Imagine you have 100 BDT, but you are unsure what to do with it. You ask your friends for advice, but they all suggest different things, leaving you more confused. And, you don’t have the time or knowledge to figure it out. Then one of your friends says, “Give me that 100 BDT, and I’ll handle the research and invest it wisely for you.” This friend, in this case, is a mutual fund.
Instead of trying to figure it all out on your own, you invest in mutual funds. They keep an eye on the market, pick the best opportunities, and make smart investment choices on your behalf. Mutual funds are managed by professional investment firms known as Asset Management Company (AMC).
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There are primarily two types of mutual funds in Bangladesh.
Closed-End Mutual Funds
These funds raise money through an IPO and are listed on the share market. Investors can buy or sell them like stocks from the stock exchange. Closed-end funds have a maturity period, after which the Asset Management Company (AMC) can:
Sell off the fund’s assets and distribute the money to the investors.
Convert the fund to an Open-End Mutual Fund if 75% of the shareholders agree.
Moreover, Closed-End Mutual Funds cannot increase the size of the fund by issuing new units. For example, if a closed-end mutual fund has raised Tk. 100 Cr. through IPO, it cannot raise additional funds by issuing new units of the funds.
Open-End Mutual Funds
These funds issue units directly to the public and are not listed on stock exchanges. Investors can buy units directly from the Asset Management Company (AMC) at the fund’s Net Asset Value (NAV). These funds allow investors to enter or exit the fund directly through the AMC at NAV, ensuring easy access to money.
For example, assume an open-end mutual fund initially raises Tk. 10 Cr. by issuing 1 Cr. shares (Tk. 10 per share). Now, fund managers invest this amount in the capital market and money market and the fund size grows to let’s say 12 Cr. Then the Net Asset Value (NAV) has gone from Tk. 10 to Tk. 12 (12 Cr / 1 Cr).
If any new investor wants to buy the share, he will buy the share from the fund manager at Tk. 12 per share. Similarly, if an investor wants to sell the share, he can sell it at Tk. 12 per share directly to the fund manager, realizing 20% profit. As fund managers continuously buy and sell fund units to investors, unlike closed-end mutual funds the capital of the open-end mutual funds can be increased or decreased.