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Open-ended mutual fund (part 1) | Finance & Capital Markets | Khan Academy - YouTube
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Let's say Pete over
here thinks that he's
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a pretty good investor.
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So what he does is, he has
an idea that says, look,
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I'm going to create
a corporation.
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And I'm going to get
a bunch of people
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to contribute money
to that corporation.
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And then I'll manage that
money, and maybe I'll
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take a little fee for
myself, so that I can maybe
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hire some analysts,
or get some computers,
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or get some office space.
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What he does is he
sets up a corporation.
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Let's say he sets up a
corporation right over here.
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And let's say the way he
first sets up the corporation,
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let's say it just
has four shares.
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And I'm making the
number really small
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just to make the drawing
and the math easy.
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This wouldn't be realistic.
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Normally it would be something
in the hundreds or thousands
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of shares, or maybe
even more than that.
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But let's say it
has four shares.
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And let's say all the four
shares are owned by Pete
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initially, just to
simplify the explanation.
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And he puts in $400
into this corporation.
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So another way to think about
it, in exchange for him putting
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$400 into this corporation,
he gets four shares,
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or each share is
worth $100, each
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of these shares right over here.
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And so what he does is he
registers this corporation--
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and I'm talking about
a US-specific case,
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but there's similar
types of organizations
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in other countries-- he
registers this organization
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right over here with the US
SEC, Securities and Exchange
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Commission.
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And he also registers
himself with the SEC.
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Or even better, he registers
a management company
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that he runs with the SEC.
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So let's call it Pete Inc. It's
a corporation he starts off
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that he also registers
with the SEC.
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And when he registers
with the SEC,
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he tells them that look,
this company right over here,
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we're going to issue more
shares for more people
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to contribute money.
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And I'm going to manage
this money right over here,
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and I'm just going to take a
percentage of the total assets
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under management.
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Sometimes you'll see AUM used.
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That just means assets
under management.
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That will go to
Pete Inc. every year
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for figuring out the best
place to invest this money.
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And it's usually on the
order of about 1%, sometimes
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a little bit less,
sometimes a little bit more.
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So 1% per year.
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So right now, with only
$400 under management,
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it would only be
about $4 per year.
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But since he registered
with the SEC,
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he can call himself
a mutual fund,
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and he can solicit
funds from the public.
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So it is a mutual fund, he has
jumped through all the hoops
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that the SEC sets up for him.
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So he can market himself as
some type of great fund manager.
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We don't know if
that's true or not.
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And he can also solicit
funds from the public.
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And we're going to
see in future videos,
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there other funds, especially
hedge funds, that one,
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they can't market, and
they can't take funds
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from the public.
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Those can only take
funds from certain types
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of sophisticated investors.
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And what happens in
Pete's fund, and this
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is going to be an open
ended mutual fund that we're
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showing here, and most
mutual funds are like that.
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Let's say that Sal comes along,
he likes Pete's marketing
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materials, and he
says hey, I want
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Pete to manage my money too.
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So Sal goes and he
gives $100, and says,
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Pete, give me a share.
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So Pete creates another
share right over here,
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he creates another share
he gives it to Sal.
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So he gets one share, that's me.
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I get one share.
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And in exchange, I
gave $100 to the fund.
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So now the fund has $500.
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So this is another
$100 right over here.
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And now Pete's
annual fee is going
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to be 1% of this whole
thing, or $5 a year.
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And if this whole
thing grows, let's say
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this whole thing
doubles from $500,
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let's say it doubles to
$1,000, then that $1,000
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is essentially split amongst
these five shares now.
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So all of the people
will essentially
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have their money doubled, minus
whatever Pete's expenses are.
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In the next few videos, I'll
go over a little bit more
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of the mechanics of an
open ended mutual fund.
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