such that it
replicates the indexs return accurately, because
supply and demand determine the secondary market
price of these shares, the exchange price can deviate
from the value of the portfolio and as a result, may
provide some imprecision in pricing. Dividend income
and capital gains realized from this fund are taxable to
the investor.
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Islamic Exchange Traded Funds

(IETF)
An Islamic exchange traded funds only tracks an Islamic
benchmark index whose constituents comprise companies that
are shariah compliant. An IETF will be managed under
shariah principles and guidelines and overseen by an
appointed shariah advisor or committee. The shariah advisor
will conduct regular reviews and audits on an IETF to ensure
strict compliance with shariah principles and practices. A
comprehensive shariah-screening methodology is performed
in order to qualify as an IETF. This involves sector screening
to determine that the fund invests only in companies with halal
businesses and that if these companies are involved with nonpermissible activities, the ratio of income from nonpermissible activities to total income should not exceed the
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stipulated ratio determined by the relevant authority.

Commercial banks and mutual

funds
Commercial banks have a dual
relationship with mutual funds,
both distributing mutual funds from
other fund sponsors and managing
their own funds. Commercial banks
also can deal with funds either its
own or others for charge or fees.
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