The advent of mutual funds has expanded the ability of individuals to participate in financial markets. A mutual fund is a mechanism by which a firm collects money from a large number of individual investors to form a pool, which can then be invested in various financial instruments. Funds sponsors pursue specific objectives to satisfy the needs of the individual investors by offering funds with different risk characteristics and exposure to different kinds of securities. In the U.S. alone, well over 2,500 mutual funds exist allowing individual investors to choose specific funds to suit their investment needs. Mutual funds are becoming increasingly popular in Saudi Arabia with banks offering a range of different funds and kept increasing in number and diversity. Mutual funds present a number of advantages to the individual investor. Professional money management, the ability to participate in a large number of securities through pooling and lower transaction costs are some of the benefits.

Mutual funds levy a variety of fees that can lower the rate of return to the investor. Load funds apply an initial fee as a sales charge and sometimes an exit fee when funds are withdrawn. Unless there is good reason to believe that the fund manager can exhibit superior investment performance, the investor is better off choosing no load funds. Most funds incur operating expenses to cover costs of operating the fund such as administrative expenses, and salaries. Other charges represent costs passed on to the investor to cover advertising expenditures, commissions paid to brokers, and the costs of printing and distributing annual reports.

Investing in mutual funds is done by purchasing shares issued by the fund. The fund in turn uses the money to invest in securities in keeping with its stated objectives. The price at which the mutual fund shares can be purchased is called the NAV or Net Asset Value, which represents the total market value of the securities held by the fund divided by the number of shares outstanding.

If the fund carries a load, the investor pays the NAV plus the sales charge. The financial press such as the Wall Street Journal carries daily price information for a large number of mutual funds. In addition a number of publications, notably ‘Money Magazine’ and ‘Forbes’ present detailed analysis of the performance of individual funds annually. In Saudi Arabia, weekly prices and trading information are presented in major local newspapers.

TYPES OF FUNDS BY OBJECTIVES Funds sponsors pursue specific objectives to meet the diverse needs of investors. These objectives are classified in terms of the degree of risk and the ability of the fund to generate income flows. Thus, stock, bond, and money market funds can be classified according to their stated objectives as follows: Stock Funds

Aggressive growth funds, which seek to maximize capital growth; current income is not a significant factor. Growth funds, seek capital growth while dividend income is not a significant factor. Growth and income funds, seek to combine long-term capital growth and current income. International funds, seek to invest in stocks of companies located outside the country. Global equity funds, which are portfolios invested in stocks traded worldwide. Income-equity funds, which seek a high level of income by investing primarily in stocks of companies with good dividend-paying records.