Investment Vehicles For Emerging Muslim Economy

1494 Words Apr 27th, 2015 6 Pages
Investment Vehicles for Emerging Muslim Economy: Which is which?

Introduction

Capital market play vital role in financial growth. Mutual fund is one of the securitization vehicles that commonly practice in today’s modern economics environment. Levy and Post (2005) mentioned investors, regardless of the type of investment they choose, have one common goal which is to get return out of their investment. Investors often have risk and return trade-off in determining their desire return. Thus, it is important to understand the financial stance of the investors in order to determine types of investments that suit them. This essay’s aim first to discuss 2 types of mutual funds, open end and close end investment. Going further is to relate them
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The fund manager is expected to deal with dilution impact as the investors will have the tendency to give up their shares to get their money back which reflects liquidity risk (Adam, 2004). As for close-end, since the duration is fixed, it is not going to be affected by the dilution impact in the state of poor economy (Greene and Hodges, 2002). The investor will still have to wait until the end of the fixed period to get their initial plus expected return.

2. Claimant structure
Since open-end consist mainly equity, it has no claimant structure. It can be redeem at any time that the investors wish to. Leverage close-end fund on the other hand, has claimant structure which depends on their strategy as follow:

a) General Close-End (Debt)

Diagram 2.0 General Leverage Strategy The financial claimant structure will depend on the structure taken by the investors. If they choose have the general leverage strategy, bond holder or bank debt holder will have the first priority in claimant. Common share holder will get the claim after all banks has been settled (Diagram 2.0). For split capital close-end, the claimant structure as in Diagram 2.1.

b) Debts plus Asset Leverage Strategy (Split Capital)
It is similar to the above structure; however, the zero dividends preferred share holder will have the priority after the bank debt and the common share holder will be subject to balance of the above to claimant.

Diagram 2.1 Debts plus Asset Leverage Strategy
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