Are mutual funds a good investment?


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

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.

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
  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.

Download, view, and read the full research paper.

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