Mutual Funds

Before defining mutual fund, it is beneficial to clarify what a portfolio is. In its broadest sense, a portfolio is a group of assets owned by an individual or an entity. In its confined (specific) meaning used here, a portfolio is a group of assets composed of capital market instruments and precious metals.

Mutual funds manage portfolios consisting of capital market instruments such as stocks,bonds and bills and precious metals on funds raised from the investors. Every investor becomes a shareholder of the fund upon having a participation certificate that represents part of the portfolio managed by the fund.

  • The capital of investor, namely his/her savings, is managed by professional and trustworthy managers.
  • As the securities included in the portfolio of the mutual fund are diversified by means of the instruments such as fixed income securities, stocks, etc., it is possible to minimise the risk.
  • Further, the valuation and control of securities, and the collection of coupon, interest and dividends are fulfilled by the fund management, which relieves the investor of time and resource wasting transactions such as following due dates, collection of payments, etc.
  • The mutual funds also allow you to make investment in the securities with high revenue in which you could not make investment with your little savings otherwise.
  • As the value increases in the fund portfolio are reflected to the portfolio value on daily basis, they allow investors to convert them into cash in whole or in part at any time whenever investors need.
  • They provide the portfolio with time and money saving due to purchases and sales in big volumes.

Appreciations/depreciations in the fund portfolio are reflected on the value of the portfolio daily. There is no concept of maturity. This, in turn, allows investors to encash all or any part of the fund assets to the extent they need based on advanced price application.

For example: Interest will be lost if a deposit account is closed before maturity date.

It is different from government bonds, Treasury bills and time deposit products basically in that its income can not be predicted in advance.

You can earn on your fund investment in three ways:

  • Primarily, the fund acquires an income from the securities it owns through dividends and interests. The fund reflects all incomes on the fund portfolio value.
  • The prices of the fund's securities may increase. If the fund sells these securities with higher prices, it acquires a capital gain. The fund reflects this capital gain or loss to the portfolio value of the fund.
  • If the investment fund does not sell and retains the securities with rising prices, the price of the participation certificates rise. A high total value of the fund indicates that the value of your investment is high.

Consequently, when investors sell their participation certificates, they have their shares in profit/loss that has occurred so far in the portfolio of their mutual fund. In Turkey, mutual funds do not distribute any additional dividend at year ends.

Participation Certificate is a certificate that allows an investor to become a shareholder of the fund portfolio. Participation Certificates are like corporate shares. Investors become shareholders of the portfolio of a mutual fund by purchasing a Participation Certificate, just like the shareholders of a company who join a company by purchasing corporate shares. The only difference is that shareholders of a company can participate in the management of their company, while the holders of a Participation Certificate cannot participate in the management of the mutual fund.

In case of purchase of participation certificate or transfer to fund, purchase order is given by referring to places where purchase and sale of participation shares to be declared on prospectus basis shall be made.

In addition, to buy or sell participation certificates, it is possible to use Turkey Electronic Funds Transfer Platform (TEFAS - which is a central fund distribution platform where the participation certificates can be bought and sold) and telephone/internet banking or ATM systems of the founder or the investment institutions (if the founder has singed a fund brokerage contract with the investment institution). Participation shares are bought and sold within certain hours during the day.

Umbrella fund is the investment fund covering all funds the units of which are issued under a single fund rules.

The Fund type indicates the type of assets which the fund portfolio mainly consists of.

Umbrella Funds can be founded in the following types.

  • a) Umbrella funds composed of funds of which at least 80% of the fund net asset value is permanently invested in;
  • 1) Public and/or private sector debt instruments are named as "DEBT INSTRUMENTS UMBRELLA FUND";
  • 2) Shares of local and/or foreign issuers are named as "SHARE UMBRELLA FUND";
  • 3) Gold and other precious metals and in capital market instruments based on precious metals are named as "PRECIOUS METALS UMBRELLA FUND";
  • 4) Units of other funds and exchange traded funds are named as "FUND OF FUNDS UMBRELLA FUND";
  • b) Umbrella funds composed of funds the portfolio of which is wholly and permanently invested in highly liquid money and capital market instruments with maximum 184 days to the end of maturity, and the daily calculated weighted average maturity of portfolio of which is maximum 45 days are named as "MONEY MARKET UMBRELLA FUND";
  • c) Umbrella funds composed of funds the portfolio of which is wholly and permanently invested in lease certificates, participation accounts, corporate shares, gold and other precious metals and other non-interest-based money and capital market instruments deemed appropriate by the Board are named as "PARTICIPATION UMBRELLA FUND";
  • d) Umbrella funds composed of funds which are not covered by any one of the types described in the preceding paragraphs in terms of portfolio limitations are named as "VARIABLE UMBRELLA FUND";
  • e) Umbrella funds composed of funds which are founded for sale of fund units only to qualified investors are named as "HEDGE UMBRELLA FUND";
  • 1) Umbrella funds composed of funds for which it is committed in reliance upon an appropriate investment strategy and upon a guarantee given by the guarantor that a particular part or full amount of initial investment of the investor or a particular yield above the initial investment level shall be repaid to investor at particular maturity or maturities within the frame of principles set forth in information documents are named as "CAPITAL GUARANTEED UMBRELLA FUND",
  • 2) Umbrella funds composed of funds which aim and intend with the framework of best effort basis in reliance upon an appropriate investment strategy to repay a particular part or full amount of initial investment of the investor or a particular yield above the initial investment level to investor at particular maturity or maturities within the frame of principles set forth in information documents are named as "CAPITAL PROTECTED UMBRELLA FUND"

New umbrella fund types, in addition to those enumerated above, may be determined, on condition that it is acceptable by the Board.

Risk Level

Remember that you are taking risk when you make investment in mutual fund. It is because the value of the securities that the mutual fund holds fluctuates, so they may increase as well as they may decrease and the latter may cause a loss of some of the money you invest. However, the risk of all mutual funds is not at the same level. Mutual funds may be categorised into more risky or less risky groups of funds.

The most important scale that can be used for this purpose is the Risk Level placed in Key Investor Information Form.

On the other hand, in general expecting, high revenue means high probability of loss, in other words, high risk. Although risky funds feature higher risk of loss, they may create bigger profit when the markets are going well. Therefore, when we make a selection between different risk levels, the key factor is to what extent we dare to lose to gain more. You should make decision about this factor and select which mutual fund to invest accordingly.

Before the investment, we strongly recommend you to consult an investment advisor and examine investment magazines to determine how the objective and risk of the fund are suitable to your interest.

On the other hand, funds are not to be confused with time deposits. While there is guarantee in deposits, there is no guarantee in funds.

Historical Performance

In general, all investors should know the fact for securities, especially mutual funds, that any historical performance does not guarantee the same performance of the same instruments in future. Although the historical performance of the fund gives an idea, it is not guaranteed to catch the same performance in future as the past.

In addition, the funds that set a benchmark to compare the fund performance, publish their performance reports in Public Disclosure Platform and in the company's website.

Expense Ratios

Expense ratios of funds make a negative impact on the revenues generated by them. However, this does not mean that a fund with a higher rate of expenses will bring worse revenue. Rates of expenses of funds may vary due to different reasons. For example, a fund portfolio may select not to make much purchase and sale after it is created, while another fund may select to make more purchases and sales to obtain more revenue from daily price actions. Naturally, the latter fund shall pay more brokerage fees and its rate of expenses shall become higher. However, the revenue it gains from such trades may cover the expenses with a bigger surplus and therefore, this fund shall get a bigger profit. Again, you are recommended to get information about the rate of expenses of funds before making investment in them.

Things to be learned

Investors who are intending to make investment in participation certificates of investment funds must have enough information about the followings.

  • Founder of the fund and the nature and type of the funds that the founder manages,
  • Portfolio manager who manages the portfolio of the fund,
  • The portfolio composition and strategy of the fund in the closest date
  • Fund management fee and total expense ratio,
  • Historical performance of the funds of the founder and their success level comparing to other funds,
  • Places where the participation certificates can be purchased and sold, trading hours, purchasing and redemption conditions
  • Whether a purchase/ redemption fee applies,

The foregoing and any further details if necessary can be obtained from the documents of the fund.

The basic principles prevailing the mutual funds are listed below:

Risk diversification principle

Thanks to this principle, mutual funds may disperse the risk to the extent that individuals cannot do personally. Let's assume that you have TL 100. You can invest this amount only in a few stocks (because stocks traded in stock exchange are not traded under a certain amounts/lots.). This will increase your risk. For example, the probability of the financial deterioration arises much due to the decrease of 2 companies stock that you purchased rather than the value decrease of the 25 seperate companies of 2 companies the stocks of which you purchased and decrease of the value of their stocks is much higher than the decrease of the values of 25 separate companies concurrently. On the other hand, mutual funds can collect money from thousands of people and create portfolios in values of millions of Turkish Liras. As a result, they have the opportunity to make investment in much more stocks and also other securities, for example in bond and bills, thereby reducing the severity of any impact that may occur due to any decrease of the values of stocks.

Professional Management

Stock exchanges are technical markets that require a certain level of accumulated knowledge due to their nature, and therefore they need to be monitored closely. Naturally, it is difficult for individuals to monitor them regularly, estimate any impact of any development that occur in such markets on the prices of securities and take action timely. On the other hand, mutual funds can have necessary equipment and qualified personnel specialised in stock exchanges because they collect money from in a high number of people and create portfolios in big quantities. As a result, they monitor the developments in the markets, understand their meaning and perform transactions (buy/sell, etc.) according to such developments.

Management of the Portfolio of Securities

Although mutual funds can make investments in cash and precious metals under certain restrictions, their main objectives are to buy and sell securities and to earn income from these transactions and from dividends and interests of these securities.

Trusted Ownership

Mutual funds are based on the principle of trusted ownership. Founder of the fund is the proprietor in the principle of trusted ownership. Investors authorise the founder to perform transactions pertaining to the funds. This authority is transferred in accordance with the Fund Rules of the fund. The founder is obliged to manage or cause to manage the fund in accordance with the fund and by protecting the rights of the investors.

Protection of Property

Although the fund is not a legal entity, the property of the fund is different from the founder. Further, in accordance with the Capital Market Law, the property of the fund cannot be subject to any mortgage or offered as a collateral against any debt or attached by third parties. In other words, the property of the fund is under the protection of law.

The basic information of an mutual fund can be obtained from the umbrella fund fund rules, prospectus, key investor information form, financial statement and portfolio distribution reports, which are explained in detail below.

It is very important to have enough information about the fund by reading these documents before purchasing the fund participation certificate. If you do not have enough information about the fund's features and the risks involved, you can suffer unexpected losses.

You can find the following documents at the places where funds are bought and sold and at the Public Disclosure Platform.

Umbrella Fund Fund Rules

The fund rules of mutual funds are contracts that govern and maintain the mutual fund portfolio between the mutual fund shareholder, founder, custodian and manager. In the fund rule, information such as the fund name, fund address and fund management principles are included. More funds may be issued depending on the umbrella fund profile, provided that separate prospectus and key investor information forms are issued.

Prospectus

The prospectus is prepared during the public offering of the shares of the fund under umbrella fund. The prospectus is the sales document of the fund.

Fundamental information about the funds (fund founder, founder and fund's address, places where fund shares will be bought and sold, information about fund managers, capital market experience, fund investment strategy, investment restrictions, expenditures, portfolio structure, related tax regulations etc.) are found in the prospectus. The prospectuses are announced at the Public Disclosure Platform before the public offering. In addition, the prospectuses are made available for examination by the savings owners at the places where the purchase and sale of the participation shares are made.

Key Investor Information Form

Just like prospectuses, key investor information forms are prepared during the public offering of the participation certificates and contains at least the following information about the fund: information promoting the fund, a brief de____script____ion of the investment objectives, investment policy and portfolio allocation, performance scenario analysis based on the funds past performance or fund type, management fee, commission, other expenses and total expense ratio, the risk and return profile including appropriate disclosures and warning about the risks which fund is exposed, purchase and sale principles of participation cerfiticates, related tax regulations etc. The key investor information form is regularly updated by the founder.

Fund Financial Statements

Balance sheet and income statements of mutual funds compared with the previous years, price reports and independent audit reports related to these information are announced at the Public Disclosure Platform. (PDP).

Portfolio Distribution Reports

Portfolio distribution report of the month is published on the PDP within the first 6 days of the following month, with information regarding the performance of the securities and participation certificates within the month and the past performance of the fund.

Daily Newspapers and Periodicals

It is possible to compare the periodical returns of mutual funds in periodical economic journals. In addition, newspapers and magazines provide news about funds. Furthermore, in the Fund Informatiın Platform presented by the Istanbul Clearing, Settlement and Custody Bank Inc., many data and statistics on funds will be available. Lastly, the monthly bulletin of our company contains detailed information about portfolio structure and portfolio distribution of all mutual funds as of last month.

According to Capital Markets Board regulations, Mutual Funds can invest in the products listed below:

  • Public and Private Sector borrowing instruments, shares of issuers established in Turkey including those that are in privatization process.
  • Tradable public and private sector borrowing instruments and issuer shares within the scope of Decision No.32 on the Protection of the Value of Turkish Currency provisions.
  • Time deposit, participation accounts and deposit certificates with less then 12 months maturity,
  • Gold and other precious metals and capital market instruments based on these precious metals trading in stock exchanges
  • Fund units,
  • Repo ve Reverse Repo Transactions,
  • Lease Certificates,
  • Real Estate Certificates,
  • Warrants and Discounted Certificates
  • Takasbank Money Market Transactions,
  • Cash collaterals and premiums of derivative products,
  • Foreign investment products and loan participation notes approved by Capital Markets Board
  • Other investment products approved by Capital Markets Board.

Since the fund return depends on the assets' returns in its portfolio, the investors should invest in mutual funds after they get information about the asset allocation or type of the fund.

Exchange traded funds (ETF) are mutual funds that are based on an index, whose purpose is to reflect the performance of the underlying index on the investor and whose shares are traded on the stock exchanges. ETFs are issued based on an index and are investing in securities based on the underlying index in proportion to the weight of the index. In this case, for example, an investor who wants to invest in the BIST 30 index can invest in ETF instead of separately dividing the shares in the portfolio, thus making it possible to invest in such indexes and benefit from the index. ETFs are portfolios of securities purchased by authorized intermediary organizations through the purchase of securities that are based on cash collected from investors. ETFs reflect the returns and risks of the underlying shares or other instruments.

  • Participation certificates are traded on the stock exchanges.
  • In the direction of the investor's request, it allows the equities in the fund to be changed in the face of the fund participation certificate.
  • It is expected to be traded at least with discount or premium according to net asset value.
  • There are public disclosure obligations such as portfolio contents and continuous disclosure of net asset value.
  • Authorized participants have different functions during the creation and withdrawal of fund participation certificates.
  • The creation and redemption of participation certificates are made through at least a certain minimum transaction unit.

Funds established with participation certificates to be sold only to qualified investors are called "HEDGE FUNDS". All Hedge Funds in Turkey are supervised by the Capital Market Board.

intermediay institutions, banks, insurance companies, portfolio management companies, mortgage financing entities, pension and provident funds, foundations, funds established pursuant to the temporary article 20 of the Social Insurance Law numbered 506, associations with public benefit and other investors designated by the Capital Market Board of Turkey in accordance with their qualifications; and individuals and legal entities having capital market instruments equal to at least TRY 1 million in Turkish and/or foreign currency as of the date of initial public offering and/or having capital market instruments.