What Are Mutual Funds?

When you think of investing, many options come to mind like real estate, private businesses, gold, stocks, and other banking solutions or mutual funds.

In this article we will talk more about mutual funds generally and mutual funds in Egypt specifically. Many people know the term but do they really understand what are they? Or how do they work? Specially that till now in Egypt, good information is always hard to find and this big, important and growing element of investment deserves a much better coverage due its usefulness to individuals and businesses.

Investing in mutual funds in Egypt hasn’t been the easiest option for some time. Although it’s a unique investment opportunity and a great way to start investing. The situation is different now with more companies emerging on the scene and promoting mutual funds’ opportunities.

But before you start investing in these funds, you first need to fully understand their nature, how they work and most importantly why is it the best option to manage your own money.

What is a Mutual Fund?

A mutual fund is a pool of money gathered from many investors against certificates or shares and that money is invested in other financial instruments such as stocks, bonds, treasury bills, etc. as per the fund’s predefined strategy. The combined holdings of the mutual fund is known as its portfolio.

In simple terms. Imagine putting your money in a large piggy bank and giving it to someone

else to manage it. This piggy bank manager is your fund manager.

Fund managers use this money to invest in the capital and money markets seeking profit. Your profit can be in two forms. Either by a cash dividend that the fund can payout to it’s holders like every year or in the form of capital gains. This means that your profit is in the price increase that happens to your share overtime.

How does a mutual fund work?

Mutual funds in Egypt (defined above) as per the Egyptian Law are issued by banks or certain companies. These funds must have a predefined investment strategy that includes the fund’s goals and underline instruments (which is what the fund will invest in). Then comes the Fund Management Company. These funds are managed by professionals which is the main benefit for small investor to be able to afford such professionals who will be managing their own money no matter how small through the fund.  Other parties also involved in mutual funds space are the custodian (which holds the underline assets), the regulator (FRA) and a list of companies that shall be entitled to receive subscriptions from investors.

Mutual funds give small or individual investors access to professionally

managed portfolios of equities, bonds, and other financial instruments. Hiring these professionals privately is very expensive and usually not worthwhile with small investments so practically do not serve small investors anyway unless through larger portfolio pools such as mutual funds.

You as an investor become a shareholder, ie. Holds a share or portion of the fund.

The value of the mutual fund is called the net asset value (NAV) and that’s calculated at the end of each business day.

The NAV is calculated by taking the total value of the stocks, bonds and any other holding in the

mutual fund’s portfolio and dividing them by the number of the outstanding

shares in the funds. The outstanding shares are those portions owned by

investors like you.

Example:

X fund issued 1 million shares for 100 EGP. Therefore, X fund is worth 100M EGP and that’s called NAV (Net Asset Value).

After one year X fund invested 50% stocks that are now worth 60M. 50% in bonds that are now worth 55M. So the NAV of X fund after one year is 115M. That is still 1M shares so your share’s price appreciated from 100 EGP to 115 EGP and that price increase is your capital gain.

There are different types of mutual funds designed for different purposes. Here are the most common types. 

1. Equity funds

which invests mainly in stocks. Generally investing in equities is most profitable in the long term but is considered high risk. 

Suitable for long term investors who are willing to take high risk

2. Money Market Funds

which mainly invests in short term debt instruments like treasury bills. Requires low risk and comes with relatively low returns

Suitable for short term conservative investors 

3. Fixed Income Funds

 which mainly invests in debt instruments like treasury bonds. Relatively low risk and fair returns as per the market 

Suitable for medium term conservative investors

4. Balanced Funds.

These tend to be a mixture of both mentioned above and tend to invest in stocks, bonds and other financial instruments 

Suitable for medium to long term investors and moderate risk takers 

5. Asset Allocator Funds.

These funds give maximum freedom to fund managers to shift between asset classes, ie. stocks, bonds, etc. This flexibility is a double-sided blade; they can easily out-perform or under-perform the market. For this type of funds; managers’ performance must be watched closely and a successful track record is a must. 

Suitable for medium to long term investors who are willing to go for high risk

Advantages of mutual funds

You are probably wondering why you should resort to a mutual fund and not invest directly in stocks or bonds. Well, most importantly investing through a Mutual Fund is the same as hiring top professionals to do the job for you. What do you get out of this?

–          Stock selection. A team of professionals is always researching the market for the top stocks in best performing sectors

–          Diversification. Being part of a big portfolio holding many stocks is way less risky than only holding a couple which can go wrong and cost you big losses.

–     No minimum investment. You can always start with small amounts or even small increments and build up your savings over time with the benefit of compound interest

–          Liquidity. Selling in the right times are equally hard decisions to buying and stock selecting, managers tend to reap your profits from the market and reinvest it for you while allowing you to redeem your certificates / shares which represent your investment anytime. Some funds have that option daily, most of them have it weekly. 

–     Different types of funds to choose from as per your investment period and purpose 

–     Shariaa Compliant Investing, some funds only invest in instruments that complies with the Islamic Share, saves you the time and effort to scan and filter the whole market to come up with available options and select among them 

The challenges of mutual funds

Whether you’re investing in mutual funds in Egypt or elsewhere, this point is the same in all of them.

–          No voting rights. You own a portion of the fund, depending on the size of your investment, but you don’t get any voting rights. Yes, you’re a shareholder in the mutual fund, but unlike being a shareholder in stock market-listed company, you don’t get to vote or get invited to shareholder meetings for the companies that the fund invests in.

–          Another problem that investors often struggle with is being unable to compare the different types of funds available and it’s not often clear what the mutual fund manages exactly or the type of holdings it invests in. BUT ZEED IS HERE NOW SO THAT’S TAKEN CARE OF.