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 What are Mutual Funds?

Structure Of Mutual Funds

Types Of Mutual Funds

Advantages and Disadvantages Of

Mutual Funds
 Mutual Funds

Report Notebook

Tab 1
IN THIS SECTION:

 What are Mutual Fund?

 History of Mutual Fund

 Beginning

 Arrival of modern ages

 Mutual Funds

Report Notebook

IN THIS SECTION:

Tab 2
 Structure of Mutual Funds

 Net asset Value

 Affiliated and interested Parties

 Restriction on Mutual Funds

 Mutual Funds

Report Notebook

IN THIS SECTION:

 Types of Mutual Funds

 Open Ended

 Close Ended

Tab 3
 Role of SECP & MUFAP
 Mutual Funds

Report Notebook

IN THIS SECTION:
 Taxation

 Taxation on Mutual Funds

 Taxation on unit holders

 Tax credit

Tab 4
 Mutual Funds

Report Notebook

IN THIS SECTION:
 Advantages

 Instant diversification

 Effective for smaller accounts

 Professional money management

Tab 5
  What is a 'Mutual Funds?
A mutual fund is an investment vehicle made up of a pool of funds collected
from many investors for the purpose of investing in securities such as stocks,
bonds, money market instruments and similar assets. Mutual funds are
operated by money managers, who invest the fund's capital and attempt to
produce capital gains and income for the fund's investors. A mutual fund's
portfolio is structured and maintained to match the investment
objectives stated in its prospectus.

 A Brief History of the Mutual Fund

Mutual funds really captured the public's attention in the 1980s and '90s
when mutual fund investment hit record highs and investors saw incredible
returns. However, the idea of pooling assets for investment purposes has been
around for a long time. Here we look at the evolution of this investment
vehicle, from its beginnings in the Netherlands in the 18th century to its
present status as a growing, international industry with
fund holdings accounting for trillions of dollars in the United States alone.

In the Beginning
Historians are uncertain of the origins of investment funds; some cite
the closed-end investment companies launched in the Netherlands in 1822 by
King William I as the first mutual funds, while others point to a Dutch merchant
named Adriaan van Ketwich whose investment trust created in 1774 may have
given the king the idea. Ketwich probably theorized that diversification would
increase the appeal of investments to smaller investors with minimal capital.
The name of Ketwich's fund, Eendragt Maakt Magt, translates to "unity
creates strength". The next wave of near-mutual funds included an investment
trust launched in Switzerland in 1849, followed by similar vehicles created
in Scotland in the 1880s.

The idea of pooling resources and spreading risk using closed-end investments
soon took root in Great Britain and France, making its way to the United
States in the 1890s. The Boston Personal Property Trust, formed in 1893, was
the first closed-end fund in the U.S. The creation of the Alexander Fund in
Philadelphia in 1907 was an important step in the evolution toward what we
know as the modern mutual fund. The Alexander Fund featured semi-annual
issues and allowed investors to make withdrawals on demand.

The Arrival of the Modern Fund

The creation of the Massachusetts Investors' Trust in Boston, Massachusetts,
heralded the arrival of the modern mutual fund in 1924. The fund went public
in 1928, eventually spawning the mutual fund firm known today as
MFS Investment Management. State Street Investors' Trust was
the custodian of the Massachusetts Investors' Trust. Later, State Street
Investors started its own fund in 1924 with Richard Paine, Richard Saltonstall
and Paul Cabot at the helm. Saltonstall was also affiliated with Scudder,
Stevens and Clark, an outfit that would launch the first no-load fund in 1928. A
momentous year in the history of the mutual fund, 1928 also saw the launch of
the Wellington Fund, which was the first mutual fund to include stocks and
bonds, as opposed to direct merchant bank style of investments in business
and trade.

 Structure of Mutual Fund

Board of Directors
A management investment company (mutual fund company) has a CEO, a
team of officers and a board of directors. Each one of these entities is
responsible for serving the interests of the shareholders. The primary
responsibility of the officers and the board of directors is to handle the
investment company's administrative matters.

The board of directors is elected by the investment company's shareholders.

The board defines the type of funds that will be offered to the public. For
example, it will suggest offering a selection of funds - growth funds,
international funds, income funds and so on - to meet the investment needs of
many individuals. It will also define each fund's objectives. The board will also
approve and hire the investment advisor, transfer agent and custodian
(defined below) for each fund.

Sponsor
The principal underwriter of a mutual fund is called a distributor, or more
commonly, the sponsor. The sponsor has a written contract with the
investment company that allows it to purchase fund shares at the current net
asset value and resell the shares to the public at the full public offering price,
either through outside dealers or through its own sales force. The contract
with the mutual fund company is subject to annual renewal, but as long as the
sponsor is distributing and marketing the shares in a satisfactory manner, there
is no reason why the sponsor's contract should be discontinued.

Custodian
The custodian is responsible for the possession of the securities purchased by
the investment company for its portfolio. The custodian also handles most of
the investment company's clerical functions. Once securities are transferred to
the custodian for safekeeping, the custodian must keep the assets physically
segregated at all times, restrict access to the account to officers and
employees of the investment company, and allow withdrawal only according
to SEC rules.

Investment Advisor
The board of directors hires an investment advisor to invest the cash and
securities held in the fund's portfolio, implement the objectives outlined by the
board, manage day-to-day trading of the portfolio, and handle other tasks that
involve the tax implications of the share. For these services, the investment
advisor is acting as a fund advisor or fund manager, and earns a management
fee paid from the fund's net assets. Usually, the fund manager earns an annual
percentage of the fund's value, plus an incentive bonus if he or she exceeds
certain performance goals.

Transfer Agent
the mutual fund contracts with a transfer agent to issue, redeem and cancel
fund shares, handle the distribution of dividend and capital gains to
shareholders, and send out trade confirmations. In certain instances, the
custodian will act as transfer agent. The fund company usually pays the
transfer agent a fee for services rendered.

Dealers
as mentioned before, the sponsor usually distributes shares of the mutual fund
through dealers. The dealers purchase shares from the sponsor at a discount to
the public offering price and fill their customers' orders. It is important to note
that dealers cannot buy shares for their own inventory to sell at a later date.
They may purchase shares to fill customer orders or for their own investment,
but any purchase that occurs for a dealer's own investment must be redeemed
when sold; it cannot be sold to an investor.

Restrictions on Mutual Fund Operations

The SEC prohibits a mutual fund from engaging in the following activities
unless it meets strict financial and disclosure requirements:

 Selling securities short

 Buying securities on margin
 Participating in joint investment or trading accounts
 Distributing its own securities, except through a sponsor

Otherwise, the fund must disclose these activities and the extent to which it
plans to participate in these activities in its prospectus.

Affiliated and Interested Parties

The 1940 act and its amendments identify two types of people, defined
as affiliated and interested parties, who may influence the investment
company's management and operations and whose actions must be regulated
and restricted by the SEC. They may not borrow money from the investment
company or sell any security or property to the investment company or
companies the management company controls.
  An affiliated person is someone who controls an investment company's
operations in any way.
 An interested person includes those individuals who have a relationship
with an affiliated person that the SEC deems influential in matters of
fund operation. These people would include immediate family members
of affiliated parties, legal counselors, broker-dealers, and so on.

Furthermore, the board of directors must have 40% outside representation:

that is, at least 40% of the board must be made up of individuals who do not
have a position with, or affiliation to, the fund. This restriction includes anyone
associated with the underwriter, investment advisor, custodian or transfer
agent.

 Types of mutual funds

1. Money market funds
These funds invest in short-term fixed income securities such as government
bonds, treasury bills, bankers’ acceptances, commercial paper and certificates
of deposit. They are generally a safer investment, but with a lower potential
return then other types of mutual funds. Canadian money market funds try to
keep their net asset value (NAV) stable at $10 per security.

2. Fixed income funds

These funds buy investments that pay a fixed rate of return like government
bonds, investment-grade corporate bonds and high-yield corporate bonds.
They aim to have money coming into the fund on a regular basis, mostly
through interest that the fund earns. High-yield corporate bond funds are
generally riskier than funds that hold government and investment-grade
bonds.

3. Equity funds
These funds invest in stocks. These funds aim to grow faster than money
market or fixed income funds, so there is usually a higher risk that you could
lose money. You can choose from different types of equity funds including
those that specialize in growth stocks (which don’t usually pay dividends),
income funds (which hold stocks that pay large dividends), value stocks, large-
cap stocks, mid-cap stocks, small-cap stocks, or combinations of these.
4. Balanced funds
These funds invest in a mix of equities and fixed income securities. They try to
balance the aim of achieving higher returns against the risk of losing money.
Most of these funds follow a formula to split money among the different types
of investments. They tend to have more risk than fixed income funds, but less
risk than pure equity funds. Aggressive funds hold more equities and fewer
bonds, while conservative funds hold fewer equities relative to bonds.

5. Index funds

These funds aim to track the performance of a specific index such as

the S&P/TSX Composite Index. The value of the mutual fund will go up or down
as the index goes up or down. Index funds typically have lower costs than
actively managed mutual funds because the portfolio manager doesn’t have to
do as much research or make as many investment decisions.

6. Specialty funds

These funds focus on specialized mandates such as real estate, commodities or

socially responsible investing. For example, a socially responsible fund may
invest in companies that support environmental stewardship, human rights
and diversity, and may avoid companies involved in alcohol, tobacco, gambling,
weapons and the military.

7. Fund-of-funds

These funds invest in other funds. Similar to balanced funds, they try to make
asset allocation and diversification easier for the investor. The MER for fund-
of-funds tend to be higher than stand-alone mutual funds.
  Rules that govern Mutual Fund

Regulation of mutual funds, compared to other pooled investment options,

such as hedge funds, is extensive and therefore beneficial for the everyday
investor. Mutual funds must comply with a strict set of rules that are
monitored by the Securities and Exchange Commission.

The SEC and the Regulation of Mutual Funds

The SEC monitors the fund’s compliance with the Investment Company Act of
1940, as well as its adherence to other federal rules and regulations.

Since their development, the regulation of mutual funds has provided

investors with confidence in terms of the investment structure and offered a
number of benefits, such as:

 Transparency: The holdings of mutual funds are publicly available (with

some delays in reporting), which ensures that investors are getting what
they pay for.
 Liquidity: Shares of mutual funds are redeemed by the fund company on
the trade date, which assures daily liquidity for investors.
 Audited Track Records: Funds must maintain their performance track
records and have them audited for accuracy, which ensures that
investors can trust the fund’s stated returns.
 Safety: If a mutual fund company goes out of business, fund
shareholders receive an amount of cash that equals their portion of
ownership in the fund. Alternatively, the fund’s Board of Directors might
elect a new investment advisor to manage the funds.

The Rules That Govern the Operation of Mutual Funds

The rules and regulations of mutual funds are extensive.

The key regulations of mutual funds are:

The Investment Company Act of 1940 -- The Act regulates mutual funds (as
well as other companies). The Act focuses on disclosures and information
about investment objectives, investment company structure and operations.
The Securities Act of 1933 -- The Act has the objective of requiring that
investors receive certain significant information pertaining to securities being
offered for sale in the public markets.

The Act also prohibits fraud and misrepresentations in the sale of securities.

The Securities Act of 1934 -- The Act created the SEC and empowers the SEC
with authority over the securities industry.

Researching the Rules and Regulations of Mutual Funds

The SEC website offers many useful links helping to research the regulations of
mutual funds as well as other securities laws.

Investors can also find useful information about the rules and governance of
mutual funds within a document called a prospectus, which can usually be
found on the mutual fund company's website. The prospectus, which is
required by the SEC, will fully explain the fees, the objective, the operations,
and the market risks of each mutual fund.

Although the prospectus and the other requirements of the SEC for mutual
funds do not remove the risks inherent with investing, they do provide a
valuable benefit in the form of protections that help assure investors they are
buying what they are intending to buy.

 Role of SECP and MUFAP

Chairman Securities and Exchange Commission of Pakistan (SECP) has very
rightly stated that “a vibrant and robust capital market has a pivotal role in the
economic growth and development of a country.” The SECP has undertaken a
series of reforms for “development of equity, derivatives, debt, commodities
markets and measures for improving governance, risk management, efficiency
and transparency in capital market operations.” Though Pakistan Stock
Exchange (PSX) is among the best performing stock exchanges, its contribution
to economy is very low. This is evident from the PSX’s low market
capitalization and small number of new listings every year. Level of domestic
savings is the key to the development and growth of capital markets; foreign
investors only play a supplementary role. Unfortunately most of the policies in
Pakistan are not designed to promote long term domestic savings. Size of
Country‘s Capital Markets strongly correlated with size of the Mutual Funds’
Assets: There is strong evidence that countries with large stock market
capitalization to GDP ratio also have large long term mutual funds (including
pension funds) assets to GDP ratio. A prerequisite to the growth of mutual
funds industry is the level of domestic savings and access to supply of
tradeable stocks and bonds. Globally both the size of long term mutual funds’
assets and listing on the stock exchanges have increased supplementing each
other. The size of the global mutual funds’ assets have increased from $4
trillion in 1993 to $28.9 trillion in 2013. Some countries, like Chile, experienced
a very sharp increase. This large and unusual growth that was more than three
hundred per cent over the 2002 – 2012 period, happened as Chile liberalized
the number of investment options open to its pension funds. Comparing it with
listings, there were 23,000 stocks listed world-wide in 1990 that increased to
40,000 in 2012. Active participation of mutual funds in the capital markets
provides the markets with much needed liquidity. This also helps in price
discovery. If securities are traded infrequently, which is the definition of illiquid
market, valuation will become very challenging. Ratio of Locally Domiciled
Fund Industry Assets to GDP: US investors over the last few decades shifted
away from direct investment in securities to investment through mutual funds.
In past two decades the shift was over $6.5 trillion. In Europe similar shift has
been noted. The European Central Bank has reported that households have
increasingly favoured investment through mutual funds rather than direct
investment. As per 2012 data, long term fund assets as a percentage of GDP
amounted to 64% in USA, 45% in developed Europe and 86% in Australia. In
contrast it was 4.8% in Mexico, 4.7% in India, 4.4% in Poland and 4.2% in China.
In Pakistan the ratio of long term fund industry (i.e. excluding money market
funds) assets to GDP was 1.11% in 2012. This ratio has improved to 1.44% in
2016. If we compare Pakistan Stock Market Capitalization to GDP ratio in the
same period it has improved from 17.55% to 25.64%. Growth of Long Term
Mutual Fund: In past two decades mutual funds have shown strong growth.
The mutual funds growth also has correlation with capital markets growth. As
stated above stock market capitalization has also increased during the above
period. Several factors lead to growth in Global Mutual Funds’ assets

Greater household demand for diversified professionally managed investment

product. Household sector has switched from direct investment to investment
through mutual funds Strong Mutual Funds and Capital Market Regulations
Availability of Deep and Liquid Capital Markets Efficient capital markets
Superior returns Pass-through tax status that avoided double taxation Tax
deferral in many jurisdictions allowing for capital accumulation Economic
development Defined Contribution pension plans allowing participants to
invest in mutual funds As the economy grows all type of financial
intermediaries grow, but mutual funds being a superior product tends to grow
faster. These factors could in next fifty years lead to substantial increase in
mutual funds’ assets. The growth of mutual funds and pension funds could
lead to improvement in savings rate and deployment of these savings in the
economy in a most efficient manner. Mutual funds will be better able to meet
potential demand if countries have appropriate regulatory frame work, robust
capital markets and individual account-based contributory pension plan. As per
2013 Q3 figures, out of total $28.9 trillion mutual funds’ assets 43% are
invested in Equity, 25% in Bond, 12% in Mixed, 16% in Money Market and 4%
in other categories. In Chile, following the consolidation of the fully funded
private pension system introduced in 1981, the housing financing was able to
take off decisively. Measures Needed for Growth of Capital Markets in
Pakistan: Pakistan has a robust capital market infra-structure and adequate
regulatory frame work. Pakistan Stock Exchange is also amongst the best
performing stock exchanges in the world. Still the capital market capitalization
and mutual funds’ asset to GDP ratios are low. For growth of the capital
markets, Pakistan needs to promote domestic savings; foreign investors can
only supplement the growth. Stock Market Capitalization: The policy objective
should be to increase quality new listing of equity securities. Government
should encourage new listing as well as increase in market float. A 5% tax
rebate for listed companies which meets minimum market float of 40% of paid
up capital will encourage companies to be listed on stock exchange. Secondly
the Government should encourage bonus shares as it increases the supply of
shares in the market. Issue of bonus shares is splitting of shares and not the
distribution of income in the hands of shareholders, therefore there should not
be tax on bonus issue. A small tax rebate can always be justified for listed
companies, being required to follow code of corporate governance and
disclosure requirements prescribed by the SECP and are less prone to tax
evasion. Development of corporate debt market should also be encouraged.
Government may also consider issuing of infra-structure bonds (related to
specific project) or municipal bonds. These may be rated instruments.
Institutions issuing such bonds should adhere to a properly laid code of
corporate governance that may be prescribed by SECP. Mutual Fund Assets:
There is a correlation in the growth in mutual funds’ assets and stock market
capitalization. As stated above mutual funds’ assets as percentage of GDP is
very low. There is tremendous opportunity for growth, if right policies are put
in place.
  Charges in Mutual Fund
As an investor, it is very important to know what are the charges involved in
investing in mutual funds. When your money is handled by a team of
experts - stocks are bought and sold on your behalf, periodical
communication is sent on investments, charges are given to the
intermediaries etc. and all these expenses come with a cost.

There are no free lunches. So the question is how much a mutual fund can
charge? Is it one time in nature or regular?

 Net Asset Value

What is 'Net Asset Value - NAV'

Net asset value (NAV) is value per share of a mutual fund or an exchange-
traded fund (ETF) on a specific date or time. With both security types, the per-
share dollar amount of the fund is based on the total value of all the securities
in its portfolio, any liabilities the fund has and the number of fund shares
outstanding.

BREAKING DOWN 'Net Asset Value - NAV'

In the context of mutual funds, NAV per share is computed once per day based
on the closing market prices of the securities in the fund's portfolio. All of the
buy and sell orders for mutual funds are processed at the NAV of the trade
date. However, investors must wait until the following day to get the trade
price. Mutual funds pay out virtually all of their income and capital gains. As a
result, changes in NAV are not the best gauge of mutual fund performance,
which is best measured by annual total return.

Because ETFs and closed-end funds trade like stocks, their shares trade at
market value, which can be a dollar value above (trading at a premium) or
below (trading at a discount) NAV. ETFs have their NAV calculated daily at the
close of the market for reporting purposes, but they also calculate intra-day
NAV multiple times per minute in real time.

Example Mutual Fund Net Asset Value Calculation

The formula for a mutual fund's NAV calculation is straightforward:

NAV = (assets - liabilities) / number of outstanding shares

In this context, assets include total market value of the fund's investments
(priced using the closing price of all the assets on the day the NAV is
calculated), cash and cash equivalents, receivables and accrued income.
Liabilities equal total short-term and long-term liabilities, plus all accrued
expenses, such as staff salaries, utilities and other operational expenses.

For example, a mutual fund has $100 million of investments, based on the
day's closing prices for each individual asset. It also has $7 million of cash and
cash equivalents on hand, as well $4 million in total receivables. Accrued
income for the day is $75,000. The fund has $13 million in short-term liabilities
and $2 million in long-term liabilities. Accrued expenses for the day are
$10,000. The fund has 5 million shares outstanding. The NAV is calculated as:

NAV = (($100,000,000 + $7,000,000 + $4,000,000 + $75,000) - ($13,000,000 +

$2,000,000 + $10,000)) / 5,000,000 = ($111,075,000 - $15,010,000) / 5,000,000
= $19.21

In practice, the expenses many be numerous; operating expenses,

management expenses, distribution and marketing expenses, transfer agent
fees, custodian and audit fees are all included.
 Taxation:
All mutual funds have fees and expenses that are paid by investors.
These costs are significant because they affect the return on the
investment; therefore investors need to calculate their returns net of all
such deductions. The fees and any other charges are usually mentioned
in the offering documents and the fund brochure printed by the Asset
Management Company. Fees generally fall into two categories: a)
management fees and b) load charges. Management fees is calculated as
a fixed percentage of the average net assets managed by the firm for
providing office space and professional management, including all
accounting and administrative services. The second category is sales
commissions described as “front-end loads” (sales charges when you
buy) or “back-end loads” (sales charges when you sell). “No-load” funds,
as the name implies, do not have front-end or back-end sales charges.
These fees are for undertaking the distribution and selling of the funds.

 Taxation on Mutual Funds:

The income of mutual funds is exempt from Income Tax, if not less than
90% of the income of the year, as reduced by capital gains is distributed
amongst the unit holders as dividend or bonus units.
  Taxation on Unit Holders
Holders of mutual funds are subject to Income Tax on dividend income
received from a mutual fund (excluding the amount of dividend paid out of
capital gains on listed securities) as under:
• Public Company and Insurance Company 5%
• If received by any other person, including a non-resident 10%
Capital gain on disposition of units in a mutual fund is exempted from tax till
such time that capital gain on sale of securities listed on the stock exchanges is
exempt from such tax.
 Tax Credit
As funds are listed at the stock exchanges, unit holders of the mutual funds,
other than a company, are entitled to a tax credit under section 62 of the
Income Tax Ordinance, 2001 on purchase of new units. The amount on which
tax credit is allowed is the lower of (a) amount invested in purchase of new
units, (b) twenty percent of the taxable income of the unit holder, or (c )
Rupees One Million (PKR.1,000,000), and is calculated by applying the average
rate of tax of the unit holder for the tax year. If the units are disposed within
twenty four months, the amount of tax payable for the tax year in which the
units are disposed is increased by the amount of credit allowed.
 Advantages and Disadvantages

 Advantages:

1. Instant diversification: A mutual fund will provide you with a "basket of

stocks" that will provide diversification in your portfolio.
2. Effective for smaller accounts: Since a mutual fund provides exposure to
hundreds or thousands of stocks, you don't need to go out and buy
hundreds or thousands of stocks on your own, which could be very
prohibitive for you if you have a smaller-sized investment account and
limited capital to invest with.
3. Professional money management: Mutual funds are run by investment
managers who would likely be considered "experts" in their field. Mutual
fund companies have resources that are above and beyond what one
may have as an individual, retail investor.

 Disadvantages
1. No intraday-trading on mutual funds: If you want to make a trade on
your mutual fund, you'll likely not know what the "NAV" price will be
when you lock in the trade. That is because the NAV (Net Asset Value) is
settled at the end of each trading day. If you don't lock your trade in
before the end of the stock market close, you'll receive the NAV as of
the close of business the following day. This makes it difficult and/or
impossible to capitalize on sudden movements in the market (if that is
something you're trying to do).
2. Not tax-efficient: In a non IRA account, mutual funds will process capital
gain distributions about once per year, which you will then be taxed on,
even if you did not take any capital gains that year. The end investor has
little impact or say on how much a fund will decide to spit out in capital
gain distributions. The funds have the freedom to delay capital gain
 distributions in some years, essentially kicking the can down the road for
later years. This could adversely impact you as the end investor.
3. Subject to the herd: If you are a disciplined investor and you know not to
"buy high" and "sell low," then you won't panic when volatility occurs in
the marketplace. However, when investing in a large mutual fund,
chances are that many of your fellow investors will not have the same
discipline. They will sell at a low point, causing the fund to sell positions
in order to account for the redemption requests. In other words, your
performance may suffer because of the lack of discipline of other
investors that also own the same fund.
4. Impersonal connection: When investing in a mutual fund, you do not
usually have easy access to the one making the investment decisions.
There may be quarterly investor calls and updates, but there will be a
significant lack of interpersonal communication with the main folks in
charge of the fund.
5. Costs: Mutual funds always carry some kind of costs. In all cases, costs
will decrease your overall rate of return. That is why it is important to
limit the annual expenses of mutual funds, the potential front-end or
back-end loads, and turnover costs. It takes more than a novice investor
to navigate these issues, but this is one of the most important
downsides to using mutual funds and thus, should certainly be evaluated
and address by all investors.

 Risk
The level of risk in a mutual fund depends on what it invests in. Usually, the
higher the potential returns, the higher the risk will be. For example, stocks are
generally riskier than bonds, so an equity fund tends to be riskier than a fixed
income fund.
Some specialty mutual funds focus on certain kinds of investments, such as
emerging markets, to try to earn a higher return. These kinds of funds also
tend to have a greater risk of a larger drop in value.

6 common types of risk

Type of risk Type of investment affected How the fund could lose money

1. Market All types The value of its investments decline because of

risk unavoidable risks that affect the entire market

2. Liquidity All types The fund can’t sell an investment that’s

risk declining in value because there are no
buyers.

3. Credit risk Fixed income securities If a bond issuer can’t repay a bond, it may end
up being a worthless investment.

4. Interest Fixed income securities The value of fixed income securities generally
rate risk falls when interest rates rise.

5. Country Foreign investments The value of a foreign investment declines

risk because of political changes or instability in the
country where the investment was issued.

6. Currency Investments denominated in If the other currency declines against the

risk a currency other than the Canadian dollar, the investment will lose value.
Canadian dollar

Portfolio Management
4 Strategies for Managing a Portfolio of Mutual Funds

After you've built your portfolio of mutual funds, you need to know how to
maintain it. Here, we talk about how to manage a mutual-fund portfolio by
walking through four common strategies:

The Wing-It Strategy

this is the most common mutual-fund strategy. Basically, if your portfolio does
not have a plan or a structure, then it is likely that you are employing a wing-it
strategy. If you are adding money to your portfolio today, how do you decide
what to invest in? Are you someone who searches for a new investment
because you do not like the ones you already have? A little of this and a little of
that? If you already have a plan or structure, then adding money to the
portfolio should be really easy. Most experts would agree that this strategy will
have the least success because there is little to no consistency.
Market-Timing Strategy
The market timing strategy implies the ability to get into and out of sectors,
assets or markets at the right time. The ability to market time means that you
will forever buy low and sell high. Unfortunately, few investors buy low and sell
high because investor behavior is usually driven by emotions instead of logic.
The reality is most investors tend to do exactly the opposite – buy high and sell
low. This leads many to believe that market timing does not work in practice.
No one can accurately predict the future with any consistency, however there
are many market timing indicators.

Buy-and-Hold Strategy
this is by far the most commonly preached investment strategy. The reason for
this is that statistical probabilities are on your side. Markets generally go up
75% of the time and down 25% of the time. If you employ a buy-and-hold
strategy and weather through the ups and downs of the market, you will make
money 75% of the time. If you are to be more successful with other strategies
to manage your portfolio, you must be right more than 75% of the time to be
ahead. The other issue that makes this strategy the most popular is it's easy to
employ. This does not make it better or worse, it's just easy to buy and hold.

Performance-Weighting Strategy
this is somewhat of a middle ground between market timing and buy and hold.
With this strategy, you will revisit your portfolio mix from time to time and
make some adjustments. Let's walk through an oversimplified example using
real performance figures.