Are mutual funds a good investment?

Introduction

Mutual funds as a form of investing first appeared in Europe and the United States around two centuries ago. Europeans have been doing it since the 1800s, while Americans have been doing it since the 1890s. Are mutual funds a good investment These were closed-ended funds with a fixed number of shareholders back then. Massachusetts Investors Trust developed the first open-ended fund in the United States in 1924, and it still operates today.

Open-ended Vs Close-ended Mutual Funds

The term "Closed-Ended Company" is used to describe a closed-end fund. These funds sell a set number of shares and are launched through an initial public offering (IPO) (Initial Public Offering). They can be bought and sold in the secondary market at market rates once they've been issued (Stock Exchange). The stock exchange publishes the market rate every day. When a closed-end fund begins trading, its prices are determined by supply and demand rather than NAV. In terms of volume, these funds dominate the mutual fund market, constantly issuing new units or redeeming issued units on demand. They have no limit on the number of shares that can be issued; when more investors purchase the funds, more shares are issued, also known as Unit Trusts. Unitholders can purchase the fund's units or redeem them on a regular basis at the current Net Asset Value (NAV). An open-end fund, on the other hand, cannot be monitored in the same way that stocks can because trading is not done on an open market. These units can be bought and redeemed through the Management Company, which publishes daily offer and redemption prices. 

National Investment (Unit) Trust (NIT) is a pioneer of the Mutual Funds sector in Pakistan, having been licensed as a non-banking finance firm by the Security Exchange Commission of Pakistan in 1962 and issuing the first open-ended mutual fund in the same year. Guide Mutual Fund is a mutual fund that invests in people. Asset Management is the management of assets. In the case of an equity fund, companies must invest at least 70% of their net assets in listed equities assets, with the remainder in cash or near cash instruments.

The task of Mutual funds Managers

Professional managers administer these funds, which invest the money of investors in stocks, bonds, short-term money market instruments, and other securities. They realized capital gain/loss, dividends (on stocks), and interest during this process (on bonds & short-term money market instruments). These monies are returned to investors as Net Asset Value (NAV) (NAV). The NAV, or net asset value, of a mutual fund, is computed on a daily basis. The goal of fund performance analysis is to determine if fund managers provide investors with good value for their money. Because investors bear certain costs, such as the opportunity cost of a poorly diversified portfolio, transaction costs, and management fees, fund managers must be able to compensate for all of these expenses. The main task of fund managers is to maximize the wealth of investors, whereas the focus of risk controllers is to minimize risk. Both views are relevant and pertinent, therefore, mere maximizing return is not sufficient, but we must consider the quality of return by resolving this conflict of risk & return.

There are more than a hundred analytical methods which can compute portfolio performance or fund manager performance and each one has its own strengths and weaknesses; these methods have been categorized as asset selection vs. market timing, standardized vs. individualized, absolute vs. relative, and excess return vs. gain measure.

Suggestions to improve Mutual Funds Appraisal

In Pakistan on directives of the Securities and Exchange Commission of Pakistan (SECP), every AMC is required to report monthly Fund Managers Report and make it available on their website in a standardized format prescribed by the Mutual Funds Association of Pakistan (MUFAP). Though, reporting risk measures such as Treynor Ratio and Sortino Ratio are voluntary for AMC as per MUFAP, however, all AMCs report their performances in Sharpe ratio. The current study proposed that,

  1. Firstly, rolling returns should also be presented along with conventional annualized / cumulative or calendar years returns.
  2. Secondly, Omega or Sharpe-Omega should also be included along with Sharpe ratio for better judgment of ranking if returns are not normally distributed as it is has been proved in this study.

This study provided room for academicians and researchers to search what other performance measures can be taken up to calculate appropriate ranks of these AMCs when you encounter non-normal return distribution.

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