What are investment funds? (also known as mutual funds)
An investment vehicle that is created through the collected funds from investors by licensed institutions and invest in a variety of investment securities such as stocks, bonds, money market instruments and similar assets in order to create gains. These vehicles are operated by money managers who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors.
According to the regulations in Turkey, banks, brokerage firms, insurance companies and pension funds can create investment funds, with related licenses obtained from the Capital Markets Board of Turkey. Investment funds are structured according to the Capital Markets Law and edicts in relations with this law. The operating mechanism of the investment funds are determined and explained in detail in their prospectus. If desired, investors can request a copy the fund’s prospectus.
How are the investment funds created?
Investment funds’ limitations are described by law and regulations in order to make sure they attain a well-diversified position.
Some of the restrictions on the funds are as follows:
- To sustain the fair price in the transactions of the fund, which is the lowest price when buying and the highest price when selling an asset.
- Not to invest in non-listed securities, with a limited exception for the securities, the founder or the portfolio manager of the fund underwrites.
- Not to invest in the securities of a single issuer more than 10% of its net asset value.
- Not to purchase more than 9% of one issuer's shares.
- Not to invest in the securities of the founder or the portfolio manager.
- Not to be represented in the management of the companies whose shares it has purchased.
Types of Investment Funds
There are two types of investment funds. If a fund invests at least 25% of its assets to Turkish stocks then that fund is classified as a Type A Investment Fund. However, in the case of Type B Funds, there is no such requirement. As Type A funds have a certain amount of investment in stocks, they are more sensitive and responsive to the fluctuations in the stock markets. In this regard, they can be seen as more risky instruments when compared to Type B funds, which also means they might provide more returns when the stock markets are positive.
Information on Investment Funds
Ordinance : A document showing the management, board and functioning structure of the fund. It is announced in the Turkish Trade Registry Gazette.
Prospectus : This document contains information the trading of the fund and fundamental information of the fund. It can also be found in the Turkish Registry Gazette.
Circular : Like Prospectus, Circular also has information about the basics of the fund and it should be published in at least two national newspapers before the issuance.
Financial Tables : The tables showing the financial status of the fund periodically over the years and the reports of independent auditors. This document is also published in the Turkish Trade Registry Gazette.
Monthly Reports : These are the reports showing the monthly performance of the funds. They are prepared within 15 days of the ending month.
Why are Investment Funds Convenient Investment Vehicles?
Just like in the world, the investment vehicles diversify in Turkey as well. In such big range of investment instruments, in order to make sound decisions, one should spend quite a lot of time to learn and evaluate all the details of the instrument. With the fast moving world, investors seeks professionals with in depth knowledge and expertise of the stock markets, macroeconomics, the variety of investment instruments, trading and so forth, to take care of their money management needs. Investment funds, run by qualified money managers are a great solution for investors.
Investment funds are able to be liquidated whenever the investor desires, when compared to the stocks, government bonds and treasury bills which have prefixed value dates to be liquidated. In addition to the value limitations, it is especially challenging for new beginners to choose the right stocks from approximately 300 stocks at the right time. Timing is crucial as the stocks can be highly volatile due to the developments in the markets.
Taxing is another issue which requires expertise. Returns from the stocks, government bonds and treasury bills above a certain level may be subject to taxes however investment funds are free of tax.
Investment funds and money managers are always more preferable because of the above listed facts and besides they allow investors to trade in small amounts without any value date worries.
What to watch out for when investing in a mutual fund?
It should be kept in mind that investment funds can vary with regards to their asset allocations such as stocks, government bonds, treasury bills, etc. Investors should choose the one that best suits their expectations.
The historical performances of the funds’ ingredient instruments should be analyzed. Their performances can be requested from the founder of the fund. They can also be found on media.
The investors should also be aware that the historical performances of the investment instruments cannot be a promise for the future. The possibility of the change of the wind in the market should not be underestimated.
Daily fluctuations in the prices and yields should not the main decision making facts, especially for stocks, as they are highly responsive the market moves. The yields should be considered for mid to long term periods.
Investors can also ask for detailed information about the fund and its working mechanism from the founder. When deciding between different investment funds, these can be taken into consideration:
- the yield of the fund
- the founder of the fund and the other investment vehicles run by the same founder
- the types of funds
- fund’s closest date of allocation
- the fund’s portfolio manager
- the founder’s performance on the earlier funds
- the places and times that the fund’s participation documents can be traded
- whether there is a requirement for notice prior to enchasing of the instrument