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Management of Financial Institutions

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Management of Financial Institutions - MGT 604
VU
Lecture # 27
Mutual Funds
Investing In International Mutual Funds
Investing in international mutual funds has two faces:
First is buying funds from US based companies that buy and manage portfolio in
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internationally listed stocks/securities. These companies are governed by regulations
of SEC (Securities and Exchange Commission)
Second is buying mutual funds from international non US companies.
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A word of caution before investing even in best international mutual funds - Unlike
domestic mutual funds investment, international investments entail additional risk factors
such as economic and political in addition to risk of FOREX value (simply put: foreign
currency exchange value) fluctuations.
Why Should You Invest In International Opportunities?
The number of funds in international investing is on the rise. We can cite a few reasons for
this.
Removal of trade barriers and expanding of economies have sparked off growth in
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many non-US companies.
Some of the major industries of the world are dominated by non US companies.
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Over 72% of the world stocks are listed out side US.
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Greater and true diversification and opportunity to capitalize on best overseas
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companies.
Investing in international mutual funds is gaining popularity for various reasons. Rising
political stability merging or opening of borders and currencies are some of the reasons.
Vibrant and upcoming economies and non US corporations becoming financially stronger
by the day are some of the reasons. In addition you get true diversification, balance and
opportunities.
Best guide for selecting the right mutual funds
Selecting best mutual funds mean a lot more than deciding by indices and their past
performances. However, you need to remember one thing that there is no quick gratification
in investments of any kind. This article tells you regarding:
How can you select a mutual fund for investment?
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Is it important to pick up companies that are performing above average?
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Is it advisable to compare mutual funds across category?
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Management of Financial Institutions - MGT 604
VU
When your investment purpose is for saving for retirement, then risk minimization should
be your mantra. And one of the best avenues for you to invest now is mutual funds as they
have an average of 50 stocks in each portfolio for diversification and cushioning the risks.
Selecting best mutual funds mean a lot more than deciding by indices and their past
performances. However, you need to remember one thing that there is no quick gratification
in investments of any kind.
Let us discuss the dos and don'ts of selecting the best mutual funds. These points should
serve as guidelines for making decision on whether your pick is among the best in the
industry or not.
Dos in Selecting the Best Mutual Fund
1. Draw down your investment objective. There are various schemes suitable for
different needs. For example retirement plan, capital growth etc. Also get clear about
your time frame for investment and returns. Equity funds are not advisable for short
term because of their long term nature. You can consider money market and floating
rate funds for short term gains. This equals asking - What kind of mutual fund is
right for me?
2. Once you have decided on a plan or a couple of them, collect as much information
as possible on them from different sources offering them. Funds' prospectus and
advisors may help you in this.
3. Pick out companies consistently performing above average. Mutual funds industry
indices are helpful in comparing different funds as well as different plans offered by
them. Some of the industry standard fund indices are Nasdaq 100, Russel 2000, S&P
fund index and DSI index with the latter rating the Socially Responsible Funds only.
Also best mutual funds draw good results despite market volatility.
4. Get a clear picture of fees & associated cost, taxes (for non-tax free funds) for all
your short listed funds and how they affect your returns. Best mutual funds have
lower cost out go.
5. Best mutual funds maximize returns and minimize risks. A number called as Sharpe
Ratio explains whether a fund is risk free based on its expected returns compared
against a risk free money market fund.
6. Some funds have the advantage of low minimum initial investments. You can start
investing even with $250 a month. This is advisable for building asset bases over a
long period with small regular investments.
Best Tips to do an Analysis of Mutual Funds
Before investing in mutual funds a proper analysis is required. While all analyses' efforts
are aimed at maximizing returns and minimizing risks, it is the latter that gains importance
as the single most fundamental criterion to compare mutual funds. This article makes you
aware of:
How can you do a mutual fund analysis?
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Important is the risk factor analysis?
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Why is it important to track the record of mutual fund companies?
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Management of Financial Institutions - MGT 604
VU
Investing in mutual funds is not a child's play unless one does a mutual funds' analysis. At
least it is not as easy as picking top performers going by indices and investing in them.
While all analyses' efforts are aimed at maximizing returns and minimizing risks, it is the
latter that gains importance as the single most fundamental criterion to compare mutual
funds.
Look At the Portfolio of Your Pick of Funds
Most of the plans will have invested in multiple stocks or securities for diversification.
Critical point here is in what proportion they have invested in different stocks. Giving a
higher weight-age to a high returning stock leaves less opportunity for broader allocation
and may back fire when market is bearish (plummeting steadily). Also higher returning
stocks carry high element of risk.
The Optimum Portfolio Size
What should be the optimum portfolio size (assortment investments under one plan) for
your pick of fund? Well, opinions are divided about this, but it is crucial to look into the
specifics of stock bets and sectors you will be exposed to. Higher exposure to specific
sectors may see you loosing out on broad based rallies in the bourses (stock markets).
Optimally 65 % to 85% may be allocated in stocks from different sectors for diversification
plus growth and the balance being in typical bond and money market instruments.
Is Your Pick of Funds Really Diversified
Notice that the competing plans, though from different fund companies, perform almost on
par as if they have a correlation. They indeed have. So, does it mean you have diversified by
spreading your money amongst them? Well, think again. Similar plans have similar pattern
of their holdings of stocks and with a similar portfolio. This means, in actual effect you are
not diversifying. They all go up and down almost as if they do it in tandem. For clear
diversification, pick those with different portfolios though they are similar plans (ex:
growth, index, or dividend paying etc).
Check Out the Facts before Jumping into Mutual Funds
If you thought for a moment, you will see an enormous growth in mutual fund industry in
the United States in recent years. A fact sheet gives you a bounty of information about the
fund. It helps you decide on a particular fund and how to tell an ethical mutual fund from a
non ethical one. This article covers:
What are the points that help you in pre-selecting the mutual funds?
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are the parameters that help you in comparing the performance of the mutual funds?
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What are the points to be analyzed while comparing the risk factors of various
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mutual funds?
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If you thought for a moment, you will see an enormous growth in mutual fund industry in
the United States in recent years. This is enticing more individuals to invest either directly
or through retirement funds like 401(k) plans (a savings plan for retirement to be funded by
the employees and employers in equal proportions. These funds are tax free till they are
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Management of Financial Institutions - MGT 604
VU
with drawn and also the contributions are deducted before tax). But come to think of it, for a
number of innocent investors, the brochures are just the reminders of their investments. And
the case is no different with fact sheets too. They elicit a quick check of their investment
necessities, status or the like. In fact it needs to be regarded as a communication of better
and more information that concerns the nature of investments the funds make.
The U.S. Securities and Exchange Commission (SEC) has some clause about the need for
communicating facts by a fund to all its share holders.
What is a Fact Sheet for Buying Mutual Funds
A fact sheet gives you a bounty of information about the fund. It helps you decide on a
particular fund and how to tell an ethical mutual fund from a non ethical one. Given below
are some important facts that you should know as an investor in Mutual Funds.
How to Pre-Select a Mutual Fund
Before you zero in for investment, make a short list of funds that are broadly doing well.
For doing this assessing following points may help:
Try to match your financial profile to a fund's characteristics and risk or reward
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history. Your profile may not permit you to invest in high paying funds if they have
a high risk element. Reading the funds' prospectus in detail will give an insight into
their portfolio and investment pattern. It is obvious that high returns are almost
always associated with risky investments. Any down turn of fortune can see you
loosing your principle haplessly.
Find out whether the fund's investment philosophy satisfies yours. If you have an
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inclination for social causes or looking for a steady build up of principle without
much risk, look for funds that are socially responsible and/or investing in
government bonds and T-Bills. Assess whether the fund's costs, fees and loads are
too much or in line with your estimation.
You may not need a portfolio of more than 8-10 funds from different companies to
sufficiently diversify your fund allocation objectives. This helps you average out and to a
certain extent stabilize returns (especially when your objective is regular income). Select
specific funds in your chosen categories to meet your needs.
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Table of Contents:
  1. Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS
  2. FINANCIAL INSTITUTIONS:Non Banking Financial Companies
  3. CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions
  4. POLICY INSTRUMENTS:Open Market Operations, Capital Requirements
  5. BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability
  6. STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments
  7. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS:Banking Inspection Department
  8. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Debt Management
  9. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Training Programs by SBP
  10. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Human Resources Department
  11. MAJOR DRIVERS OF FINANCIAL INDUSTRY:GLOBAL FINANCIAL SYSTEM, The World Bank
  12. INTERNATIONAL FINANCIAL INSTITUTIONS:ADB Projects in Pakistan, Paris Club
  13. PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions
  14. INCREASING FOREIGN DIRECT INVESTMENT:Industrial Sector, Managing the Debt
  15. ROLE OF COMMERCIAL BANKS:Services Typically Offered by Banks, Types of banks
  16. ROLE OF COMMERCIAL BANKS:Types of investment banks, The Management of the Banks
  17. ROLE OF COMMERCIAL BANKS:Public perceptions of banks, Capital adequacy, Liquidity
  18. ROLE OF COMMERCIAL BANKS:Problem bank management, BANKING SECTOR REFORMS
  19. ROLE OF COMMERCIAL BANKING:Private Deposit Insurance,
  20. BRANCH BANKING IN PAKISTAN:Remittances, Online Fund Transfer
  21. ROLE OF COMMERCIAL BANKS IN MICRO FINANCE SECTOR
  22. Mutual funds:Types of international mutual funds, Mutual funds vs. other investments
  23. Mutual Funds:Criticism of managed mutual funds, Money Market Fund
  24. Mutual Funds:Balanced Funds, Growth Funds, Specialized Funds, Measuring Risks
  25. Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
  26. Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud
  27. Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund
  28. Role of Investment Banks:Recent evolution of the business, Possible conflicts of interest
  29. Letter of Credit:Elements of a Letter of Credit, Commercial Invoice, Tips for Exporters
  30. Letter of Credit and International Trade:Terminology, Risks in International Trade
  31. Foreign Exchange & Financial Institutions:Investment management firms, Exchange Traded Fund
  32. Foreign Exchange:Factors affecting currency trading, Economic conditions include
  33. Leasing Companies:Basic Purpose of Leasing, Technological Benefits
  34. The Leasing Sector in Pakistan and its Role in Capital Investment
  35. Role of Insurance Companies:Indemnification, Insurer’s business model
  36. Role of Insurance Companies:Life insurance and saving
  37. Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
  38. Agriculture Sector and Financial Institutions of Pakistan:What is SMEs
  39. Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment
  40. Financial Crimes:Process of Money Laundering, Terrorist Financing
  41. DFIs & Risk Management:Managing Credit Risk, Managing Operational Risk
  42. Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits
  43. The Collapse of ENRON:Auditing Issues, Corporate Governance Issues, Corrective Actions
  44. Classic Financial Scandals:Corruption, Discovery, Black Wednesday
  45. RECAP:FINANCIAL INSTITUTIONS, CENTRAL BANK,