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Though logical, its good.
5 investors? isnt there only one investor so far? ie the one that contributed the £100?
Redemption of fund is where share holder can buy or sell there share at any time at NAV. Shareholder will surrender there share to the IM/comapny and thake the money back
It is good cource
How we can get fund
Let's continue with the story of
Pete's mutual fund.
The year goes by,
and then even after paying Pete the 1%,
so we had $500 of assets under management
this whole assets under management
a year later goes to,
let's say it goes to, like I mention at the end of the last video,
$1,000, so Pete either is really good, or really lucky,
or a little bit of both.
So now it is at $1,000,
and it still has the same five investors here,
and I am lucky enough to be one of them.
So here are the five investors,
let me draw the shares, so there is one,
four, five shares.
Now, each of these shares,
well the $1,000 is called the NAV,
or the net asset value,
let me give you that piece of terminology,
it just means net asset value.
So there is an NAV per share,
the NAV per share over here is $200,
I just took the total NAV and I divided it by the shares.
And what's special about an open ended mutual fund
is that the close, or end of every day,
either new shares can be removed from the fund,
or be created before the fund.
So, in the first video,
I showed how I wanted to buy into the fund,
so I bought a share, and that increased the NAV,
and it also increased the number of shares,
he had to create a share for me to buy,
he didn't sell me a share that already existed,
so you can imagine after this type of performance
more people would want to buy shares,
so now they would have buy in,
to make things fair,
at $200 per share
because that's the current NAV per share,
so lets say that five more people want to buy in at
$200 per share,
so what Pete would do, or what this mutual fund,
its not Pete really, its the corporation,
it would creat five new shares.
So, one, two,
three, four, five, if there was only one person that day
it would create one share that day,
if there were ten people that day,
it would create ten shares that day,
and it can keep doing this,
and the NAV of each of these are
So it gives these shares to each of these people,
and they have to contribute $200,
it puts another $1,000 into the pool, that Pete can now manage,
and so now the total NAV for the fund is $2,000 now
and Pete will get his 1% management fee
off of this entire $2,000.
Now, lets say we fast forward a little bit,
we fast forward a little bit to,
lets say Pete starts having a not so good year,
so lets say we fast forward a year past that,
and Pete has a negative 10% return.
So if you started at $2,000,
and that's when you include taking his management fee out,
you started at $2,000,
you lose 10% in one year,
so it goes down to $1,800.
Let me put this in a new color,
so now he's at $1,800.
It's not completely drawn to scale,
but hopefully you will get the idea.
So now he is at $1,800,
$1800, but you still have a total of ten shares,
you still have a total of ten shares,
let me draw,
or let me do my best to draw, the ten shares.
One, two, three,
four, five, six,
seven, eight, nine, ten.
These should be at equal size,
and now the NAV per share is going to be
$1,800 divided by 10,
And lets say, that I get a little freaked out,
by this recent performance,
and I have some other commitments with my money,
so I say,
you need to buy my one share back from me,
so what Pete does,
is he would give me back $180,
so the total NAV would lose $180,
so it would go down $180,
so we would take this out of it,
$1,800-$180 is $1,620,
and they would buy back a share from me.
So they would cancel one of the shares, but notice,
the NAV per share does not change,
by me redeeming my share,
it does not change what happens to everyone else,
now you have $1,620, divided by
that should still get you $180 per share,
if I did my math right,
so $1,800 minus $180 gets you $1,620,
it should still be $180 per share,
but this is the nature of an open ended fund,
you can keep creating shares and selling them to the public
to raise more money,
or when someone wants their money back,
you essentially buy the share back from them,
give them their money,
when you buy it back, and you remove that share.
So an open ended fund,
really at the close of every trading day,
can keep growing or shrinking,
it can keep adding more and more investors,
or their investors can take their money back.
What's difficult about this,
from the fund manager's point of view,
is that they have to manage this,
they have to manage this constant buying and selling with the public,
they have to manage the paper work,
and if you think about it,
they can't have all of their money invested,
in relatively illiquid assets,
or even in regular stocks,
they have to keep some amount of their money,
and it is usually 3 to 5%,
they have to keep some of this $2,000,
they have to keep some of it in cash.
and from an investor's point of view,
they would say,
well if I'm good at investing, I should try to minimize
the amount of cash that I have,
because I am not getting a return on cash,
but because it is open ended,
because investors might come by and say,
hey, I want my money,
you have to have a little amount of cash on hand
as part of the asset pool,
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