History

Mutual funds appear for the first time in Great Britain in the 60-s of the XIX century. The management of a multitude of individual investors'money lies in their foundation. People invest their savings in a mutual fund which through its professional managers buys for them bonds, shares etc, so that the investments may generate higher return for the investors than they would achieve trading individually on the stock exchange.

Worldwide as well as in Bulgaria the mutual funds operate in two forms – corporate and contractual. The corporate form called open-end investment company is a joint-stock company whose object of activity is the investment in securities of cash raised through public offering of securities and which operates based on the principle of risk diversification. The contractual fund - a mutual fund constituted under the law of contract as a contractual fund - is not a legal entity and it represents separate property with the purpose of collective investment in securities of cash raised through public offering of units which is performed, based on the principle of risk diversification, by an asset management company.

Even though being different in from, their content is the same, therefore we shall call them hereafter using their generic name mutual funds. It is more important , however , for investors to know that the mutual funds differ insofar as their investment strategy is concerned. Investors invest money in the mutual fund by purchasing its shares (in the case of investment companies) and/or units (in the case of contractual funds). By means of cash collected in that manner, the fund purchases various securities on the stock exchange and over the counter. The income from such securities – interest, dividends and capital gains forms the profit of the fund. The mutual funds cover with part of such income their expenses, which are minimal, and all the remaining balance represents profit for those having invested in the relevant fund.

This is how the mutual fund operates

Types of mutual funds
In accordance with the investment strategy they follow the mutual funds are classified in four principal groups:

Conservative – investing in debt securities (bonds) and money market instruments
Low risk - investing in debt securities (bonds) and on a small scale – in shares.
Balanced – investing simultaneously in shares and bonds
Aggressive – investing predominantly in shares

Advantages of the mutual fund
Opportunity for higher returns in comparison with traditional products such as bank deposits