How mutual funds work

Standard Chartered Bank recently launched the first offshore mutual fund product in Uganda. The fund is licensed by the Capital Markets Authority. This product is very similar to the local unit trusts. The main difference is that it is denominated in foreign currency, invests in international markets and the minimum investment is US$100. 

Standard Chartered Bank has partnered with Alliance Bernstein which is a global fund manager with assets under management exceeding US$779 billion.

A mutual fund is a financial vehicle that pools assets from shareholders to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus. 

Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund.

Investors wishing to invest with Standard Chartered Bank Uganda can choose between two available mutual funds. The first is the AB Global High Yield Fund which seeks to produce high current income as well as overall total return by: applying a global, multi-sector approach to bond investment; investing mainly in higher-yielding, lower-rated (below Investment Grade) securities of issuers located throughout the world, including developed and emerging market countries; and, investing in both US dollar and non-US dollar-denominated securities. This portfolio will suit higher-risk-tolerant investors seeking the income potential of fixed-income investment. The AB Global High Yield Fund was founded on 22/09/1997 and has returned about 6.15% since inception. There is a cost of entry into the fund which is limited to 5% of invested amounts and an on-going fee of 1.6% per year. The fund mainly invests in high yield government and corporate bonds which are dollar-denominated and domiciled in the USA. The fund holds about 2,060 individual securities across the world and has over US$13.943,16 bn in assets under management.

The second available fund is the AB Income Fund. The AB income Fund seeks to provide a high level of current income consistent with preservation of capital by: employing a US dollar-denominated multi-sector bond approach in search of the best opportunities; dynamically balancing credit and duration through investments in high yield and emerging market sectors to enhance income and dampen interest-rate risk, and in high-quality government bonds to alleviate credit risk when markets are stressed; limiting exposure to below investment-grade rated bonds to 50% and avoiding CCC-rated issuers. The AB Income Fund will suit higher-risk-tolerant investors seeking the income potential of fixed-income investment. The fund was inaugurated on 01/07/1993 and has returned about 4.33% since inception. The AB Income Fund has over US$16.399.55 bn in net assets and over1,073 individual securities. The maximum entry fee is 1.5% and the ongoing charge is 0.77%. The fund mainly invests in high grade government and corporate bonds which are dollar denominated and domiciled in the USA.

There are two ways an investor can join any of the two funds. The investor can either place alump sum with a minimum amount of US$1,000 or build wealth gradually by investing a minimum of $100 every month. For the lump sum option, an upfront fee of 3% of the investment amount is charged by Standard Chartered Bank. For the wealth builder plan, the bank will charge a non-refundable plan establishment fee which is equivalent to the first installment of the investment. The bank will also charge an annual management fee of between 0.5 -2.5% per annum for both options. There is no redemption fee in either case and an investor can withdraw funds at any time. Customers also have the option to open joint accounts for purposes of investing as a group. Interested investors can contact Standard Chartered Bank for more information.

There are several advantages to mutual funds. First, there is no active management by the investor. A professional investor does the actual investment strategy and execution. Second, this particular mutual fund is regulated by the Capital Markets Authority under the collective investment schemes act of 2003. Third, the fund is dollar-denominated and invests in international markets which provides some diversification from the local economy and currency. Fourth, the investment amount is relatively small. For as little as $100 an investor can gain access to the largest bond markets in the world.

Despite the obvious advantages, this mutual fund is fairly high risk for the common investor and does not offer capital protection. The fund values fluctuate unpredictably from year to year and the returns are relatively moderate compared to the local unit trusts. The funds also have a relatively high cost structure compared to local unit trusts and similar Exchange Traded Funds available cheaply through Chipper Cash. Potential investors should carefully study the fund prospectus and make sure their individual objectives match the fund objectives and strategy.

Overall, this mutual fund is a welcome product on the Ugandan Capital Market. It is something I would recommend for medium to high net worth individuals with above-average incomes as a way to diversify their asset portfolios with some international exposure.

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