Once a mutual fund is authorized, it is launched to potential investors by way of an initial offer of shares or units at a fixed price. The terms of the offer are restricted by regulations, which cover matters such as how long the initial offer period may last and the circumstances that require it to close.

The fund or its management company may set a minimum and a maximum target of capital to be raised, and the prospectus must explain what will happen if those targets are not reached or are exceeded.

The launch is usually accomplished by making announcements in the press, mailings to prospective investors, launch briefings for advisers and agents, and advertisements. Although not permitted in the US, some countries allow advertisements to solicit money ‘off the page’ by inclusion of an application form. Nowadays, this extends to advertising and making investment via the Internet.

FundsDuring the period of the initial offer, the fund does not normally invest subscriptions received from would-be share- or unit holders, but waits to see how much has been raised and whether this exceeds the minimum or maximum amount specified in the offering prospectus. Some jurisdictions allow investment prior to close of the offer period, but only if this possibility is stated in the prospectus and has been agreed with the custodian or trustee. In this case, it is usual to require the NAP to be kept under review and, if it would create a share or unit price materially different from the fixed offer price, for the offer to close and the fund to move to the normal NAP basis of dealing. In the UK, the relevant difference is plus or minus 2% from the fixed price.

RUNNING THE FUND

expenses to capitalRunning the fund can be thought of in terms of management, marketing and administration. Each function has to distinguish between capital and income to some extent:

expenses to capitalManagement is concerned essentially with investment management and initially with investment of the capital raised from the launch of the fund. The investment objectives of the fund determine the type of security and specific investments, but unless the fund is promoted as concentrating on producing a stated or implied income yield, the manager will structure the fund’s portfolio so as to preserve and enhance its capital value.

Marketing the fund requires, among other things, an explanation of the investment objectives and policies and how policies and charges may affect the security and growth of capital.

Administration requires the accurate and complete recording of capital transactions and positions for purposes of settlement/delivery, valuation, reporting, taxation and reconciliation’s with the custodian’s records.

Depending on the jurisdiction, income may include realised capital gains, but normally it refers to the income arising from holding assets acquired as a result of deploying the capital, such as dividends and interest. Strictly, the term should be net income, as almost invariably it is meant to convey the income after expenses, charges and taxation.

Management is concerned with income to the extent that the fund’s objectives include achieving a particular level or rate of income. Fund managers have a variety of techniques and instruments available to them to improve the level of income (including the charging of certain expenses to capital), but must balance the drive for income with the risk of reducing the quality and capital growth prospects of the underlying portfolio. Highyielding equities frequently carry greater risk, whilst high-yielding corporate or Government bonds carry little prospect of capital growth in a stable interest rate environment. Charging expenses to capital may inhibit capital growth or, in extreme circumstances, actually erode capital.

Marketing the fund must include an explanation of the likely income yield and, if a bond fund, the yield to redemption, as well as the bases and effect of charges, and the policies and practices for allocation and distribution or reinvestment of net income.

Administration involves collecting the income (usually a responsibility of the custodian or trustee) and paying the expenses, charges and taxes. Detailed records of income must be kept to verify that:

  1. all entitlements are received;
  2. only permitted expenses are paid;
  3. net income available for allocation to individual share- or unit holders can be determined with confidence, distributed accurately and reported on as required.

Possibly related posts: (automatically generated)
Mutual Funds Launch Procedures and Practices