Nuts & Bolts of a Mutual Fund
The Regulatory Body
The Financial Regulatory Authority (FRA) of Egypt, the regulatory body for mutual funds, is also the regulator for all capital market activities in the country. With discipline and attention to details, the FRA protects the investors and works seriously to maintain stability of the capital markets. Hence every aspect of a mutual fund, from launch to its continuous operation, is closely regulated, monitored and supervised by the FRA. No fund is launched and no fund-management company or app exists without a license from the FRA.
Fund prospectus is a document that contains all the details of a mutual fund – it is reviewed & approved by the regulatory body. It details the investment policy of the fund, the various parties involved in running the fund (like the supervisory committee, fund sponsor, fund manager, sales entity, audit firm, legal firm, etc.), the fee structure, i.e. the operating expenses incurred by the fund apart from other details such as whether it’s an open-ended fund or closed-ended fund, etc.
Every mutual fund has an investment policy, that instructs its fund manager on how to invest the money in the fund, i.e. types of assets, the asset composition, etc. The investment policy is decided at the outset when a mutual fund is formed and is documented in its prospectus.
The people who pool their money together to invest jointly are the investors in a mutual fund. They could be individuals or entities, like companies etc.
The portfolio of a mutual fund is managed by a professional fund manager. He is a qualified professional, licensed by the regulator, with the necessary educational qualifications & experience for managing funds. His actions including his adherence to investment policy are supervised by a supervisory committee and in turn by the regulator.
Asset Under Management (AUM)
The total portfolio of a fund, i.e. the total monetary value of the assets owned by the fund is called the assets under management.
Mutual Fund Certificates
Like a company issues shares, a mutual fund issues certificates (aka units) to its investors. The investors are also referred to as “certificate holders”. The number of certificates owned by an investor out of the total issued is his proportionate ownership of the fund’s assets.
At the initiation of a fund a certificates has a pre-determined price (say EGP 1 or EGP 10). Over time, depending on the return earned by the assets of the fund, the price of the certificate changes.
Net Asset Value (NAV) of a Certificate
The total AUM (Assets under Management) of the fund divided by the total number of certificates is called Net Asset Value (NAV) of a certificate. E.g. if the AUM of a fund is EGP 450 million and it has issued a total of 100 million certificates, then the NAV of certificate is EGP 4.5 (= 450 million / 100 million).
Purchase / Redemption of Certificates
An investor invests their money in a mutual fund by “purchasing” its certificates. They may liquidate or “redeem” the certificates they own to get their money back. Different funds have their own unique time-period when redeeming is permitted.