QUESTIONS AND ANSWERS

Mutual fund is a method of collective investment of money in securities by a group of investors with the purpose to earn from such investments. The concept of collective form of investing dates back to the second half of the 18^th century when a Dutch merchant and broker Adriaan van Ketwich invited subscriptions from investors to form an investment trust, thus enabling individual investors possessing smaller amounts of money to allocate their investments. The next step of development was made nearly a century later in England by adopting the laws of 1862 and 1867 to regulate joint-stock companies. These legal regulations allowed investors to partake of the profits realized by such investment companies by limiting at the same time their liability to the extent of the capital they have invested in the company. Immediately after that, in 1868 in London, the Foreign and Colonial Government Trust was created, which offered “small-scale investors the same possibilities as the ones available to major capitalists ... by dividing their investments into multiple separate stocks”. The first true mutual fund was created in the beginning of the 20^th century in the USA (Boston, 1924) - Massachusetts Investment Trust. The innovation here was the continuous issuance of new units upon the presence of new investors and the repurchase of such stock upon the wish of existing stockholders as well as the clearly defined targets and restrictions. In Bulgaria, according to the Collective Investment Schemes and Other Undertakings for Collective Investment Act, mutual funds can exist in two legal forms – corporate and contractual. The corporate form, called an open-ended investment company, is a joint-stock company whose objects of activity consists of investing money raised by public offering of stocks in securities, which is implemented on the principle of risk distribution. The contractual form, called a contractual fund, is assets distinctly intended to serve for collective investment of money raised by public offering of stocks in securities which is also implemented on the principle of risk distribution by the asset management company. Although differing in their forms, in essence the open-ended investment company and a contractual fund is one and the same thing.

Investing in mutual funds is applicable for both individual investors and legal entities (corporative and institutional investors) who either temporarily or permanently are in possession of available money and are looking for an investment alternative to the bank deposits that could ensure them higher earnings and stay liquid at the same time (money can be withdrawn when needed while keeping the current rate of earnings).

There are several baseline criteria to be followed when choosing a mutual fund to invest in. The most important of them are as follows:

• who shall manage the fund activity and portfolio;


• what type of fund would be suitable for you;


• what  is the return of the mutual fund that has been realized so far;


• in what kind of securities are invested the assets (what is the fund portfolio structure) and what is the fund’s investment strategy;


• what is the entrance fee and the exit charge and what is the yearly asset management fee ;


• is there any required amount in minimum for the investments, etc.

Investments (both the activities and portfolios) of the mutual funds are managed by an asset management company. Such asset management companies are joint-stock companies licensed by a government authority – the Financial Supervision Commission which supervises their operations.The asset management company of DV Mutual Funds is DV Asset Management. As of 30.09.2024 that company manages and consults the management of financial assets valued at BGN 6,660 billions of major institutional and many  individual investors.

Basically there are two methods of making investments – direct and indirect investment method. The direct method is an investment where the investor is himself responsible for making decisions and for placing orders for purchase / sale of securities. To be able to do that, the investor should have much free time available in order to track the stock exchanges, have the necessary skills in order to make the best possible investment decisions and last but not least have a big portfolio providing the opportunity for a good diversification (allocation of money) to reduce the risk. The indirect method is an investment of individual money in a common mutual fund through which the asset management company shall invest in various securities. The advantages of such indirect investments are that the investor entrusts the management of his money to professional financial managers-specialists in the field of capital markets who shall, based on their market analysis and the securities currently offered for sale, make a diversified portfolio to decrease the risk. The second advantage of such indirect investments consists of minimizing the cost of brokerage as a result of combining the funds and the possibility to purchase larger security packages (i.е. from economical point of view this means economies of scale and lower transaction-related expenses).

Yes, there is a risk for the money invested in mutual funds but it is proportional to and consistent with the respective rate of earnings of the fund, i.е. the higher the expected rate of earnings is, the higher the involved risk will be, and vice versa, the lower the expected rate of earnings is, the lower the involved portfolio risk will be. Depending on the type of risk, mutual funds could follow different investment policies, which could be either conservative, low-risk, balanced or aggressive and shall be implemented in consideration of the applicable risk level. Such diversity of investment opportunities makes it possible for every investor to judge for himself what rate of earnings he would like to get and at what risk level he would be comfortable investing his money. An advantage of mutual funds is that the assets in one portfolio are many and different types whereas the individual asset risk is much higher than the overall portfolio risk because the portfolio is made of many and different types of securities.

The success of mutual funds in the well-developed countries depends mainly on the legal frame and the established rules that have to be applied consistently. In Bulgaria the regulatory legal frame was defined in conformity with the European directives and is subject to strict regulations. The regulatory government authority is the Financial Supervision Commission which controls the activities of mutual funds both in terms of documentation and in terms of actions, and in return the mutual funds are obliged to submit on a monthly basis financial accounts and liquidity reports about the formed investment portfolio. Investors’ money аre set in a separate structure (either an investment company or a contractual fund) other than the asset management company and are kept in a bank-depositary.

The fund portfolio structure can influence the security level of investments so that in case an investment in a certain financial instrument is not profitable enough or even starts bringing losses at a certain time, then the investment in another financial instrument could compensate for that and the portfolio as a whole could have a good rate of earnings. The more diverse and numerous assets are included in one portfolio, i.е. the more diversified it is, the lower the risk will be.

The security level of investments in one fund can be guaranteed by the experience of the portfolio-managing team. Last but not least, investors have access to transparent information for a specific mutual fund because the portfolio management methods and the risks associated with investments in mutual funds are described in details in the Prospect for primary public offering of shares/stocks. Every investor must read carefully this Prospect, before he makes an investment decision about his money. Of course, it would be misleading to give a guarantee for the investors’ money and for their rate of earnings because it would mean that we know for sure how will happen in the capital market and how the prices of securities in which this fund shall invest are going to change in the future. Nevertheless, the forecasts and experience of specialists are essential for the achievement of good results and the diversity of investment products gives opportunity to everybody to determine what would be the desired result and what price he is ready to pay for this.

This is the most frequently asked question that every investor is interested to know the answer of. The  relevant return depends mainly on the type of mutual fund where the investor has chosen to invest his money (conservative, low-risk, balanced or aggressive), in what assets the fund shall invest, where it shall invest, what the situation of the capital market was at the respective period, etc. In particular, the rate of earnings realized by the mutual funds of DV Asset Management is formed first, from investments in securities, i.е. income from interests, dividends, and second, from the increased value of such securities (capital profit).

Mutual funds are required to calculate at least twice a week the issue price and the redemption price of  their units. Thus, every investor can easily calculate the amount of earnings from their investments to date. In addition, investments in mutual funds are very liquid, i.е. by the investor’s request, some or all  units offered for sale can be quickly converted into cash. This is most definitely an advantage compared, for example, to the bank deposits where the client will lose the income from interest if the deposit is withdrawn before the value date.

Here, you can find information about the procedure for purchase and repurchase of shares from the mutual funds of DV Asset Management.

The longer an investment stays in a mutual fund, the greater the opportunity for the mutual fund to gain higher earnings. In general, investments in mutual funds should be regarded as long-term investment instruments, although, to summarize, investments in lower risk mutual funds usually tend to be shorter-termed whereas investments in higher risk mutual funds are respectively longer-termed.

In this context, investors should obtain consultation about the advisable term for their investments in a mutual fund. For example, the advisable terms for investments in the mutual funds of DV Asset Management are as follows:

• for DV balance - Class A (Harmony) and  Class B (Treasure) – at least 5 years


• for DV Dynamic – at least 5 years

There are several main advantages: А) Professional management of investments - A mean individual investor in possession of relatively small amount of money cannot afford to use the services of a professional manager for an individual portfolio of securities whereas the money raised by a multitude of such individual investors combined together in a mutual fund shall form a significant monetary resource, for whose management it would be affordable from economic point of view to hire a professional portfolio manager in the face of asset management company. This type of companies are licensed by the Financial Supervision Commission, whose duty is to ascertain that every such company has the required equipment and human resources to ensure the investment process realization. B) Diversification - Diversification means distribution of the risk by investing in numerous different securities. This results in lowering the overall risk associated with the portfolio due to the elimination of the individual risk associated with each separate investment. Diversification is easily achieved if the portfolio of securities (the mutual fund) is big and difficult, even impossible, if the portfolio (individual investor) is small. C) Liquidity - Liquidity means the possibility for quick and easy conversion of the investment into cash without incurrence of any losses. Mutual funds are obliged to repurchase the shares or stocks they have issued upon the investor’s request. Shares/stocks shall be repurchased at fair price based on the so called “net value of share/stock”. The net value of share/stock is calculated by subtracting the mutual fund liabilities from the market value of assets (securities) owned by that mutual fund and the resulting score is divided by the number of share/stock in circulation. It is important to note that the transactions with issue (sale) and repurchase of shares or stocks shall be carried out on the basis of the first given price calculated after the submission of investor’s request. This principle prevents the possibility for current or future investors to “play against” the mutual fund, i.е. against the other investors in that fund. D) Variety of investment opportunities – mutual funds have different investment targets and investment strategies. Such great variety allows the investor to choose the fund that comes most closely to his own investment targets. In general, mutual funds are classified in four main groups: a. mutual funds investing in instruments on the money market (money market-funds); b. mutual funds investing in bonds and debentures (bond-funds); c. mutual funds investing in shares/stocks and bonds at the same time (hybrid-funds, such as DV Balance) d. mutual funds investing in shares/stocks only (equity-funds, such as DV Dynamic).

There are no restrictions as to the amount of investments to be made in a mutual fund but at least it should be equal to the  issue price (the sale price) of a  unit of the mutual fund. Open-end investment companies sell only undivided shares whereas mutual funds offer for sale also portions of divided  units whose value is calculated to include the fourth digit after the decimal point.

As a matter of fact, the risk of Currency Board failure in Bulgaria is zero to none. Any possible removal of the currency board would produce a negative effect on the value of investments only in case the Bulgarian lev devaluates in relation to the Euro. For clients who want to avoid such a risk, DV Asset Management offers the service of hedging ( elimination of the currency risk) of the investments in Bulgarian lev and in Euro and the involved expenses for such operation are determined dynamically, according to the current market conditions. Hedging is an operation of purchasing Euros by Bulgarian levs at a future date thus eliminating the risk of possible changes in the exchange rate.