Financial Markets and Mutual Funds: Key Features
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Functions of a Financial Market
- Connecting Buyers and Sellers: Facilitates the meeting of buyers and sellers of financial assets without needing a physical location.
- Issuance and Exchange of Assets: Supports the creation (primary markets) and subsequent trading (secondary markets) of financial assets.
- Price Determination: Establishes the prices of financial assets through various pricing mechanisms, such as supply and demand or predetermined conditions.
- Public Information: Disseminates information about asset prices, trading mechanisms, and pricing systems.
- Providing Liquidity: Ensures that assets can be easily converted into cash without significant loss of value.
- Reducing Transaction Costs: Lowers the costs related to finding counterparts and determining asset prices.
Basic Characteristics of Mutual Funds
- Portfolio: Aggregation of funds provided by investors, whose value changes due to market value fluctuations and investor transactions.
- Units or Shares: Represent the investment unit in the fund, with the price determined by the Net Asset Value (NAV).
- Net Asset Value (NAV): Calculated as the portfolio value divided by the number of shares, indicating the per-share value at a given time.
- Fees: Include management fees, trustee fees, subscription and redemption fees, and other operating expenses affecting final profitability.
- Profitability: Measured as the percentage change in NAV from the subscription to the redemption date.
- Risk: Includes market risk (volatility) and interest rate risk (duration of fixed income assets).
Illustrating the Value of Mutual Fund Characteristics
- Portfolio: In 2023, the assets of domestic financial mutual funds in Spain showed significant growth due to favorable market conditions.
- Net Asset Value: The daily NAV calculation ensures transparency and helps investors track the value of their investments.
- Fees: Funds with higher TER (Total Expense Ratio) often show lower net returns, illustrating the impact of fees on profitability.