Mutual Fund Products and Structures
Domain focus
Products and structures tests whether you can classify a fund, explain its legal structure, identify its risk/return profile and price it correctly.
Structure
Most Pakistani mutual funds are open-end unit trusts: investors buy units from the AMC or distributor and redeem at NAV. The AMC manages; the trustee holds assets and monitors; the custodian holds securities. Closed-end funds are listed and trade at market price, which may be at a discount or premium to NAV; they do not offer daily redemption at NAV. Exchange-traded funds (ETFs) are listed, track an index, and rely on authorized participants for creation and redemption; the investor typically trades at market price.
SECP categories
Equity, income, money market, balanced, Islamic, index, fund of funds, capital protected and fixed-return funds. Equity funds hold equities within regulatory limits and carry market risk; money market funds hold short-term instruments and target liquidity; income funds hold fixed-income securities and carry credit and interest-rate risk; balanced funds mix equity and debt. Islamic funds must follow Shariah-compliant screening and have a Shariah advisor. “Capital protected” is a structure, not a deposit guarantee.
Costs and pricing
Management fee, trustee fee, custodian fee, sales tax and other expenses form the total expense ratio (TER). Front-end and back-end loads are separate from TER and are disclosed in the offering document.
Worked example
A client wants index exposure with intraday liquidity. An ETF gives exchange trading but price can deviate from NAV; an open-end index fund gives end-of-day NAV dealing. If the client needs certainty of NAV, the open-end fund is more suitable; if intraday execution matters and the client accepts market price, the ETF may fit.
Traps
Assuming closed-end funds redeem at NAV; ignoring ETF market price; treating Islamic or capital-protected funds as risk-free; comparing funds on return without TER and load; missing the fund’s category limits.