What is a Mutual Investment Fund (MIF)?
What is a Mutual Investment Fund (MIF)?
In this article, we explore the essence, types, and benefits of the investment instrument known as a MIF – a mutual investment fund.
When learning about investments and the capital markets in general, a novice investor encounters many new terms and unfamiliar abbreviations. Today, we will examine the term MIF – mutual investment fund.
What are they for, what advantages do they have, and how can Ukrainians invest in MIFs? These are the topics covered in the article.
What is the essence of MIFs?
Based on the name, a MIF is a type of investment fund. Therefore, its main purpose, like any other investment fund, is to manage investors' money with the goal of growing it and simplifying the investment process for private investors.
Like most types of funds, a MIF is created and managed by an asset management company, or AMC for short. These are licensed companies that can create and manage various investment funds.
The feature of a MIF is its organizational simplicity. This type of fund is not even a company – it is a portfolio of assets owned by investors, which is managed and accounted for by the AMC according to a pre-established regulation. In fact, the AMC acts as the asset manager for the investors, combining their assets into different MIFs according to their investment preferences.
A mutual fund is a collection of assets that belong to the participants of the fund under a joint partial ownership agreement, managed by an asset management company and accounted for separately from the results of its business activities.
The first MIFs appeared in the United States in the first half of the 20th century, under the name Mutual funds. At that time, investments on the stock market were a complex and inaccessible process for ordinary citizens, and most Americans did not have an organized investment process. Mutual funds began to accumulate public funds, which contributed to the rapid growth of the country's economy and the development of national business.
The total value of assets registered in U.S. mutual funds from 1998 to 2022 (in trillion dollars). (c) statista.com
Today, they are the most attractive instruments for placing citizens' savings in developed countries. As of 2022, American mutual funds alone manage more than $22 trillion.
One of the first mutual funds, Massachusetts Investors Trust (MITTX), was created by the management company MFS in 1924. This fund survived several global crises and is still operational, confirming the quality and effectiveness of this instrument.
What types of MIFs exist?
Each MIF has its own specific activity, clearly outlined in its regulations and the prospectus for the issuance of investment certificates. Over the years, many different investment funds have been created, each with its own goals and purposes. Therefore, it is important to be able to classify them before starting cooperation.
Generally, MIFs are distinguished by three characteristics: the type of fund, the term of activity, and the type of activity.
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Fund Type helps understand when and under what conditions an investor can exit the MIF and receive the invested amount with accumulated income. There are 3 types of mutual funds:
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Open-ended type;
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Interval type;
Closed-ended type.
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Interval type;
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Open-ended type;
Fund Term defines its duration. Based on this characteristic, MIFs can be:
- Perpetual. Such funds can exist for an indefinite period, as long as no decision is made to liquidate them. Any interested investor can invest in it for a potentially unlimited period.
- Term-based. Typically closed, these funds are created to implement a specific project (e.g., building a house or buying a particular bond issue). After the term ends, participants receive their assets back, along with the accrued income.
Activity Type: MIFs can be:
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Diversified. A MIF is considered diversified if it:
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Does not own 10% of the shares of any one company;
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The share of each individual security does not exceed 40% of the total assets of the fund;
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At least 70% of the fund’s assets are invested in securities, bonds, cash, or precious metals. Most public MIFs are diversified, which ensures a higher level of investment security for investors.
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Non-diversified. If a MIF does not meet the conditions of a diversified fund, it is considered non-diversified. Such MIFs have a higher risk level and often specialize in specific projects.
- Specialized. A mutual fund is considered specialized if it invests in a clearly defined list of assets, such as currency, bonds, stocks, or precious metals. Due to investment in public assets, specialized MIFs are a popular and reliable way to preserve and increase capital.
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Non-diversified. If a MIF does not meet the conditions of a diversified fund, it is considered non-diversified. Such MIFs have a higher risk level and often specialize in specific projects.
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At least 70% of the fund’s assets are invested in securities, bonds, cash, or precious metals. Most public MIFs are diversified, which ensures a higher level of investment security for investors.
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The share of each individual security does not exceed 40% of the total assets of the fund;
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Does not own 10% of the shares of any one company;
- Qualification type. These funds invest exclusively in one type of asset and do not have strict structural requirements. Such funds invest in real estate, credit assets, rents, and other assets from the allowed legislative list.
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Diversified. A MIF is considered diversified if it:
By understanding the specifics of a fund's activities, you can expertly assess its suitability based on risk levels, activity frequency, potential profitability, and other factors.
What are the Advantages of Investing in Mutual Investment Funds (MIF)?
Investing in a Mutual Investment Fund (MIF) significantly simplifies the process of saving and growing funds for the investor and positively impacts the country's economy. Compared to other investment options, this type has both advantages and disadvantages:
Advantages of Investing in MIF:
- The return on MIFs is usually higher than that of bank deposits and bonds.
- The asset portfolio is managed by qualified professionals, considering diversification principles and risk hedging.
- Low entry threshold – starting from the price of one investment certificate.
- Investors can sell their shares at any time, receiving the principal investment and accrued interest.
- MIFs with different strategies can be chosen – aggressive, passive, or specialized in certain assets, etc.
Disadvantages of Working with MIF:
- The Asset Management Company (AMC) does not guarantee the profitability of investments, and the investor assumes the risk of potential losses.
- The fund retains a percentage of the investment as payment for its services.
- The low level of development of Ukraine's stock market limits the fund’s activities in it.
Given the characteristics of MIFs, they are an excellent option for beginner investors, as well as for those who do not plan to dive deeply into the principles of investing. Here's what needs to be done to start working with a fund.
How to Invest in MIFs in Ukraine?
Unfortunately, Ukraine's stock market, in its short history, has faced many challenges and is currently in a state of decline. However, Ukrainian investors still have the opportunity to invest in MIFs – both on the local market and in foreign funds.
There are several functioning MIFs in Ukraine that offer services to investors, even in the current difficult conditions. Each fund has its specific activities and will suit the particular needs of an investor. Our team has conducted a detailed analysis of the operations of Ukrainian investment funds, the vast majority of which are indeed MIFs.
Steps to Start Working with a MIF:
- Choose the right MIF: It's important to consider the fund's type, assets, and specialization.
- Sign a contract with the Asset Management Company (AMC) that manages the MIF's assets.
- Purchase investment certificates of the MIF by transferring funds to the AMC. Investment certificates exist in electronic form and are accounted for at the depository institution in the investor’s securities account.
Logic of Investor Cooperation with MIFs
Usually, Ukrainian MIFs either build their own strategies within the existing stock market framework (with a focus on government bonds and foreign currencies) or invest the funds of investors in foreign funds. In the second case, the fund acts only as an intermediary between the investor and the foreign fund, charging an additional fee for this service.
To avoid intermediaries, residents of Ukraine can cooperate directly with foreign MIFs. The easiest way to do this is by purchasing shares of Exchange-Traded Funds (ETFs) – a fund that is traded on the stock exchange. These are structures similar to MIFs, but to work with them, there is no need to sign a contract or transfer funds to a foreign AMC account – you simply need to buy ETF shares through a broker listed on the exchange. Fondexx provides the opportunity to buy shares of all ETFs traded on the American market.
In Summary:
A Mutual Investment Fund (MIF) is an investment tool that allows many investors to jointly invest their funds in various assets under the management of professional managers. This tool is one of the most popular investment solutions in the developed world and is ideal for those looking for a way to preserve and grow their savings while ensuring professional control and asset management.