Ahmed Niaz 180762 BSAF 5B

QUIZ 4
Name: Ahmed Niaz
Roll No.: 180762
Class: BSAF 5B

Definition:

Mutual funds are financial institutions that pool the financial resources of individuals
and companies and invest those resources in diversified portfolios of assets. A large
portion of mutual funds sell new shares to investors and redeem outstanding shares
on demand at their fair market values. They provide opportunities for small investors
to invest in a liquid and diversified portfolio of financial securities. Hence, they can be
viewed both as a financial institution and as a type of security investment. For small
investors, mutual funds ab re also able to enjoy economies of scale by incurring
lower transaction costs and commissions.

Types of Mutual Fund:

The mutual fund industry is usually considered to have two sectors: short-term funds
and long-term funds. Long-term funds comprise equity funds, bond funds and hybrid
funds. Short term funds comprise taxable money market mutual funds and tax-
exempt money market mutual funds.
 Equity Funds
Funds consisting of common and preferred stock securities.
 Bond Funds
Funds consisting of fixed income securities with a maturity of over one year.
 Index Funds
Funds consisting of stocks that correspond with a major market index.
 Hybrid Funds
Funds consisting of both stock and bond securities.
 Money Market Mutual Funds

Funds consisting of various mixes of those money market securities with an original
maturity of less than one year.
 Income Funds
Funds consisting of government and high quality corporate debt bonds which provide
a steady cash flow to the investor.
Ahmed Niaz 180762 BSAF 5B

How Mutual Funds work:

A mutual fund investor basically purchases a partial ownership of the mutual fund
company and its assets, similar to buying a stock of a company. The main difference
is that when an investor purchases a stock of a company, the business can have
different natures however mutual fund companies solely have a business of making
investments as opposed to offering different services or products to customers.
There are three main ways a mutual funds investor earns a return:

1. Income can be earned from dividends on stocks and interest on bonds held in
the fund’s portfolio. A fund pays out nearly all of the income it receives over
the year to fund owners in the form of a distribution. Investors are also given a
choice to collects their earnings or re-invest the earnings and get more shares
in return.
2. If the fund sells securities that have increased in price, the fund has a capital
gain
3. If fund holdings increase in price but are not sold by the fund manager, the
fund’s shares increase in price. You can sell your mutual fund shares for a
profit in the market.