Basics of Securities and the Stock Market

- Offering through underwriting organizations: The most common way to sell shares of investment funds under the corporate model is through underwriting organizations. Under this method, the fund's underwriter acts as a wholesaler and distributor for securities trading and brokerage firms. These companies in turn sell shares to the public through their branch offices. In addition, investment funds can conduct the offering through offering agents such as commercial banks, securities companies or financial companies.

- Direct offering from the fund or fund management company: Funds sell their shares directly to investors without going through any intermediary. Contractual investment funds established by a fund management company often offer investment certificates in this form through the fund management company's network or the custodian bank's network. In addition, they deal with current and potential shareholders through mail, telephone, bank networks, or their local offices. These funds attract investors primarily through advertising, direct mail, as well as speeches, effective advertising means. đ Issue-related costs Offering costs

- Cost of printing the prospectus

- Costs paid to stock and investment certificate agents

1.2. Basic contents of the prospectus Some main contents of the prospectus:

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(l) Detailed explanation of the fund's investment objectives.

(2) A description of the investment policy, such as the types of fund securities that may be purchased, the allocation of the fund's cash and assets to investments, etc.,

(3) Investment limits

or investment activities

that fund

not carried out

Typically this section will determine the level of diversification of the fund's portfolio.

(4) Costs related to the transaction activities of investors in the fund (beneficiaries in the contract fund model or shareholders of the fund in the corporate model).

(5) The fund's performance history is based on figures such as earnings per share/investment certificate, changes in capital and demonstrable financial ratios.

(6) Detailed analysis of risks for investors when investing in the fund, including risks of the general business environment and risks of the investment portfolio in particular.

(7) Relevant information about the fund manager: the fund management company or investment consultant and related fees payable to the fund management company or consultant.

(8) Information related to the fund's asset custodian and transfer agent.

transfer or income distribution agent (if any).

(9) Method of distribution of dividends and capital gains and notification of relevant taxes to investors (if any).

(10) Services provided to investors such as telephone transactions and reinvestment of profits paid to investors.

(1l) li Funds established and managed by the same fund management company (for what type of contract investment fund model?

1.3. Trading investment certificates/shares when the fund has been formed - valuation and issuance costs. Concept of fund net asset value The fund's net asset value (NAV) is equal to the total value of the fund's assets and investments minus the fund's liabilities. For investment funds, the fund's net asset value is one of the important indicators to evaluate the performance of funds in general and is the basis for pricing the offering price as well as determining the repurchase price for open-end investment funds. Trading investment certificates/shares of the fund after issuance The difference in the structure of capital movement mentioned above leads to two ways of trading investment certificates/shares of the fund. For closed-end investment funds In any model, after issuance, the fund's investment certificates/shares are listed on the centralized market and traded like any other listed stock. Therefore, the price of investment certificates is regulated by supply and demand in the market and tends to deviate from the net asset value. The price of investment certificates of closed-end funds can trade above the net asset value and can trade at a discount, that is, at a level lower than the net asset value. For open-end investment funds, after issuance, the fund's investment certificates are issued and repurchased at the fund management company itself or through the company's agents. The price of investment certificates/shares of open-end funds is always linked to the fund's net asset value. Valuation Nav(fund)/ Nav(certificate/shares) = total number of outstanding share certificates Offering price (Po) = Navlcertificate + Recording selling fee AV

- Po Offering fee rate (%) = Po If the offering fee rate is predetermined in the fund prospectus, the offering price can be calculated using the following formula: NAV Po = 100% = offering fee rate Purchase price = Nav/certificate - redemption cost. 1

4. Fund borrowing and lending mechanisms Very few funds have large borrowings because they are often prohibited by law. In fact, some funds, such as aggressive growth equity funds, sometimes use borrowed money to try to inflate capital gains when the market is down. At the same time, the cost of borrowing, reflected in 'sustained short-term interest rates', makes the portfolio perform well. However, this is a double-edged sword that can magnify losses. Highly leveraged funds are often among the worst performing funds in down markets. The resale of investment certificates or shares of individual (. open-end funds) funds can exacerbate the usual problems when prices fall. A fund that uses leverage usually carries greater risks. When leverage is used, NAYs tend to move up and down very quickly. Therefore, the laws of many countries usually only allow funds to borrow money from banks. Therefore, leveraged portfolios can only meet short-term capital needs. These funds are also limited in the amount of debt they can borrow, which means they have to control the leverage ratio. If the value of the investment portfolio increases, everything is right and the asset-to-loan ratio increases. But if the value of the assets decreases, the fund must also immediately reduce its bank loans. This may force the manager to sell shares at a discount. However, the fund must also pay interest on the loan with money drawn from the fund's profits. Interest costs are separated from operating expenses on the additional line in the analysis of each type of stock.

Leverage is especially difficult when interest rates rise or stock prices fall, which often happen together. However, it would be unusual for any fund to borrow up to its limit. Many funds will often take out small loans to help managers make acquisitions without having to sell existing shares.

2. Investment objective - determining the fund's investment portfolio

2.1. Choosing the investment objective of the fund Any fund aims to achieve the following initial objectives:

+ Income: quickly have a source of dividend payments.

+ Capital gains: increase the value of initial capital through the appreciation of stocks in the fund's portfolio.

+ Income and capital gains: a combination of both. Many funds also set the goal of maintaining and preserving capital as a secondary goal. Basically, each goal has its own exit and so do investors. This makes it really difficult to find a stock fund that simultaneously achieves both high income and acceptable capital gains goals. If you want the potential for growth

maximum growth, you will have to give up the income goal. Another example, an oil portfolio

The most stable investor would invest only in government bonds, but it has no potential

Growth and poorer dividend yield compared to Riskier income investment funds often focus on securities such as junk bonds. To achieve their initial goals, each fund forms its own investment policies, on the basis of which they can establish an investment portfolio to achieve the set goals. Investors will choose and decide to invest in funds according to their ability and risk tolerance based on information about the fund's investment policies and objectives. The name of the fund shows the fund's investment objectives and policies. Common types of funds are: Growth funds Funds in this area are generally less stable than the above funds. As their name implies, growth portfolios hold stocks of companies whose profitability is expected to increase at a higher rate than average. Portfolio managers are often more interested in capital growth than dividend income. Income and Growth Funds Capital growth, dividend income, and even future dividend growth are attractive features to income and growth fund managers. However, they often focus primarily on the potential for capital growth. This investment is often of interest to those who want something more than income and is perhaps less of a discount than that offered by a growth fund. _ This portfolio includes both growth companies and income stocks with good dividend payout profiles. Income Funds' Stocks The income stock strategy is a special type of value investing. These managers often focus primarily on annual rate of return. They seek out stocks with annual rates of return that are higher than the market benchmark, such as

For example, the S&P 500 yield. When a stock's price falls, its annual return increases. Income-stock funds include natural resources, financial, energy, and high-tech companies. Some funds also hold large amounts of convertible securities, bonds, and preferred stocks. Some of these companies may temporarily fall outside the fund manager's focus. They may be undervalued if they fail to deliver above-average returns. Balanced Funds Balanced portfolios attempt to achieve three objectives: income, small capital appreciation, and capital preservation. They do this by investing in bonds, convertible securities, and perhaps some

preferred stocks as well as common stocks. Generally these funds invest 40% to 60% of their value in bonds. They tend to focus on securities issued by high-quality companies. Convertible funds

Convertible securities are bonds or preferred stocks that can be converted into a predetermined number of shares of a company, at the option of the holder. Convertible securities are inherently separate from their issuance. Sometimes they are considered common stocks, but sometimes they are considered bonds. These securities often offer the upside of fixed-income securities and the upside of stocks. Because of the hybrid nature of convertible bonds, a convertible fund is something similar to a balanced portfolio. It usually focuses more on income and capital preservation than typical stock investments. Option Income Funds Relatively stable option-income funds typically invest in large, dividend-paying companies in which options are readily available. They then sell the options against their stock positions, collecting premium income in the process. These premiums, tied to stock dividends, result in good returns. ' ' ' Options contracts tend to reduce losses in a falling market, but also limit rapid gains in a rising market. During periods of market decline

sector funds tend to be more diversified than broadly diversified portfolios. The returns of these funds are often inconsistent with the average returns of the market. However, sector portfolios are often more attractive than simply investing in stocks in the sector you are interested in. These funds vary within their investment groups and therefore do not carry the specific risks of any one company. ~ Bond Funds For many people, the fund industry is a way to invest. Small investors, in particular, will enjoy several advantages with a portfolio of mutual funds over individual assets. These advantages include:

+ Easy access: It is often difficult and expensive for small investors to trade directly in the bond market, which always requires professional investors. Transaction costs are higher and liquidity is lower for those who buy and sell in relatively moderate volumes. To be successful in bond investing, you should carefully survey different traders to get a reasonable price.

+ Liquidity: You can easily withdraw money from the fund without losing price compared to selling bonds that have traded before maturity. This is especially true for high-yield, illiquid corporate debt and many municipal securities issues. The trading spread can be even greater when it comes time to sell.

+ Monthly Income: Bond funds generally declare monthly dividends. In contrast, individual bonds typically pay interest semiannually. Retirees may especially appreciate monthly distributions on their investments as a source of additional income.

+ Easy reinvestment. Bond funds offer convenient reinvestment of dividends and capital distributions, even for small amounts. This allows for more efficient coordination to generate long-term income.

+ Professional Management: Fluctuating interest rates and other factors make a buy-and-hold bond strategy risky. High returns are often due to active portfolio management. Good managers can respond to opportunities in the fixed income market and begin to execute. They can also sell off low-quality issues when their risk becomes unacceptable. For this reason, bond funds often make more sense than individual assets.

+ Diversification: If a mutual fund holds hundreds of bonds, it will help shareholders hedge against credit risk more than if they held positions in one or a few of those bonds. These aspects can be especially important for investors in a certain range.

2.2. Asset allocation and fund portfolio formation Asset allocation means dividing the fund's money into investment "baskets", each basket to achieve a specific separate goal or the entire portfolio's profitability requirements. When dividing the fund's money into different types of assets, the investment manager can calculate the balance between the value of the investment portfolio as well as the profitability of each type of securities. Therefore, the fund's asset allocation and the formation of the fund's investment portfolio is an important step after the fund has been formed and is preparing to carry out investment activities. Asset allocation will contribute significantly to optimizing the investment portfolio and optimizing the profitability of investments. The fund management company is the one who has a good understanding of asset allocation techniques. Understanding the risks and deciding on asset allocation can increase or decrease the risk of each investment as well as the entire fund's investment portfolio. All investments have some degree of risk. For example, stock prices tend to fluctuate in the short term, but in terms of long-term income, they are relatively consistent and relatively high. Treasury bills have relatively stable and consistent returns, but there is a risk related to the purchasing power of money over time due to the effects of inflation. Once the asset allocation has been made, the fund manager can evaluate the investments and their profitability.

3. Costs related to operations

There are three basic types of costs related to the operation of funds. Here we only mention the costs for the operation of the fund after the fund has been formed and started investing. The costs related to the issuance and repurchase of investment certificates/shares of the fund mentioned above are:

3.1. Fees related to investment activities

- Brokerage fees paid by fund management companies to brokers Investment advisory fees Fees for keeping and preserving fund assets Interest in case the fund has to borrow short term, taxes (if any) Fees paid to organizations that value your investments

3.2. Management and operating expenses include fees and bonuses for managers as well as various costs of running the fund, monitoring fees. Management and operating expenses often appear as part of the expense ratio. Management fees, a common fee for all portfolios, are paid by advisory firms to securities analysts and the portfolio management functions they perform. These fees generally range from about 0.4% to 1% per year. At 1%, portfolio management costs are about $10 million for a portfolio worth $1 billion. In many cases, advisors must disclose that the fund is planning to reduce fees as assets grow. For example, the ABC Growth Fund has an active management fee of 0.7% on the first $100 million of assets, 0.6% on the next $400 million of assets, and 0.5% on assets exceeding $500 million.

3.3. Other administrative management costs

- Fees for preparing reports

- Audit fees Fees for legal services

- Fees for changing the terms of the trust agreement at the request of shareholders (if any) Fees for holding a general meeting of shareholders or a general meeting of investors of the fund. Many companies limit their expense ratios, usually for competitive purposes. For example, the adviser may reimburse the fund for excess fees to maintain a maximum fee ratio of 1%. This can be accomplished by adjusting the advisory fee. Details will be reported in the prospectus and in the semi-annual and annual operating reports. Expense ratio limits are common in small, new funds and may be temporary.

Basics of Securities and the Stock Market - 51

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