• This article explains what fund shares are and how they function.
• The information is intended for asset managers, financial advisors, and investors seeking to expand their knowledge of Mutual Fund (MF) operations.
• FlexFunds offers an asset securitization program that improves the distribution and liquidity of with outstanding share. For more information, do not hesitate to contact our experts.

The mutual fund (MF) industry is one of the most complex to understand within the financial sector. This is because it encompasses several essential concepts, such as fund shares

What is a fund share?

A fund share is the unit of participation in a mutual fund that represents the portion of the fund’s assets belonging to each investor.

Its value is obtained by dividing the fund’s net asset value (NAV) by the number of shares outstanding and is updated daily based on the performance of the assets making up the fund’s portfolio.

Every time the fund gains or loses value, the share price fluctuates accordingly.

Owning shares entitles the investor to a proportional part of the profits (or losses) generated by the fund. Furthermore, this design provides liquidity to the investor, as an open-ended mutual fund allows them to recover their contributed capital within a relatively short period.

The unit subscription process

Subscription occurs when the investor contributes capital to the fund. Each contribution triggers the issuance of new units or shares that are added to the fund’s total equity.

The exact number of units assigned depends on the amount invested and the unit value at the time of subscription.

If an investor deposits a certain amount of capital, they will receive as many shares as are equivalent to that contribution based on the daily price. Thus, the subscription increases the fund’s capital and grants new participation rights to the investor.

How subscription works

The process of subscribing to shares generally follows these steps:

• Inflow of funds: The investor transfers money to the mutual fund. This contribution determines the number of units based on the current value.
• Daily valuation: Each day, the share value is calculated by evaluating the assets in the fund’s portfolio. This value reflects market conditions and investment performance.
• Allocation of units: Within a short period (usually within 24 hours), the exact number of shares assigned to the investor is confirmed. The unitholder receives a statement showing the new number of units in their possession. For example, if the unit value is USD 10 and the investor contributes USD 3,000, they will receive 300 units.

What is share redemption?

Share redemption is the process in which the investor requests to withdraw all or part of their money from the fund.

Upon executing a redemption, the shareholder returns the corresponding shares, and the fund pays out the equivalent liquid capital based on the current value of the units on the request date.

This means that the amount received will be the result of multiplying the shares surrendered by the value of each one at that moment. Thus, redemption restores liquidity to the investor, allowing them to access their invested money according to their needs.

How is it performed?

The redemption order is sent to the fund’s management company and is executed at the closing value of the day it is requested. Settlement periods depend on the type of fund:

• Immediate liquidity funds: With highly liquid assets, they credit the redemption within a maximum of 24 hours.
• Fixed-term open-ended or closed-ended funds: Since they hold less liquid assets (bonds, stocks, etc.), they require 48 hours to several business days to complete the redemption.

In any case, requests are generally consolidated once a day at the market close.

Key aspects for managing fund units

Understanding how units work and their subscription and redemption periods is essential for the investor:

• Operational knowledge: Knowing how shares are valued and the processing times allows for informed decision-making.
• Impact on profitability: The variation in unit value determines the fund’s profitability. This is calculated as the percentage difference between the entry and exit values. Choosing the right time to redeem can significantly influence real returns.
• Available liquidity: Open-ended mutual funds offer quick access to invested money. Knowing the agility of each fund helps align the investment with cash flow needs.
• Fees and costs: Most funds do not charge a commission for subscribing or redeeming shares, although they do apply annual management fees. It is important to know each fund’s policies to evaluate the total cost of the investment.
• Fund diversification: Managing units involves choosing funds that match your risk profile and objectives. Combining investments in funds with different characteristics (terms, asset types, etc.) balance the pursuit of profitability with necessary liquidity.

After understanding what units are, it is important to know that mutual funds can be securitized to improve their liquidity and distribution through companies like FlexFunds.

To learn more about FlexFunds’ ETPs, do not hesitate to contact our executives. We will be glad to assist you.

Fuentes:

• https://www.rankia.com.ar/blog/fondos-comunes-de-inversion/4519772-que-rescate-cuotapartes-como-realiza
• https://www.argentina.gob.ar/sites/default/files/pdf_cafci.pdf
• https://www.bbva.com.ar/economia-para-tu-dia-a-dia/ef/inversiones/-que-es-un-fondo-comun-de-inversion-.html