International Mutual Funds Term Paper

International Mutual Funds

Mutual Funds, the dynamic market:

The business of mutual funds changes continuously and one of the things that is done is to replace the manager of the portfolio, or even change the investment strategy for the fund. If the fund has been badly affected, the practice is to stop buying the risky growth stocks and instead buy the slower industrial and consumer stocks. This is the situation now at many growth funds in the United States which have come down by about 40% during the last two years. Yet the changes often do not lead to the results that are expected, and the changes that may have been correct to take up a couple of years ago may lead to a lot of damages now, after the market has already gone through a decline.

The type of stocks that are not in favor at certain times may again come back into favor, and then the change of style may harm the fund. This is what happened at a number of value funds when the market was seeing large rises from the growth funds. One of such funds was the $1 billion Safeco Equity fund, which was going below the Standard & Poor 500-stock index for a straight period of three years in the end 1990s. Then the management decided to boost up the results of the fund by getting into growth stocks in 1999, but these stocks also reached there peak a couple of months later. This made the fund turn out its worst result with a growth of 6% in 2000. 1

1. Geoffrey, Smith. When Your Fund Switches Tracks. Business Week Investor. March 4, 2002. Accessed 21 May, 2004. Available at http://www.businessweek.com/magazine/content/02_09/b3772112.htm

What is a mutual fund?

The aim of any mutual fund is to pool in the money from different investors and put it in a position where it can be managed by professionals. It is the manager who makes the trades and realizes the gain or loss and collects the income in the form of dividend or interest. The gains or losses are then passed on to the individual investors. The operation of most funds are open-ended, and that means that the investment company is at liberty to issue new shares to investors, and also undertakes to buy back shares from investors who want to leave the fund. There are also close ended funs which issue a fixed number of shares, and only these can be bought or sold by the investors among themselves through a stock exchange. The person who has issued these closed funds is not responsible for redeeming them, so the trading of these has to be only through a broker.

There are also mutual funds which are targeted to a particular agency like high technology or utilities. These mutual funds are known as sector funds. There can also be investment in bonds called bond funs which are targeted to different types of bonds which have different levels of risk like high yield or junk bonds; or types of issuers like government agencies, corporations or municipalities; or based on the maturity duration like short-term or long-term. There are both and stock funds can be investing only in U.S. securities in which case they are domestic funds, both U.S. And foreign funds when they are called global fund, or mainly foreign funds and then they are called international funds. The status of mutual funds is like corporations under the U.S. law, but they are subject to different rules for accounting and tax. These corporations are not taxed on their income, as long as most of it is distributed out to their investors. Again the nature of the income is not changed while going through to the investors. The mutual funds distributing tax-free municipal bond income remain tax-free to the investors. Other distributions can be ordinary income or capital gains depending on the method of earning by the fund. 2

There are some advantages of mutual funds which lead the investors to invest through the. The first benefit is that the investments are made with the experience and skill of professional investment managers and they have more knowledge and information to take the decisions than ordinary investors. The other factor is that mutual funds hold diversified portfolios, and these reduce risks. This is also through holding different types of assets like bonds, equities and cash, which stops people from being in the wrong investment at the wrong time. The third benefit of a mutual fund is from the liquidity it provides, and this is through the facility of selling the mutual fund units on any day and receiving the current market value of the investments made. Another advantage is that the initial investment required for a mutual fund is quite low, and some of them can be started for as low as $500. For this amount of investment, the funds provide the investors with detailed reports and statements that make record-keeping simple.The performance of the fund can be checked almost daily by just going through the business pages of most newspapers. 3

2. Mutual fund. Accessed 21 May, 2004 Available at http://www.wordiq.com/definition/Mutual_fund

3. FAQ's on Mutual Fund Investing. Fremont Mutual Funds, Inc. 2004. Accessed 21 May, 2004 Available at http://www.gabelli.com/university/qa-mf.html

There are choices of thousands of mutual funds, and it is not easy to make a choice. Some of the mutual funds are tax-free and they are useful to the investors in the highest tax brackets. The duration of the investment should be for the period that one expects the money to be invested. Thus money market funds are for money that one may require immediately and money that will be needed after retirement about 30 years later should be in long-term investments like stock or bond funds. Some funds call themselves "balanced funds" and they are not a good investment, as one can make a personal choice of the mix, and here stock is aggressive and bond is conservative. One should also look at the expense ratio in the prospectus of the fund, and the cheapest funds are better. 4

These are more important in index funds which are supposed to match the market. The highest returns are often from sector funds, but in business it is a different sector that is on top every year, and that is why it is risky to have them as major parts of the portfolio. The profit distributions are made by funds towards the end of their year, and the investors will have to pay taxes on the earnings when they get the dividend, so it is better to invest after the dividend is made so that taxes will be lower. It is important to go through the prospectus as the money is being entrusted to fund managers, and all its performance should be checked to make a good choice. To reduce risk, the investment should be always in a mixture and this can be in the form of stocks, bonds and cash. Among the stocks, there should be some foreign stocks. 5

4. Mutual fund. Accessed 21 May, 2004 Available at http://www.wordiq.com/definition/Mutual_fund

5. Mutual fund. Accessed 21 May, 2004 Available at http://www.wordiq.com/definition/Mutual_fund

The choice of international funds:

The international funds have varying reasons for choosing different reasons and as an example let us the reasons given by one of the funds called the Matthews Asian funds given for the choice of Asia as an investment destination. They begin by saying that almost half of the people of the world live in Asia and it is one of the largest regions of the world. The production from Asia is about 24% of the world's economic output and about 17% of the total world market capitalization is in Asian stock exchanges. During the last twenty years the Asian region has been having a mean growth rate of 4.4% and that is a lot more than the world average of 3.3%. Compared to Asia, the growth of the United States and the European Union has been lower at 3.2% and 2.3%. This has made the region almost the same size of an economy as is the European Union. From 1960, it has been noted by the economists and analysts that the investments made in Asia have been sound. 6

There have been good liking for the high savings rates in the region, the attained levels of educational progress, and the continuous emphasis on hard work and enterprise. In spite of these strong fundamentals the region did not grow very fast as there were quite a few structural weaknesses, and this led to the recent financial crisis, and that led to the economic downturn. Asia's companies are supposed to be one of the reasons for investing in the region, and the area full of entrepreneurial innovation. The spirit of entrepreneurship had given rise to many competitive companies in the areas of technology, finance and retail consumption. 7

6. Asian Funds. PFPC Distributors, Inc. May 23, 2004.….....