The Mutual Fund Regulations

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People have different investments opportunities such as forming companies, investing in real estate, housing, and security markets, for instance, stocks and bonds among other options. An important aspect of a venture entails investing in mutual funds. These funds call for investment companies to pool together money derived from a range of investors. The companies then directly invest in bonds through various money and capital instruments, securities, and even stocks. The money collected from investors can also be invested by lending cash credit. Investors buy shares offered by mutual funds directly or via an appointed fund broker.

Nevertheless, investors have no opportunity for purchasing shares in mutual funds via the available secondary entities that trade in stocks. Investors pay Net Asset Value (NAV) and sales load prices as the purchase fee for shares that are offered through mutual funds. Various rules are applied in trading in mutual funds. Concerning the Saudi Arabian mutual fund markets, this paper discusses mutual fund regulations, global issues encountered while trading in mutual funds, and the institutions that use mutual funds. The paper will also offer the difference between mutual finances and hedge funds.

Mutual Fund Regulations

Mutual funds take different forms such as stock resources, finances from the money markets, index funds, and bond finances (The US Securities and Exchange Commission par.4). The different types of mutual funds have diverse objectives. They also deploy different strategies and investment portfolios. Depending on the type of mutual funds, investors experience various levels of volatility risks, pay dissimilar amounts of fees, and/or encounter unique expenses. Depending on the distinctive characteristics of each type of mutual fund, different regulations apply.

In the Saudi Arabian mutual fund markets, most of the different types of mutual funds can be redeemed. Therefore, investors who seek to sell their shares do so to the mutual fund with the help of brokers who act as commissioners of the mutual fund companies. The selling prices of the shares are equal to the prevailing NAV per share basis. However, redemption charges, overdue sales loads, and any other necessary charges are subtracted from the NAV fee.

Mutual fund regulations may be subdivided into regulations that relate to governance, investments, and reporting necessities, shares distribution, prohibition made on various affiliated transactions, and compliance rules. Depending on the jurisdiction in which a mutual fund company operates, other rules may also apply. From the context of the Saudi Arabian mutual funds market, regulations concerning investments demand mutual funds companies classify themselves as offering open-ended and closed-ended funds (Capital Markets Authority 7).

In Saudi Arabia, when developing mutual funds, managers must provide specifications of the funds’ capital structure. They must provide information on all funds invested together with amounts gathered. In terms of capital invested, open-ended funds are highly flexible. Capital Markets Authority asserts that this type of mutual funds can “increase or decrease according to the exported units that represent the percentage of the investors’ contribution in the fund” (7). Thus, investors can redeem all their investments at any time when needed.

In Saudi Arabia, this investment approach is the most common type of mutual fund. Contrary to open-ended mutual funds, closed-ended funds are issued in fixed units, which cannot change. The fund’s outcomes are realized when they expire, as opposed to when they are converted.

Investors in Saudi Arabia can also invest in exchange-traded funds (ETFs), which combine the characteristics of open-ended and closed-ended mutual funds. ETFs have the advantages of low cost, flexibility, and transparency. Transparency is ensured through the publication of indexes and the disclosure of the related performance information in the markets. Managers also expose the funds to continuous inspections to guarantee the accurateness of the iNAV and NAV (Capital Markets Authority 8). Through inclusion within the fund market, ETFs are easy to handle. This situation guarantees high flexibility. Low management fees ensure that EFTs costs remain low.

An in-depth discussion of various mutual funds is beyond the scope of this paper due to its limited length. However, it is important to consider an overview of the regulations, especially those that apply to investment organizations, which deal with mutual funds and the rights of shareholders. Companies that operate mutual funds businesses experience various restrictions. For instance, they are not permitted to engage in buying various securities based on margins. Such companies do not have the authority to hold joint accounts to engage in securities trading. Based on the findings by Naftalis, mutual fund organizations have no permission to buy above 3% of total stocks that are outstanding in other investment organizations (3). They also do not possess the capacity for selling short-term securities.

Rules and regulations on mutual funds provide for mechanisms for protecting the rights of shareholders. Indeed, Mazdoor observes that all investment organizations need to comply with some specific guidelines that are aimed at protecting shareholders from losing their investment in the short and long term (484). In Saudi Arabia, mutual funds companies are required to abide by such rules, unless in situations where shareholders disprove the rules through voting.

For example, mutual investment organizations have no permission to alter their objective of investments. They are also not allowed to terminate the nature of business they engage in or stop functioning as investment organizations. Although mutual funds organizations may constitute themselves as offering open-ended or closed-ended mutual funds, they are not permitted to change from one form to the other.

Mutual investment organizations must exercise duties owed to the shareholders. Joint investment organizations issue financial reports to the shareholders. The reports include statements of investment value, balance sheets, and income records. When the balance sheet is issued, the organizations should also make submissions of value together with lists of various securities to the shareholders. For example, they must disclose the number of securities sold and/or bought. Mutual investment organizations owe the shareholders the right of disclosure of the information relating to an organization’s expenses such as the amount paid to directors and the recruited advisory boards. Considering the nature of the business that mutual funds organizations engage in, various global issues emerge as discussed in the next section.

Mutual Fund Global Issues

Mutual fund companies operate within a set of regulations and guidelines. In the era of globalization, investors seek mechanisms for ensuring that mutual funds are attractive on the global front. For example, Investment Company Institute reveals that 10% of the total mutual funds in the US have internationalization dimensions (2). Similarly, Saudi Arabia offers a range of mutual funds in the international markets, including Europe, the United States, and Japan (Tadawul par.1). This diversity presents the major global issue in terms of the application of different regulations in different jurisdictions in mutual funds trading.

Therefore, one of the major global issues in the Saudi Arabian mutual funds entails the harmonization of different regulations to suit the global markets. This issue influences the capacity to maximize shareholder value in the context of foreign investments.

On the global platforms, mutual funds attract two critical issues. Firstly, corporate governance issues concerning mutual funds arise due to the deployment of different policies and practices, depending on the jurisdiction in which they (funds) are issued. Corporate governance involves all aspects of organizational control and the control of interests that organizations serve (Clarke 75). Some of the particular relevant areas concerning corporate governance entail but are not limited to, the composition and remuneration of organizations’ board of directors. However, corporate governance addresses issues concerning finance, regulations, and ownership systems. In terms of mutual funds management, at the heart of corporate governance is the need to mitigate conflicts of interest, including control and prevention among stakeholders (Clarke 76).

The mitigation of these conflicts of interests is more often accomplished through the enactment of various customs, laws, processes, policies, and institutions, which have enormous repercussions of afflicting how organizations are controlled. Indeed, issues emerge when mutual funds lack uniformity of policies and regulations across jurisdictions. Lack of uniformity in the application of policies across different nations may hinder the exercising of different shareholder rights.

Secondly, applicable regulations on mutual funds within other jurisdictions, apart from Saudi Arabia, may create several loopholes that can impair the capacity of protecting shareholders from investment risks. Voting entails the process through which shareholders ensure that their voices are heard by mutual fund investment companies. However, there exist some procedural hindrances to practicing one’s voting rights, depending on policies applicable within a given jurisdiction (Investment Company Institute 3). For instance, some companies that operate in global dimensions require shareholders to cast their votes directly without using alternative means such as mails. In other scenarios, investment organizations may prohibit making transfers for shares, unless after holding meetings.

Apart from corporate governance, issues emerge on information that relates to comparative fees. Rating expenses on the above-average principle is not attractive since people incur costs, irrespective of the market dynamics. Indeed, upon disclosure of expense ratios for mutual funds, little or no information is shown on how the costs measure up to the market competition. Mutual funds investment organizations have an obligation of providing information that guarantees shareholders quick decision-making processes.

A major global issue concerning mutual funds involves the provision of a quick prospectus in a summary form. Revenue service reveals informing concerning changes in tax codes together with filing requirements relative to how mutual funds inform owners upon the alteration of operating rules and the prospectus. Therefore, it is necessary to issue a quick summary of the changes within the past fiscal year and the prospectus of the incoming fiscal year. This strategy increases the capacity of the owners to understand the concept of mutual funds by lowering potential surprises, which may be against the owners’ interest.

Institutions that use Mutual Funds in Saudi Arabia

Mutual funds are available to individuals, groups of people, and even institutions. The type of investors who subscribe to mutual funds determines the demand for shares. For example, in Saudi Arabia, several institutions use mutual funds through the financial institutions’ finances. The funds aim at ensuring that all investors possess reliable platform investments by participating in investment opportunities that are offered by leading institutions within Saudi Arabia.

Institutional investors who invest in mutual funds include non-financial businesses, different financial organizations, and organizations that engage in non-profit-making businesses. For example, in Saudi Arabia, HSBC issued mutual funds in 2004. The Equity Fund offered by HSBC was first invested in leading publicly listed financial institutions that operate in Saudi Arabia. The funds then extended to include non-financial institutions and insurance organizations that are listed in GCC coupled with Saudi Arabia. The funds also paved room for liquidity management by providing opportunities for money market instrument investments.

Difference between Mutual Funds and Hedge Funds

Hedge funds and mutual funds comprise any manageable portfolios. Hence, managers select various securities that they consider likely to perform well in the market while consolidating them to form one portfolio. The portfolio is then broken down into portions that are later issued to different investors who share the gains with losses that accrue from the portfolio. This way, they acquire immediate diversification and management services for their money professionally. However, despite this similarity, the two funds are different in various aspects.

The first difference emerges from the way they are managed. Hedge funds attract aggressive management. Investments in hedge funds allow the participation of market speculations, especially derivative securities. Hedge funds also permit investors to participate in short selling of their stocks (Bibey par.1). This situation has the implications of increasing leveraging levels.

Consequently, the level of risk in a hedge fund is higher compared to the case for mutual funds. A key distinction between the two is that investors in hedge funds have an opportunity for making money, even in a collapsing market. Indeed, mutual funds investors cannot take highly leveraged positions. This case increases their safety in terms of protecting investors’ assets and cash.

The ease of the availability of the two funds differentiates them. Hedge funds are offered to certain groups of people, particularly complicated investors. Such investors have a large net worth. The term ‘accredited investor’ describes them. The criterion followed in the determination of whether one fits in this classification is both restrictive and lengthy. Comparably, mutual funds can easily be bought. Smaller sums of money are also required to buy them compared to hedge funds (Bibey par.4).

Hedge funds and mutual funds can be differentiated based on the regulations that are applied to them. Mutual funds have a high set of regulations. Therefore, the funds cannot out-power the market in terms of performance. The regulations also ensure that they do not perform well in any collapsing markets. Lack of strict regulations on hedge funds provides opportunities for managers to employ more aggression in managing them. Risk-averse investors prefer mutual funds due to the extensive regulations employed in their management.


Mutual funds constitute one of the ways through which people can invest to benefit from the instant management of their money together with the gains that are acquired in the trading of shares. Just like any other company, which people entrust with the responsibility of increasing returns on their money, mutual fund organizations that operate in Saudi Arabia are subjected to the application of various rules and regulations that ensure that they do not expose the shareholders’ money to excessive risks.

To this extent, the paper has discussed various regulations that apply to mutual funds. It has also discussed global issues on mutual funds before differentiating them from hedge funds, which are only availed to people who have a large net worth.

Works Cited

Bibey, Chris. Hedge fund v. Mutual Funds: What are the Key Differences?. 2013. Web.

Capital Markets Authority. Kingdom of Saudi Arabia: Mutual funds. 2013. Web.

Clarke, Thomas. International Corporate Governance, New York, NY: Routledge, 2007. Print.

Investment Company Institute. Global Governance Issues for Mutual Funds, Washington, DC: Investment Company Institute, 2005. Print.

Masdoor, Abu. “Ethical Theories of Corporate Governance”. International Journal of Governance 1.2(2011): 484-492. Print.

Naftalis, Kramer. Overview of Key Mutual Fund Regulations, New York, NY: Frankel LLP, 2013. Print.

Tadawul. Mutual Funds Report, 2015. Web.

The US Securities and Exchange Commission. Mutual Funds, 2015. Web.

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