Introduction
Mutual fund, Is a major form of financial institutional investment. Institutional Investment means any business which aims at investing and organizing resources either for client or by itself. For the purpose of this script, we will concentrate on Mutual Fund which is an asset security type that enables investors to pool their money together into one professionally managed collective investment fund. Mutual funds constitute of three types which are investment trusts, unit trusts, and OEICs (Open Ended Investment Companies).
Unit trust is a fund managed by bank, insurance company or Investment Company, or is unincorporated mutual fund structure that allows fund to hold asset and pass profit through to the individual owners rather than reinvesting them back into fund. Open Ended Investment Company is a company which has an open ended capital structure that is they invest in other investment companies hence, its capital decreased and increased by redeeming and issuing of shares and Investment Trust means an institution in which individual investors buys shares to this company and this company invest in other company under the guidance of Board of Directors who formulate investment strategies so that to be implemented by management of investment management company.
The types of mutual fund have different characteristics on how investor will invest and gain benefit from them. Therefore any person needs to invest in these categories should know the performance, objectives and requirement of each company because all of these companies are accepting any individual investor to invest his money regardless of the person of any level of income. This Fund has several similarities and differences and the advantages which make investors to prefer investing in this three funds especially retail investors. A retail investor is a person or small investor who purchases asset for his or her own personal account. This is small investor with small capital to invest. Consequence they only buy securities in smaller quantities or retail.
Purpose statement
This assignment required the student as finance expert to differentiate the major types of mutual funds. The objective is to help the student understand how this mutual funds work and to help the student in making decision on which type to invest .Also to know the differences and similarities between this fund and the reasons why the retail investors buy such products.
DIFFERENCES BETWEEN UNIT TRUST, INVESTMENT TRUST, AND OEICs (OPEN ENDED INVESTMENT COMPANIES
Definition – A unit trust is a fund managed by bank, Insurance Company or Investment Company, while an Investment trust and Open ended Investment companies are companies whose purpose is to invest in other companies.
Management and control – An investment trust has board of directors, which decides on broad investment strategy and objectives but the implementation of the strategy and objectives is normally carried out by an investment management company, while A unit trust is constituted by board of trustee, each unit trust has trustee who must be independent from manager, the manager is responsible for the day to day operation of the fund, the managers is normally an insurance company, bank or investment company. The role of trustee is taken by a bank or insurance company, the trustee is the custodian of the assets it hold, maintains a register of unit holders, the trustee has the role to protect the interest of unit holders and insuring that the managers do not stray from their stated objectives
Nature of investment- Unit trusts are open ended, the purchase or sale of unit by individuals’ investors causes the fund to expand or contract. Likewise the number of unit’s increases or decreases. . OEIC (Open ended investment companies) is similar to unit trust in these respect while Investment trust are closed fund because they tend to raise amount of cash then invest it. They do not create new shares whenever someone want to buy them instead they are listed on the stock market. The purchase or sale of share by individual investors has no effect on the size of the fund, by Contrast a unit trust and OEIC managers regularly issue new units or shares or buy back existing ones inorder to accommodate fluctuations in demand.
Ability to borrow- An investment trust have very extensive borrowing power and can thereby increase their exposure to stock by using borrowed money to buy shares, this increase in market exposure can render investment trust prices more volatile than those of unit trust and open ended investment companies (OEICs) which are able to borrow only up to 10% of the fund.
The existence of premium or discount – An investment trust can change as a result of variations in discounts and premium whereas unit trust and OEICs do not have this source of price volatile. The risk arising from gearing has been suggested as an explanation for the discount in many investment trusts.
Price – Unit trusts involve a difference between the buying price and selling price ,frequently the buying price s are higher than selling price while An investment trust and OEICs has a single price although the buyer of an OEICs may have to pay initial charge or the seller of an OEICs may have to pay an exit (withdrawal) charge. In the case of an investment, trust transaction costs are incurred through commission payment to brokers rather than via a spread between selling and buying prices.
Existence – An investment trust come into existence in 1997 as a result of European legislation to create investment products (Robert 2004) unlike unit trust and OEICs are not based on trust law they are based on on specially framed company law.
Return – A unit trust and OEICs are often available as either income or accumulation unit or shares. Income units pay the dividends to the investors whereas accumulation units reinvest the dividends so as to in hence the rate of price increases. While an investment trusts do not have such division, it distributes most of their shareholders but may retain some to re-invest within the fund.
Valuation of shares – Unit trusts and Open Ended Investment Company, price of units are valued using net asset value of the underlying assets while under investment trust, price of shares are not valued by market forces which may also result on net asset value or premium to net asset value which increases volatility compared to others.
SIMILARITIES BETWEEN UNIT TRUST, INVESTMENT TRUST AND OPEN ENDED INVESTMENT COMPANIES (OEICs)
Collective or pooled investment, Both fund are collective or pooled investment that is they pool the money of large number of individual investors to create a much large amount of money which can then be invested and they both use fund manager to decide which companies to buy with the investors money, they remove the need for investors to ascertain which share or bonds to buy the choice is made by professional managers
Registration and compliance, Both funds are listed and comply with laws and regulations, this implies that these companies must be registered and must comply with the security laws of the specific country before their operations as investment companies. Also Under unit trust a trustee must make registration for the unit holders and the same applies to open ended investment in which this process will be done by Associate Corporate Director of which in practice they may delegate this activity to managers. Investment trust is formed and controlled by Companies Act
Cost, risk and return, both funds are associated with low cost and risk that is they take risks on behalf of the individual investors hence risks reduction to individual investors. All of three categories accept fund from retail investors and make investments in order for the value of the fund to be increased for the benefit of investors and company as a whole. They made diversification of the company’s capital indifferent financial institutions in order for them and individual investors to grow.
Role played by them both fund have the same role that is investment. They allow individual investors to invest in large portfolio with many other investors. Individual investors invest in unit trust, Open ended and Investment trust so as to enjoy return and any other benefit that will accrue to such particular investment.
THE REASONS WHY RETAIL INVESTORS PREFER TO MAKE INVESTMENT IN SUCH PRODUCTS
Low cost investment or Capital. All forms of mutual fund allow investors to have a spread of investments for a small money outlay. The small investors have limited fund so because this mutual fund can take place even with small amount the Investors can enjoy the risk-reduction benefits of a well-diversified portfolio.
Return from investment. The returns from mutual funds come in two forms; one is the dividend (or interest) income from the investments and the other is the increase in the prices of the investments
Diversification, Mutual funds can hold hundreds of different securities among different companies, sectors and regions. The diversification allows investors to reduce the risk of a particular stock. The main point here is that by investing in a mutual fund single investors with small amount get access to diversified pool of securities which they would not be able to do by their own means, Security and safety. This means that investment in mutual funds is safe since these companies must be registered and comply to security laws of the country which makes retail investors to have confidence when doing business with them and by doing so they can be sued for any unauthorized actions which might affect investors like committing fraud. Also assets of these companies are kept and protected by trustee on behalf of investors for the case of unit trust, by directors for the case of investment trust and by managers under supervision of authorized corporate director.
Performance incentive, this implies that investors are attracted by the performance of these companies as most of them do perform well in the market that is price of shares and other units do rises due to the continued profit which reflects the price of securities.
Economies of scale, This happens due to investing in multiple funds serially over time or concurrently by these companies. These economies ought to benefit investors as they are charged lower fees with better returns.
Easy and expediency to investors , For example when you want to buy units in the Unit Trust Fund. The transaction will take place with less than 30 minutes to accomplish your processes of opening your account and purchasing units. Also when you need cash that means when you want to sell your units it will take less than two weeks to obtain your cash. This example also applies to the open ended investment company. Under Investment Company you will make your transactions through stock exchange market which is also easy and convenience to investors while performing any transaction concerning their investment.
Conclusion
All in all we have seen the three types of mutual fund which are unit trust, investment trust and open ended investment companies and how this funds differ from each other as well as the similarities. They are collective investment in that they aggregate the investment of large number of individuals. The amounts thus allocated are used to buy more portfolio asset which has diversification than can normally be achieved by an individual. We have to keep in mind that when choosing between these types of funds the most important factors for any investment is performance, the unit with high performance is better for investment.
We also seen the reasons as to why investors prefers to invest to the above mutual fund like risk reduction, low costs, easy convenience, performance incentive and economies of scale. Also the mutual funds contribute a lot to the economy of the country as they create income and stimulate the rise of economy of the country.
Therefore we can conclude that investment is very important than keeping your money in bank account. Investment in these funds will increase the value of the funds invested on it rather leaving them in bank in which it will reduce the value of it by bank charges but through investment a person will receive return such as interest, dividends and capital gain. Therefore investing in the above product is highly motivated. We can conclude that mutual funds are the best way to invest your money with minimal risk and good returns.