- Specialized management: a key feature of investing in funds is to benefit from the experience and knowledge of the fund’s manager in making the best investment decisions. Direct investment in securities requires analysis, study and knowledge of the determinants of profit and loss and the risks associated with these securities. Only a small segment of investors have these skills. For that, investment funds give the opportunity to benefit from the knowledge and professionalism of those specialized in investing and managing securities for investors who doesn’t have financial analysis skills. The nature of the managers’ work requires full time and moment by moment follow up on the market and economy as well as their skills in understanding the data and the consequences.
- Diversify investments and reduce risks: investing in funds allow the individual investor to diversify his/her investments with a relatively lower cost from direct diversification and investment. This would give him/her a bigger opportunity to lower the risks of investment due to the diversity of the securities owned by the fund. Investment funds provide investors with the possibility to diversify and distribute investments in a systematic way across a wide range of assets, geographic regions and industries to reduce the risk of concentrated assets and take advantage of the differing returns.
Investment Funds are usually divided into two kinds
When establishing any fund, the fund manager specifies the structure of the fund’s capital i.e. the amount gathered and invested by the fund. Open-end Funds are flexible investment funds in regard to the capital invested. It can increase or decrease according to the exported units that represent the percentage of the investors’ contribution in the fund. An investor can get back the amount he/she invested whenever he/she wants. This type is the most common type in all financial markets and Saudi Arabia is one of them. On the other hand, closed end Funds are characterized that the investor’s capital is fixed and the number of its units never changes. The outcome of the fund is not achieved by redemption but by selling the units to another investor or by the expiration of the fund’s period.
Exchange Traded funds (ETFs) appeared for the first time by the end of the 80s, 1989 to be exact, with the rapid development of the financial innovations. ETFs combine between the flexibility of the open-end funds in regard to capital and high liquidity that is one of the closed –end funds characteristics. These funds started in the Canadian financial markets then the American markets followed in 1993. Since then, ETFs started expanding and growing rapidly.
Features of Exchange Traded Funds (ETFs)
- Transparency:
Since ETFs track market indexes, it is easy to identify the investments of those funds in terms of content and investment rates. Issuers of these funds are committed to publish the information on full discloser of the funds and the indexes it follows. Also, these funds are characterized with continuous assessment from the fund’s manager during the trading period for the unit’s value or what is known as the indicative Net Asset Value (iNAV) in addition to the end of the day evaluation or what is known as the Net Asset Value (NAV). - Flexibility:
ETFs units, due to their inclusion in the market, are easy to deal with. An investor can buy the units or sell them directly through the market just like buying stocks. Also the investor can buy from any of the ETFs regardless of the source unlike investment funds, where investments should be handled through the fund’s manager directly. In addition to that, there is no minimum to participate in ETFs.
- Cost:
Investing in ETFs is mainly characterized with low costs because the management fees are low. The reason for that is that the investment style, which is considered passive, is not required to make decisions in choosing stocks but it just follows a particular index. In addition, the investor shall bear the costs of trading the units of these funds which are the selling and buying commission compared to the subscription and redemption fees, if any, for other funds. The issuer of these is also committed to disclose those expenses in the memorandum of terms and provisions. To facilitate trading the units of the ETFs, the fund’s manager assigns a market maker for the fund. The market maker is an authorized person by the Capital Market Authority. His job is to provide liquidity in the ETFs market so there would be ongoing orders for buying and selling in order for the investor to buy or sell the units at any time.