Mutual funds and ETFs
Open-Ended Mutual Funds Mutual fund basic
⇐ Use this menu to view and help create subtitles for this video in many different languages.
You'll probably want to hide YouTube's captions if using these subtitles.
- Let's say Pete over here thinks that he's a pretty good investor,
- so what he does is, or he has an idea, and says
- "Well look, I'm gonna create a corporation,
- and I'm gonna get a bunch of people to contribute money to that corporation
- and then I'll manage that money, and maybe I'll take a little fee for myself
- so that I can, um, maybe hire some analysts
- or get some computers, or get some office space."
- So what he does is he sets up a corporation
- Let's say he sets up a corporation right over here
- And let's say the way he first sets up the corporation
- let's say it just has 4 shares. And I making the number really small
- just to make the drawing and the map easy.
- This wouldn't be realistic, normally it would be something in the 100s or 1,000s of shares
- or maybe even more than that, but let's say it has 4 shares
- and let's say all of the 4 shares are owned by Pete initially
- just to simplify the explanation.
- And he puts in $400 into this corporation,
- so another way to think about it, in exchange putting $400 into this corporation
- he gets 4 shares, or each share is worth $100
- Each of these shares right over here.
- And so what he does, is he registers this corporation
- I'm talking about a US specific case, but there's similar types of organizations
- in other countries. He registers this organization right over here
- with the US SEC (Securities and Exchange Commission)
- And he also registers himself with the SEC, or even better
- he registers a management company that he runs with the SEC
- so let's call it "Pete, Inc." is a corporation he starts off
- that he also registers with the SEC.
- And when he registers with the SEC he tells them that look,
- "This company right over here, we're going to issue more shares
- for more people to contribute money, and I'm going to manage this money right over here
- and I'm just going to take a percentage of the total
- assets under management. Sometimes you'll see AUM used
- that just means Assets Under Management. That will go to Pete, Inc. every year
- for figuring out the best place to invest this money.
- And it's usually on the order of about 1%, sometimes a little bit less
- sometimes a little bit more, so 1% per year.
- So right now with only $400 under management, it would only be about $4 per year
- but since he registered with the SEC
- he can call himself a mutual fund and he can
- solicit funds from the public. So it is a mutual fund
- he has met, he has jumped through all the hoops
- that the SEC sets up for him, so he can market
- he can market himself as some type of great fund manager
- we don't know if that true or not,
- and he can also solicit funds from the public
- So from the public.
- And we're gonna see in future videos there are other funds,
- especially hedge funds, that can't just, that one
- they can't market, and they can't take funds from the public,
- those can only take funds from certain types of sophisticated
- investors. And what happens in Pete's fund
- and this isn't going to be an open-ended mutual fund,
- that we're showing here, and most mutual funds are like that
- let's say that Sal comes along, he likes Pete's marketing materials,
- and he says, "Hey, I want Pete to manage my money too!"
- So Sal goes and he gives $100 and says "Pete, give me a share!"
- So Pete creates another share right over here
- he creates another share, he gives it to Sal
- so he gets 1 share -- that's me, I get 1 share,
- an in exchange I give $100 to the fund,
- and now the fund has, the fund has $500
- So this is another $100 right over here,
- and now Pete's annual fee is going to be 1% of this whole thing
- or $5 a year, and if this whole thing grows,
- let's say this whole thing doubles from $500,
- let's say it doubles to $1,000,
- then that $1,000 is essentially split amongst these
- 5 shares now, so all of the people will essentially have
- their money doubled, minus whatever Pete's expenses are.
- So let's say that a 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 $1,000
- So Pete is either really good or really lucky
- or a little bit of both. So it goes to $1,000.
- So let me draw it like this.
- So now it is at $1,000 and it still has the same 5 investors here
- and I'm lucky enough to be one of them.
- So here, the 5 investors. Let me draw the shares,
- so there's 1, 2, 3, 4, 5 shares.
- Now each of these shares, well the $1,000 is called the
- NAV, the Net Asset Value, so let me give you that
- piece of terminology, it just means
- Net Asset Value, and so there's an NAV
- per share, the NAV per share over here his $200
- I just took the total NAV and I just divided it by the shares,
- and what's special about an open-ended mutual fund
- is that the close, or at the end of every day
- either new shares can be removed from the fund
- or can be created for 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 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 to buy in to make things fair
- at $200 per share, because that's the current NAV per share
- so let's say that 5 more people want to buy in
- at $200 per share. So what Pete would do, or what
- this mutual fund, it's not Pete really, it's the corporation
- it would create 5 new shares, so 1, 2, 3, 4, 5,
- if there was only 1 person that day, it would create 1 share
- that day, if there were 10 people that day,
- it would create 10 shares that day
- and it could keep doing this, and the NAV of each of these
- are $200, so it gives these shares to each of these people
- and they have to contribute $200, so essentially
- it puts another $1,000 into the pool that Pete
- can now manage, and so now he's met 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 let's say we fast forward a little bit,
- we fast forward a little bit to-
- let's say Pete start having a not-so-good year.
- So let's say we fast forward a year past that,
- and Pete's has a minus, a negative 10% return.
- So if we started at $2,000, and that's when you include
- taking his management fee out. You start at $2,000
- you lose 10% in 1 year, so it goes down to $1,800
- Let me put this in a new color.
- So now he's at $1,800. That's not completely drawn to scale,
- but hopefully you get the idea.
- So now he's at $1,800.
- But you still have a total of 10 shares,
- So let me try to do my best to draw the 10 shares,
- So I have 1, 2, 3, 4, 5, 6, 7, 8, 9, 10.
- These should be of equal size.
- And now the NAV per share, the NAV per share
- is going to be $1,800 divided by 10, or $180
- And let's say that I get a little bit freaked out
- by this recent performance, and I have some
- other commitments with my money,
- so I say, "Pete, you need to buy my share back for 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 minus $180 is $1,620. So now it is $1,620.
- And they would buy back a share from me,
- so they would cancel 1 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 9 shares,
- that should still get you to be $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 could 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 the share 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 paperwork,
- 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's usually like 3-5%, they have to keep some of this
- $2,000 (before he lost my money)
- 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'm not getting a return on cash,
- but because it's open-ended, because investors
- might come by and say, "Hey, I want my money"
- you have to have a little bit of cash as part of the asset pool
Be specific, and indicate a time in the video:
At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
|
Have something that's not a question about this content? |
This discussion area is not meant for answering homework questions.
Discuss the site
For general discussions about Khan Academy, visit our Reddit discussion page.
Flag inappropriate posts
Here are posts to avoid making. If you do encounter them, flag them for attention from our Guardians.
abuse
- disrespectful or offensive
- an advertisement
not helpful
- low quality
- not about the video topic
- soliciting votes or seeking badges
- a homework question
- a duplicate answer
- repeatedly making the same post
wrong category
- a tip or feedback in Questions
- a question in Tips & Feedback
- an answer that should be its own question
about the site
Share a tip
Suggest a fix
Have something that's not a tip or feedback about this content?
This discussion area is not meant for answering homework questions.