CHAPTER 3

INVESTMENT FUND
MANAGEMENT COMPANIES AND
INVESTMENT FUNDS
A. Fund Management Company

A fund management company is a securities

trading organization, established in accordance
with law and performing the operation of
managing securities portfolios and managing
securities investment funds
Function of fund management company

• Raising capital to form funds

• On behalf of the fund conducting investment activities

• Calculate the interest of the fund to pay the investor

• Valuation of fund assets

• Identify the fund's NAV

 The basic business of the fund
management company

▪ Portfolio management: is the management of

securities investment fund under the trust of each
investor in buying, selling and holding securities
▪ Investment fund management: is the
management company of the fund management
of investment funds formed by the fund
management company
Portfolio management

▪ Portfolio Management Contract:

▪ Full Portfolio Management Contract: is a
contract in which the client authorizes the entire
portfolio manager
▪ Limited Portfolio Management Contract: in
which the client clearly specifies that the fund
management company is only allowed to perform
certain activities on his or her behalf.
 Requirements when conducting portfolio
management activities
• Ensure the profitability and safety of the portfolio
• Ensuring that the diverse needs of the group of
investors are met
• Ensuring legal safety, compliance with the provisions of
law, of investment management agencies and legal
ownership of investors.
• Ensuring flexibility in investment, ease of transfer
• Ensure internal control mechanisms and report
information on portfolio management activities.
•
 Portfolio management process

On the level of contract performance

Performance
Find out Sign a End of
of
customer management management
management
needs contract contract
contracts

On the level of investment analysis

Asset
Research Measurement and Portfolio
allocation
,risk/profit valuation of restructuring
(portfolio
analysis investment results (as needed)
building)
B. Investment fund

The investment fund is formed from the investor's

contributed capital for the purpose of seeking profits
from investing in securities or other types of
investment assets, including real estate, in which
the investor has no daily control over the decision-
making of the fund.
Classification of investment funds

According to the • Collective investment fund (public)

participant • Private equity fund (member)

According to • Venture capital fund

operational • Growth investment fund
objectives • Safe investment fund

• Equity Investment Fund

According to the • Mixed investment fund
investor • Money Market Investment Fund
• Bond Investment Fund

• Corporate fund
By legal nature • Trust fund

According to • Closed-end fund

mobilized manner • Open-end investment fund
Based on the objectives and
investment policies of the fund
 Money market funds: invest in money market
instruments, such as certificates of deposit...
 Stock funds: mainly invest in stocks (growth
funds, stock income funds, index funds ...)
 Bond fund: invest mainly in bonds (Gov. bond
fund, corporate bond fund, high-interest bond
fund ...)
 Mixed profit fund: balanced fund, asset
allocation fund..

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Company Fund
 The Foundation is a legal entity; The
highest executive body is the Board of
Directors: managing and supervising the
entire investment activities of the fund
 The Board of Directors selects the fund
manager to run the day-to-day operations
of the fund
 Choose a storage bank to store and
preserve the fund's assets.
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Contract fund
 The foundation is not a legal entity.
 Fund management company raises
capital
 Operating on the basis of asset trust
relationship (contract signed between
the parties)
 Organization of supervision and
preservation of assets.
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 Comparison of closed-end funds -
open-ended funds

Open investment Closed

Quota
fund investment fund
Number of
Always changing Fixed
outstanding securities
Offered for sale to
Continuous Once
the public
Acquisition Acquired No buybacks
Buy directly at the
Where to buy and Stocks traded on
fund through the
sell certificates of the the centralized and
fund management
fund OTC stock markets
company
The purchase
Relationship
Purchase price = price is determined
between purchase
NAV + transaction by supply and
price and (NAV) net
fee demand in the
asset value
market
The role of the investment fund.

• Diversifying portfolios reduces risk

• Professional investment management
For investors • Low operating costs
• Be safe from unfair behavior.

For a fund
management • Collect commissions and bonuses
company

• Mobilize capital for the development of the

economy in general and the development of
For the the primary market in particular
economy and • Secondary market stability
stock market • Universal securities investment, internal
strength promotion
• Enhance the ability to raise foreign capital
 Subjects related to the organization
and operation of the investment fund

elected by the
general meeting of Investors
investors to
supervise the
activities of the
investment fund, Fund
the fund representative
board
Auditing firm

management Investment
company, the fund
custodian bank. is a commercial bank with
Investor meeting a certificate of registration
of securities depository
Implementing activities selected by the
investment fund Fund
Management Custodian
fund management
Company Bank
management to ensure company to perform
compliance with fund custody services and
charters & increase the supervise the
fund's assets management of funds
Custodian Bank
 Receiving and preserving assets of investment
funds
 On behalf of and for the benefit of the investor to
supervise the investment activities of the fund
management company in accordance with the
law and fund charter

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Principles of operation of the
custodian bank

 Dedicated, honest, true to the requirements of

professional ethics and for the benefit of investors
 Comply with the law and fund charters
 Having a specialized department, managing
separate assets of the fund from the assets of the
bank itself to supervise and manage the
separation of assets of each investment fund
 Do not receive improper, illegal benefits for
yourself or others when performing supervision.

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 Operations of the investment fund

Capital raising activities:

- Determining the selling price of fund certificates for the first
time: company-type funds (defined underwriting organizations)
and contract funds (defined fund management companies)
- Selection of the method of offering: offering directly or through
the guarantor organization

Investment activities: (objectives)

Income: quickly have a source of dividend payment
Capital gains: increase the value of the initial sources of capital
through the evaluation of the shares in the fund's portfolio
Income and capital gains: a combination of the two factors
above
Capital mobilization
 Company fund: issuing shares to
raise capital to form the fund
 Contract fund: the amount of capital
expected to form the fund is divided
into units. The fund will issue
investment fund certificates
confirming the number of units
corresponding to the amount of
capital contributed by investors.
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How to offer
 Offered through the following combinations:
 Guarantor organizations issue distribution to agents
(commercial banks, securities companies, financial
companies...)
 Agents offer shares/fund certificates to the public through
their network
 Direct offering from the fund or fund management company:
 Sell directly to investors without intermediaries.

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 Investment process of investment fund

Asset
Risk/profit Investment allocation Build a
Research and
analysis objectives securities portfolio
selection
 Operations of the investment fund

• Activities to provide information to investors

• Valuation, issuance and acquisition of certificates
•
• NAV = [Total value of assets and investments - Total
liabilities]/total outstanding fund certificates
• NAV is usually calculated at the close of the exchange's
trade
Valuation of shares/ certificates of fund
issued for the first time

The first valuation is determined by the

organizations that set up the fund.
Company fund: issued by the founding organization
or underwriting organization to determine the
price.
Contract fund: determined by the fund management
company.

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 Method of determining the purchase/sale
price of investment fund certificates of open-
ended funds

Purchase of fund certificate (price of investment fund offered):

- In case of no-load fund: purchase price = NAV
- In case of charging transaction fee (load fund): Purchase price = NAV
+ transaction fee (sale fee)
Selling fee: determined by 1 percentage based on the term of holding, or
investment objective, or investment value determined in the prospectus
In Vietnam, the issuance fee shall not exceed 5% of the transaction
value; acquisition fee, conversion fee not exceeding 3% of transaction
value
Sale of fund certificates (repurchase fund price)
Acquisition price = NAV - NAV* rate of acquisition fee
Why NAV is important
 Notify the fund's shareholders:
 Open-ended funds are the basis for valuing
fund certificates – ensuring fairness among
investors who are participating, will participate
and will terminate investments in the fund
 Closed-end funds: potential value orientation
 How to do it: compare NAV at the beginning
and end of the period
 The basis of the calculation of operating fees
and annual management fees

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 For example, how to calculate NAV
The XYZ investment fund has:
Cash and cash equivalents: $200,000
Stocks and market prices
10,000 company shares A x $50 = $500,000
20,000 company shares B x $30 = $600,000
50,000 company shares C x $08 = $400,000
Total assets $1,700,000
Except for $100,000 obligations
Total net worth (NAV) $1,600,000
Number of shares/ certificates of fund in circulation 100,000
NAV per share/fund certificate $16

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NAV example

THE NAV of VF1 investment fund is announced by

VietFund Fund Management Company (VFM) as follows:

NAV by week % change

(30/3/2007)
VFMVF1 44.442/CCQ -6,19

Market price = 40.000

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 Details
unit: VNĐ
STT Quota Period b/fox dated Period b/fox dated
March 30, 2007 March 23, 2007
1 Changes in the fund's (146,736,827,351) (113,587,875,068)
NAV due to investment
activities during the
period
2 Changes in the fund's
NAV due to the fund's
transactions for
investors
3 Changes in the fund (146,736,827,351) (113,587,875,068)
NAV (1+2)
4 NAV early in the period 2,368,825,641,098 2,482,413,516,166

5 Nav at the end of the 2,222,088,813,747 2,368,825,641,098

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period
Obstacles to identifying NAV

 There is no reliable market price.

 There have been no transactions in recent days.
 Trading is very few so the price formation is unclear
 Unlisted securities
 Non-market transactions are not disclosed information
 Manipulative behavior (manager receives % from NAV)

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 Trading shares/ fund certificates
 Closed-end funds:
 After the issuance, shares/fund certificates are listed on the
exchange and traded as ordinary listed shares.
 Possible trading price on NAV (extra), which may be lower
than NAV (at discount)
 Discount or add-on = (Market price – NAV)/NAV


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Example
On March 30, 2007, VF1 data:
NAV/CCQ = 44.442
Market price = 40,000
Discount = 40,000 – 44,442 = -0.1
44.442
fund certificates are being traded at a discount of 10%
compared to NAV

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 Trading shares/ fund certificates
 Open-ended funds:
 After issuance, shares/fund certificates are further issued or
acquired at the fund management company itself or through agents.
 The transaction price is always associated with NAV.
 Asking price (Po) = NAV/certificate + Selling cost
 Offer fee rate = (NAV – Po)/Po
 If the offer rate is predetermined, then:
 Po = NONE
 100% - offer fee rate
 Purchase price = NAV/certificate - acquisition cost

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 Evaluation of the performance of the
investment fund
➢ The fund's operating expenses:
➢ - Expenses related to the issuance of fund certificates to the fund's first
public (printing, marketing, paying agents) - 4-6%
➢ - Operating-related expenses:
➢ Investment advisory fees;
➢ Fees for the preservation and preservation of the fund's assets;
➢ Interest rates, taxes (if any);
➢ Fees paid to organizations that value the fund's investments;
➢ Management fees:
➢ . reporting fees to shareholders/beneficiaries,
➢ . the cost of maintaining and managing the investor's account,
➢ . audit fees, fees paid to fund operators,
➢ . fees for legal services,
➢ . in relation to the fund's loans,
➢ . fees and charges that the fund must pay in accordance with the
provisions of law,
➢ . the fee for changing the provisions of the trust contract at the request of
shareholders (if any),
➢ . fees for holding shareholders' meetings or investors of the fund,
➢ . other expenses as prescribed by the fund charter
 Evaluation of the performance of the
investment fund
➢ Fund income:
➢ - Income from interest rates, dividends, bond interest, gains/losses
when selling investments, value obtained from issued fund
certificates, deposit interest, other income
➢ - Distribution of income
➢ - Target assessment of business results
➢ Total income:
➢ + Distribution of income from net investment income: dividends,
interest earned from the portfolio minus fees
➢ Net income is acknowledged as capital gains: net income is
acknowledged as settled investments that are profitable (or loss-
making)
➢ + Net increase (decrease) in NAV
➢ 𝑇𝑅=(income distribution+capital gain+𝑁𝐴𝑉 spread)/(𝑁𝐴𝑉 at the
beginning)
➢ For closed-end funds:
➢ 𝑇𝑅=(income distribution+capital gain+spread)/(price at the beginning)
 Evaluation of the performance of the
investment fund

Cost ratio: evaluation of cost control related to the operation of the fund
Operating expenses for the year/(average NAV of the fund)
Ratio of investment income
Net investment income value=/(Average net NAV)
Revenue ratio
Total transaction value for the year/(The fund's NAV of the year)
 Portfolio swap fund (ETF)
An open-ended fund formed from the receipt and swapping
of structural securities portfolios for fund certificates
Criteria Open-ended funds ETF fund Closed fund
Number of fund Capital change Capital change Capital
certificates issued unchanged
Where to make a sale Not listed on the exchange, Listed on the stock Listed on
Over the Counter Market; exchange stock
buying and selling directly exchange
at the investment fund
Fund Certificate Purchase price Trading prices are close to At market
Value =NAV+purchase fee NAV, with small prices
discounts/bonuses
Acquisition of fund acquisitions acquisitions No buyback
certificates
Time to trade directly Periodically Daily None
with the fund
Portfolio Secured Public Secured
NAV publication time Recurring (usually weekly) Daily updates, iNAV Recurring
(reference net asset value) (usually
continuity during trading weekly)
 Trading methods for capital
contribution to establish ETFs

Distributors (4)
(4) (2)
Fund Transfer
(1)
(1) Management Agent/Deposit
Companies ory Center (3)
Investors
(1)
(1)
(4)
(4)

Fund-setting
members
Step 1:
+ Fund establishment members (FEM) register to contribute
capital directly with the fund management company
+ Investors register to contribute capital through FEM or a
distribution agent where investors open an account
Contributed capital: portfolio of structured securities (or money)
Minimum contributed capital of 01 lot of ETF certificates (in
Vietnam)
Step 2: The fund management company sends a valid
application to the transfer agent
Bước 3: The transfer agent blocks the entire portfolio of
mortgaged securities of the FEM/Investor. These assets must be
deposited on the ETF's depository account opened at the
custodian bank (immediately after the fund establishment
registration certificate takes effect).
Bước 4: The fund management company distributes ETF
certificates to FEM/Investors. ETF certificates that investors have
registered for valid capital contribution will be automatically
deposited and allocated to the investor's depository account.
 Trading methods
ETF Certificate
Investors
•Swaps (primary trading) Command

Distributors
Command

Fund-setting
members
In Vietnam: Command
Trading unit: 1 lot of ETF Fund management
certificate company/supervising bank
Payment time: up to 03 working
Command
days
Depository Center
 ETFs trading methods

Trading ETF certificates on an exchange (secondary trading): the

same as trading listed stocks
Trading unit/settlement time/lot: according to the regulations of the
department where the ETF is listed
Case:
P ETF < NAV ETF : Fund members buy ETF certificates to fill 1 lot of
ETF certificates and exchange them for securities in the portfolio
for arbitrage trading → demand fund certificates  → P ETF 
close to NAV
o P ETF > NAV ETF : Fund members buy ETF certificates from the
fund and resell them to individual investors → provide fund
certificates  → P ETF  close to NAV
 Basic Terminology:

• Reference index: market index

• Structured securities: the underlying securities that
constitute the portfolio of securities of the reference index
• Structured securities portfolio: a portfolio consisting of
structured securities designed to simulate the volatility of
the reference index and accepted by the fund
management company in exchange for lots of ETF
certificates.
• Reference net asset value (iNAV) on a fund certificate:
the net asset value on an ETF certificate is determined
during the trading session.
• Portfolio swaps: the exchange of a portfolio of structured
securities for lots of ETF certificates and vice versa.
• One batch of ETF certificates including a minimum of
100,000 ETF certificates
• Tracking error -TE: the difference between fluctuations in the
fund's net asset value and the volatility of the reference
index
• Swap order:
• Sell order: is an order that requires the ETF to receive the
ETF certificates lot and return the structured portfolio
• Buy order: is an order that requires an ETF to receive a
structured portfolio and issue ETF certificates
 The necessary skills of investors when
investing in the fund

 Understand yourself
 Choose a suitable fund for yourself
 Invest to achieve goals
 When should fund shares be sold?
 Required documents read: Fund prospectus

44
Understand yourself

 What are your specific financial goals?

 How long is the term of your investment?
 How willing are you to take risks?

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Choose a suitable fund for yourself

 The basic rule: make sure the fund's goals align with your
own
 On that basis consider the investment objectives, past
achievements, costs and risks of the fund.

46
Invest to achieve goals
 Long-term goals
 Medium-term goals
 Short-term goals
 Immediate goals

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When to sell shares/fund certificates
 When your investment goals have changed
 When the fund performs worse than the market as a whole
and compared to its equivalents for a long time
 When funds redirect strategies
 When the fund changes managers.


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Required Documents Read: Prospectus
The most important parts that investors should keep in mind
when reading the prospectus:
Investment objectives and strategies of the fund
Risks of the portfolio
The cost of the investor
Financial basics

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