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Fund dictionary

Fund investment

Briefly, a fund is an investment tool that collects scattered money from investors and engages a professional investor (such as the fund manager) to invest the money according to an investment strategy. Fund investment can gather scattered capital and share investment profits and risks. A securities investment fund is issued to public investors and invests in securities. Fund holders have the ownership, distribution, disposal and other related powers relating to their funds and undertake the corresponding responsibilities.

Fund Investment Flowchart

Fund operating process:

1. Gather investors' capital;

2. Designate a fund manager;

(1)
the investors, fund manager and custodian enter a trust agreement to define the trust relationship between the three parties and their respective rights and duties.
(2)
Fund manager and custodian (generally a bank) enter a custody agreement to define their rights and duties.

3. The fund manager manages the fund and generates profits for investors.

In China, a fund custodian must be a qualified commercial bank, and the fund manager must be a licensed fund manager. Fund investors are entitled to the profits from securities funds and undertake loss risks.

Contract-type and Corporation-type Fund

A contract-type fund is opposite to a corporation-type fund.

Securities investment funds can be divided into contract-type and corporation-type funds based on fund organization type and legal status.

Contract-type Fund

A contract-type fund, or trust fund, is set up by issuing beneficiary certificates to investors based on the trust deed. The trust deed of the fund is generally entered into by the fund manager, custodian and investors. As the promoter of a fund, the fund manager can issue profit certificates and raise funds to establish a trust property. According to the trust deed, the property is placed in the custody of the fund custodian who is responsible for securities and cash management and related agency businesses; investors purchase profit certificates to subscribe for the fund and enjoy investment profits. The profit certificates certify investors' stake in the fund.

Corporation-type fund

A corporation-type fund is established based on the company and invests the raised capital in various marketable securities. The organization mode of a corporation fund is similar to a joint-stock limited company. Investors (shareholders) own the assets of the fund company. Directors are elected by shareholders, and the chairman of the board designates a fund manager to manage the fund.

Corporation-type funds must be registered as the industry and commerce administrative authorities and the Securities and Exchange Commission and stock exchange where the fund is issued. The organization structure of a corporation-type fund involves the following parties: fund shareholders, fund company, investment consultant or fund manager, fund custodian, fund conversion agent and main underwriter.

Currently, all securities funds in China are contract-type funds.

Close-ended Fund

The total value of a close-ended fund is determined when the fund is initiated by the fund promoter. When the raised capital exceeds 80% of the total value, the fund is established and locked up. During the lock-up period, subscriptions are not accepted.

For example, Fund Kaiyuan (4688) was initiated in 1998 in the Shenzhen Stock Exchange with a total of 2 billion shares and a lock-up period of 15 years. This means that the fund operating period is 20 years with a maximum value of RMB2 billion. During that period, investors can neither subscribe for nor redeem shares.

However, investors can buy and sell shares on the secondary market.

In China, close-ended fund shares are listed and traded on stock exchanges. Investors can only buy and sell fund shares through brokers on secondary markets.

(

Note:

Fund duration means the period between the establishment and expiration of the fund.)

Open-ended Fund

An open-ended fund's total issue volume is unfixed. Investors can subscribe and redeem shares relating to the fund through institutions specified by the fund manager.

The issuer of an open-ended fund can issue additional shares or redeem existing shares at the request of investors. Investors can redeem shares at a price equal to the NAV minus commission, or subscribe for additional shares to increase their shareholding stake.

Example: HuaAn Innovation, China's first open-ended fund. The fund was established in 2001 with an initial offering of 5 billion shares and with no fixed duration. The number of fund shares will change as investors subscribe for and redeem shares, or as investors choose to reinvest dividends.

In China, investors can only subscribe for and redeem fund shares through fund sales websites of fund management companies or fund sales agencies (generally banks). Investors can subscribe for and redeem fund shares at counters via telephone or online.

Differences between close-ended and open-ended funds

The main differences between close-ended and open-ended funds are listed in the following table:

	Close-ended fund	Open-ended fund
Trading place	Shenzhen Stock Exchange and Shanghai Stock Exchange	Fund management companies and fund sales agencies (mainly banks)
Fund duration	Fixed	Unfixed
Fund size	Fixed size, no additional share	Unfixed (with a minimum size)
Redemption	Investors cannot redeem shares during the duration period and can only sell shares on the secondary market.	Investors can submit subscription and redemption applications at any time.
Trading channel	Secondary market	Fund management companies and fund sales agencies (mainly banks)
Pricing factor	Supply and demand relation	Net asset value
Dividend distribution mode	Cash	Cash and dividend reinvestment
Fee	Commission: 0.25% of the transaction	Subscription fee: 5% of the subscription amount at most Redemption fee: 3% of the redemption amount at most
Investment strategy	As investors cannot redeem close-ended fund shares in advance, the fund manager can invest money to acquire long-term profits.	Fund managers must keep a certain amount of cash or assets with high liquidity to handle the share redemption by investors, hindering long-term investments. Fund managers must control the assets liquidity and risks and meet higher investment and management requirements.
Information disclosure	Disclose the unit NAV once a week at least.	Disclose the unit NAV on each trading day.

Securities fund has the following features:

1. A securities fund is operated and managed by investment experts.

Fund assets are managed by professional fund managers. Fund managers are assisted by numerous experienced investment experts at investment analysis and portfolio theories.

2. A securities fund is an indirect investment in securities.

Investors indirectly invest money in securities by subscribing for fund shares. Compared to buying stocks directly, fund investors only share profits of the invested companies that have no direct relation with listed companies and no involvement in their decision making and management processes.

3. Investment in securities fund investment is featured a low investment threshold and low costs.

In China, the par value of each fund share is RMB1. Thanks to the low investment threshold, investors can flexibly determine the amount of subscription based on their financial status. Moreover, the commissions for fund descriptions and redemption are low.

4. Securities funds can reduce risks by investing in a portfolio of stocks.

According to investment experts, investing in about ten stocks can effectively reduce risks. As the old saying goes "don't put all your eggs in one basket". However, many small and medium investors cannot establish an effective portfolio. If investors invest all their money in one company, they will lose all their investment if the company goes bankrupt. A securities fund collects the money from numerous small and medium investors into a large sum of money that is then invested in a portfolio of stocks. Losses incurred by dips in some stocks will be offset by rises in others in the portfolio, thus reducing risks.

5. Strong liquidity

The fund subscription and redemption processes are very simple. Close-ended funds can be traded on secondary markets such as stocks. Open-ended funds can be subscribed for and redeemed through fund management companies, securities companies and other specified investment institutions.

Fund issuance mode

In China, securities fund issuance can be online or through an office.

(1) Online issuance

Funds are issued through nationwide securities sales offices connected to the transaction system to the public. This mainly applies to close-ended funds.

(2) Offline issuance

Funds are issued to the public through banks or securities sales offices in a specific range. This mainly applies to open-ended funds.

Key Points

Key points in a prospectus

A fund manager needs to determine the investment objective, scope and strategy before managing a fund to ensure that the investment features are highly profitable, safe and liquid. Risks and profit and safety and liquidity are closely related. Fund managers seek to minimize risks and maximize profits by choosing appropriate investment tools and establishing optimal portfolios. When selecting funds, investors need to focus on what investment tools fund managers adopt to realize their investment objectives.

Information about fund operation is included in the fund prospectus, and covers:

Investment objective

This refers to the investment target set by the fund manager, such as seeking long-term stable gains and fixed dividends.

Investors should choose funds for which the investment objectives coincide with their own objectives. If the objective of a fund changes over a period of time, you need to reevaluate your investment.

If you prioritize high growth, your objective is to realize a long-term appreciation; if you prioritize gains, your objective is to obtain stable gains from the investment; if you prioritize stability, your objective is to ensure the safety of your investment. No investment can realize these three objectives at the same time. Some focus on one objective, some weigh one objective against another, and others seek to balance the three objectives.

According to regulations, the trust deed and prospectus must specify the fund's investment objective.

Investment scope

The trust deed and prospectus should specify the scope of securities that the fund may invest in, the investment subjects, how the fund manager selects these subjects, the securities that the fund prioritizes, and how the fund manager invests in these securities.

Investment subjects cover liquid financial tools such as the stocks and bonds issued to domestic investors and others approved by China Securities Regulatory Commission. Most funds focus on stocks issued by listed companies. Funds mainly invest in securities and listed companies, for example, the stocks of listed companies that perform stably, are growing, or have strong growth potential.

Investment philosophy

This refers to the fund manager's preference for long-term or short-term investments. In mature overseas markets, investment philosophy reflects the fund manager's investment wisdom, and is a precondition for a successful investment. It is vital for investors to compare the investment philosophies of several funds.

Investment objectives, philosophy, style and risk control vary between funds. Analyzing different types of funds can help you choose funds that coincide with your risk appetite and investment objectives. However, investment philosophy is abstract and can only be examined over a long period of time.

Investment decision making

This forms the decision-making basis, the process, and investment portfolio.

Investment strategy

Investment strategy refers to principles of selecting various securities. For example, how the fund adjusts in terms of holding cash, treasury bonds or different types of stocks.

Investment portfolio

The investment portfolio is designed to de-centralize investment risks and protect fund holders' interests.

Risk

The trust deed and prospectus of each fund will specify market, management and other risks facing the fund.

Risk awareness is vital for investors. As markets fluctuate, your investment may make or lose money. In addition to general investment risks that investors tend to focus on, each fund is exposed specific risks such as inflation, interest rate fluctuations, credit control, and tightened liquidity.

Fund investment limits

The Interim Measures for the Administration of Securities Investment Funds states that the investment portfolio of a fund must meet the following requirements: Investment in the stocks and bonds of a fund must not be less than 80% of the total assets value of the said fund;

Stocks of a listed company held by a fund must not exceed 10% of the net assets value of the said fund;

One company's securities held by all the funds managed by a fund manager must not exceed 10% of the total value of these securities;

Investment in treasury bonds must not be less than 20% of the net asset value of the fund;

The Interim Measures also prohibit:

1.
Mutual investment between funds;
2.
Fund investment by fund custodians and commercial banks;
3.
Fund managers cannot buy and sell securities under the name of fund management using capital that is not related to the managed funds;
4.
Fund managers cannot underwrite securities in any form or for independently operated securities other than treasury bonds;
5.
Fund managers cannot lend or borrow money;
6.
Investing bank credit capital in funds;
7.
State-owned enterprises cannot speculate on funds in violation of national laws;
8.
Using fund assets as a pledge, guarantee, or for borrowing or lending a loan;
9.
Performing securities credit transactions;
10.
Investing fund assets in real estate;
11.
Undertaking an investment that might incur unlimited liabilities on the fund assets;
12.
Investing fund assets in securities distributed by companies that have an interest in the fund custodians or fund managers;

Investment products

Fund managers invest in products with high yields, low risks and strong liquidity. Risk and profit and safety and liquidity are closely related. Fund managers seek to minimize risks and maximize profits by choosing appropriate investment tools and establishing optimal portfolios. Investment products mainly include treasury bonds, IPO stocks, and listed companies’ shares.

When investing stocks, fund managers seek to raise returns and lower risks. This requires appropriate analysis methods, investment techniques and well-designed investment portfolios.

Tips for Financial Report Analysis

Fund performance report

In terms of annual reports, investors are concerned about the fund's performance last year. Generally, the fund manager will outline the fund's performance during the year in the annual report.

Key points:

(1)
Fund establishment time

Generally, an annual report runs from January 1 to December 31. The first reported year of a fund runs from the establishment date to December 31 of the same year.

The timeline of the Tong Yi Fund runs from its establishment on April 8, 1999 to the end date of the reporting period, which is December 31, 1999.

(2)
Note: the "weighted" growth rate and effective growth rate

If a fund has not been operated for one year, the fund manager will calculate a weighted growth rate as follows to offset the difference in the operating period:

Growth rate Xi = [(closing NAV-opening NAV) x (365/the number of days between the fund establishment date and December 31)]/opening NAV

The weighted growth rate is only an estimated rate, not the effective growth rate. According to Tong Yi Fund's performance in 1999, the largest rise occurred in the one or two months after May 19, 1999. During these two months, most stocks rose quickly. The weighted growth rate during these two months is not the effective growth rate of the fund.

Many fund managers only calculate the weighted growth rate, but not the effective growth rate, which can be calculated as follows:

Growth rate Xi = [(closing NAV – opening NAV) x 365]/opening NAV

(3)
Comparing NAV growth rate with the bank deposit interest rate and growth rate in the overall stock index over the same period

Generally, performance reports compare growth rates in a fund NAV with the overall stock index for the same period. Investors should compare the fund NAV growth rate and the bank deposit interest rate. If the fund NAV growth rate is equal to or lower than the interest rate, investors should choose a bank deposit because the fund incurs high risks. The comparison between the NAV growth rate and overall stock index growth rate can only serve as a reference, especially for income and balanced funds. Based on this, investors focus on absolute NAV growth rather than NAV growth in terms of overall market performance.

(4)
Evaluating fund performance after deducting the impact of preferential policies

Currently, funds enjoy many privileges that contribute a large proportion of income; for example, fund privileges in the placement of new stocks. However, considering improvements to the securities market and increasing competition, the income created by such privileges is likely to decrease in the future. Generally, the contribution of new stock placement in a NAV is deducted when the effective growth rate is calculated to reflect the true investment capability of the fund manager. It can serve as basis for investors to estimate the fund's performance in the future.

Fund manager's work report

The work report is provided in text form and includes the fund manager's profile, his/her operational and investment experience, information about funds managed, fund performance in the previous year, and forecasts for the next year.

Key points:

When reading a work report, investors should focus on:

1.
Who is the fund manager?
2.
What is his/her operational capability and investment experience?
3.
Has he/she managed funds before?
4.
Has the fund changed the manager previously or will management change in the near future?
5.
What is the fund manager's investment style?
6.
How has he/she evaluated the fund's performance in the previous year and forecasted next year's performance?
7.
Is he/she aware of potential risks?

These factors will impact the operation of a fund. For example, the yield of the fund may vary largely with the fund manager's investment style (radical or conservative). Barings Bank was bankrupted due to huge losses caused by radical financial investment. The fund manager's forecast of the market for the next year directly affects the manager's stock selection strategy.

Investors can obtain useful information from the forecast. For example, the fund manager's 2000 report for the Tong Yi Fund stated a preference for high-growth companies with strong competitiveness in emerging industries, undervalued listed companies that were performing well, and high-tech companies. Based on the market's and investors' forecasts, investors can estimate the fund's future performance and decide whether or not to invest in the fund.

Audit reports

This includes the financial audit report, internal supervision report and fund custodian's report.

Key points:

1.
Study the financial audit report drafted by the certified accountants firm to check if there are any qualified opinions. If it does not have any, the financial statistics provided by the fund company is trustworthy. If it does, investors should be cautious about investing in the fund.
2.
Study the internal supervision report for any reported mistakes made by the manager.

Important events

This describes important events in the previous year that investors should consider; for example, a drop in fund management fees, legal action facing the funds company, changes to key personnel, notices about reducing the management fees, and announcements of changes in the investment direction.

Investment portfolio statement

This describes the stock portfolio in which the fund is invested in the current year, and reflects the fund investment type and preferences of the fund manager.

Top 10 holders

Information about the top-10 holders of the fund is an important reference for investors and enables the analysis of the structure of the fund holders.

The information about the top-10 holders of the fund in the annual report can help investor analyze the structure of fund investors. For example, a rise in the concentration of the fund holding reveals that the securities investment fund has shifted its focus from small and medium investors onto investors with large sums of capital.

Financial indicator analysis method

Ratio analysis

Comparisons must be based on a benchmark; for example, earning RMB20,000 in a month is different for companies with a registered capital of RMB50,000 and RMB500 million. A company's performance can only be evaluated based on a ratio.

We can also use the ratio analysis method. The following table lists the major ratios in the balance sheet and the income statement of a financial report.

Balance Sheet
Liabilities/assets	This reflects the fund's liabilities and the ratio of fund assets held by fund holders.
Current assets/current liabilities X 100%	This reflects the fund's liquidity ratio. Current assets include cash, deposits, receivables, and marketable securities. As investment funds mainly invests in marketable securities and the liquidity ratio of a fund company is usually above two, which indicates that the fund company has the necessary solvency and a strong operational capabilities.
Estimated appreciation/total assets	Assets include the estimated appreciation in stock and bond value based on solid assets that may fluctuate considerably in the market. The ratio can be used to analyze the share of the unstable components of the fund's assets.
Cash (including bank deposit)/assets	Fund companies must retain a necessary cash balance to pay dividends and other expenditures. However, the ratio should not be moderate to the extent that profits are not generated. A high cash/assets ratio may indicate the fund company's low cash utilization and impair profitability. Generally, the cash/assets ratio should be maintained at about 10%. You can calculate the ratio yourself.
Income Statement
Capital gain from stock transaction/fund	Income that truly reflects a fund company's performance is the capital gain from stock transactions rather than other privilege-based factors. Therefore, we can use the ratio of capital gains from stock transactions/fund income (total income) to judge the fund's effective performance.
Income (total income)/total costs	The capital utilization of using one and two shares to generate equal income is different. Therefore, we can use the ratio of income (total income)/total costs to analyze the fund's capital utilization level. Generally, a high ratio indicates high capital utilization and strong investment performance.
Fund unit		This is a certificate issued by the fund promoter to unspecified investors that represents holders' ownership of the fund's assets, income distribution rights and other related rights.
Total assets		This is the total value of various securities, bank deposits and other financial products in which the fund is invested.
NAV		This is equal to the fund's total assets minus the fees deductible from the fund's assets according to set terms.
NAV per unit		This is calculated by dividing the fund's NAV on the calculation date by the total number of fund units on the same date.
Fund income		This includes bonuses, dividends, bond interest, price differences in securities transactions, deposit interest, and other income.
Net income		This is equal to the fund's income minus the fees deductible from the income according to set terms.

Notice:

In addition to analyzing the above ratios in the annual financial report, we should also consider the following problems:

1.
Compare these ratios horizontally: Asset structure, composition and performance ratios such as assets turnover, liquidity and quick ratios should be analyzed through comparison with average levels of other funds.
2.
Compare these ratios vertically: Statistics from the previous year might not help us make reliable forecasts for future growth. Therefore, we should analyze these statistics with earlier data to improve forecast accuracy.
3.
Performance-balanced and comprehensive analysis: To fully evaluate a company's performance, investors should comprehensively analyze financial data rather than focusing on isolated statistics.

Analysis through comparison

If investors only analyze one fund or an annual report without analyzing the previous and present results, they may fail to make a correct judgment. Therefore, investors should use the ratios mentioned above to compare one fund with others.

The comparison should adopt the following principles:

1.
When analyzing the balance sheet, investors should compare the total assets with total liabilities and compare different figures, e.g., comparing fund income with costs to analyze the fund company's financial and operational structures.
2.
Investors should compare the statistics of certain time periods with those listed in the annual report, e.g., comparing each week's NAV with the NAV in the annual report to analyze whether the fund's NAV has been growing steadily and whether the closing NAV has been impacted by a major stock in the fund's investment portfolio. This can help investors analyze the fund's operating performance and growth trends, and serve as a basis for investors to make investment decisions and select funds.
3.
The key section of an annual report is the comparison between the fund and similar ones. For example, fund that invests in high-growth stocks is compared with similar ones in terms of its NAV growth rate and allocation of capital. The comparison can help investors understand the fund's position among peers and prompt the fund manager to adjust the operating strategy and optimize performance.

Major indicators

Fund unit	This is a certificate issued by the fund promoter to unspecified investors that represents holders' ownership of the fund's assets, income distribution rights and other related rights.
Total assets	This is the total value of various securities, bank deposits and other financial products in which the fund is invested.
NAV	This is equal to the fund's total assets minus the fees deductible from the fund's assets according to set terms.
NAV per unit	This is calculated by dividing the fund's NAV on the calculation date by the total number of fund units on the same date.
Fund income	This includes bonuses, dividends, bond interest, price differences in securities transactions, deposit interest, and other income.
Net income	This is equal to the fund's income minus the fees deductible from the income according to set terms.

Information Disclosure

Requirements for information disclosure

The disclosure of fund information must comply with the

Interim Measures for the Administration of Securities Investment Funds and Guide for Information Disclosure of Securities Investment Funds.

Fund information that must be disclosed includes:

Prospectus

The prospectus discloses any information that might substantially impact investors' investment decisions, including information about the manager, custodian, fund sales channels, subscription and redemption modes, categories of costs and commissions and rates, the fund's investment targets, accounting and auditing principles, and profit distribution mode.

The prospectus is the most important document for investors to read before making an investment. It should be updated bi-annually to reflect any changes in the fund.

Regular reports

Regular reports include annual and mid-year reports, fund NAV, the investment portfolio, and unit NAV statements.

Annual report

The annual report reviews and summarizes the fund's operational status and reflects its performance over the past year. It helps investors comprehensively understand the fund's current operational status and the manager's yearly performance.

The annual report also includes the custodian's report and auditor's report.

Mid-year report

This generally reflects the fund's operation and performance over the past six months.

It mainly includes the manager's report, financial report and other key issues. The financial report comprises the balance sheet, income and distribution statement, new assets’ change statement, notes regarding financial statements, and a description of other influential factors.

NAV statement

The NAV of close-ended funds and open-ended funds must be released once a month and once a week respectively. NAV is the key indicator of a fund's operational status and value, and the NAV statement lists the fund's net assets and unit NAV for investors.

Investment portfolio statement

The investment portfolio statement discloses the stocks, bonds and cash held by the fund and related changes. The report discloses the percentages of invested stocks and bonds, the corresponding industries, and information about the top-10 stock holdings.

Unit NAV statement

The statement is issued on a daily basis to disclose the closing net market value of the fund assets (after deducting the liabilities) of each fund unit. The net market value is calculated on a daily basis, and is disclosed the next day. The data is a key indicator for reference of open-ended fund investors.

Provisional report

This report mainly discloses matters that may substantially impact fund investors' interests and unit NAV during the fund operating process. It should be issued immediately after a related issue occurs.

Issues include:

Resolutions of general fund holder meetings

Changes to the fund manager or custodian

Changes to the chairman of the board, general manager and manager of the fund depository department of the fund company

Changes to over half of the directors of the board of the fund company

Changes to over half of the major personnel of the fund company or fund depository department

Major related transactions

Disciplinary action, lawsuits and arbitration against the fund manager or custodian

Expiration of the fund in advance, high-volume redemption of fund units, and other major issues

Others

1. Other information that must be disclosed according to the law, the administrative regulations of China, and the provisions of the China's Securities Regulatory Commission

Accounting and legal information must be reviewed, audited, and issued by certified accountants and law firms. Related institutions and personnel should ensure that issued documents are free of false and misleading statements or omissions, and shall bear joint liability for any errors.

2. Statements for clarification

Time of information disclosure

In the same way as for listed companies, the person in charge of information disclosure must immediately clarify any rumors that might mislead investors or substantially impact fund value.

		Close-ended fund	Open-ended fund
Prospectus		Before issuance	Before issuance
Regular reports	Annual report	Within 90 days after the fund's accounting year	Within 90 days after the fund's accounting year
	Mid-year report	Within 60 days after the end of the first 6 months of an accounting year	Within 60 days after the end of the first 6 months of an accounting year
	Unit NAV statement	Issued on a weekly basis, calculated on a daily basis, with the NAV released each Saturday	Issued and calculated on a daily basis, with each day's NAV released the next day
	Investment portfolio statement	Quarterly investment portfolio statement, issued on a 3-month basis, released within 15 work days of the end of each quarter	Quarterly investment portfolio statement, issued on a 3-month basis, released within 15 work days of the end of each quarter
Provisional report		Issued immediately upon events to be disclosed	Issued immediately upon events to be disclosed

FAQ

Evaluating a fund manager's investment capabilities

1. Operational capabilities

If a fund manager is prudent and conservative, the share of stocks will be low in the fund's investment portfolio while securities and cash assets will be high. Therefore, investors can judge the fund manager's risk appetite (speculative or conservative), asset portfolio strategy, and capability to analyze future trends based on the disclosure of asset portfolios, changes in the investment portfolio statement of the fund, and movements in the overall market. In addition, the fund manager's investment risk, strategy, and portfolio can serve as a basis for analyses and judgment.

2. Management capability

The management capability of a fund management company includes the operating status and market image of each fund promoter, their earning performance compared with competitors, research capability and performance, and stock investment performance. Other indicators include the fund management or securities investment experience of senior management and core employees, and the overall performance of funds managed by the company.

3. Return rate

The investment return rate is a definite indicator of fund performance. It can be calculated as follows:

Return rate = (Closing NAV – opening NAV + cash dividends)/opening NAV x 100%

Investors can compare the investment return rate with the same-period bank deposit interest rate and overall stock index growth rate to evaluate the performance of the fund. An outstanding fund management company focuses on mid-to-long-term investment opportunities to bring stable returns for investors. Therefore, investors should not choose a fund management company whose performance fluctuates violently.

4. Fund income distribution percentage and policy

The percentage and policy for income distribution varies between fund management companies. Some fund prospectuses rule that the fund management company must meet the following conditions to receive performance-based compensation:

1)
The annual average unit NAV is not lower than the par value;
2)
The distributable net yield exceeds the interest rate of a same-period one-year time deposit by more than 20%;
3)
The growth rate of the NAV exceeds the average yield of the securities market;
4)
The unit NAV after income distribution is not lower than the par value.

An excellent fund management company is able to distribute income to investors while achieving good performance.

Is dividend reinvestment cost-effective?

There are two ways for an open-ended fund to pay dividends: cash dividends and fund share dividends.

Cash dividends are widely known among investors. Currently, it is required that close-ended funds must distribute at least 90% of the income of the current period to fund holders in cash. Like stock cash dividend, the cash dividend for a fund is paid based on each investor's holding. If you hold 100,000 units of the fund and the dividend for each unit is RMB0.2, you will be paid a cash dividend of RMB20,000. If you choose dividend reinvestment and the unit NAV (to be announced on the next day) is RMB1.20, you will receive RMB20,000/RMB1.20, that is 16,667 units, adding your holding to 116,667 units.

Share dividends are also known as dividend reinvestment, i.e., reinvest the received cash dividend in the fund to increase the fund units held. The fund management company will not charge a subscription fee to encourage investors reinvest their dividends. Assuming that the subscription fee rate is 2% and you choose a cash dividend, you can only subscribe for (20000－20000 X 2％) X 1.20, that is 16,333 units with the cash dividend, 334 units less than the fund share dividend. If you are optimistic about the fund's growth, you should choose the fund share dividend.

What are the skills required for analyzing a financial report?

Skills for analyzing a financial report

There are mainly three required skills for analyzing a financial report.

1. Analyzing problems flexibly

Ratios in the annual report must not be analyzed rigidly. For example, a liquidity rate of 2:1 is generally considered acceptable. However, it is too rigid to impose this requirement on all management companies. The indicator is a reference and is not the sole indicator of a company's liquidity.

2. Using unit-based statistics

A fund features a large total asset value, which might confuse investors about the operating status of the fund company. Therefore, investors can divide financial and accounting figures into unit-based statistics such as NAV per share. This helps investors analyze the company's operating status, especially its earning status. By dividing income into income per share, investors can objectively compare operating performance over several years and compare one fund company with others.

3. Using both absolute and relative figures

"The fund's NAV has grown 20% this year" is an abstract description for its growth rate this year and the detailed profit is not disclosed. Relative figures can help us track the development trends of a company, while absolute figures reveal the company's growth. When analyzing an annual or mid-year report, we should analyze not only fiscal statistics, but also the description in the report and the fund’s current development.

Fund Transaction Tips

Fees and taxes

Fees Like buying a product, investors have to know the price before subscribing to a fund. Investors should inquire about the commission charged by the fund management company for the securities investment services it provides and also about the fees payable for fund subscription and redemption. Otherwise, investors may bear losses when subscribing for or redeem fund shares. Fund operating fees
Compensation for fund management company	The management fee is paid to the fund management company for the professional management and investment services it provides. The annual management fee is deducted from the fund's dividend and interest income, or from its assets.
Custodian fee	This is charged by the fund custodian for fund assets custody and disposal.
Listing fee	This is charged by the exchange where the close-ended fund is listed.
Securities transaction commission	Commissions for marketable securities transactions
Information disclosure fee	This refers to the costs of issuing and publishing mid-year and annual reports and various statements.
Fund holder general meeting fee	This is a fee for holding fund holder general meetings.
Accountant and lawyer fee	This includes service fees payable to certificated public accountants, lawyers and auditors.

Calculation, rates and terms of payment

The fund operating fees are accrued from fund operations, including management fee, custodian fees and others, which are deducted directly from the fund's assets.

(1) A fund management fee is charged by the fund management company for the asset management service. The fund management company can charge this fee based on a fixed rate or a fixed rate plus a performance incentive fee. The performance incentive fee is charged based on the fund's performance and is in addition to the fixed management fee. The fixed-rate management fee is calculated based on the fund's daily NAV and is deducted regularly.

Daily management fee = current NAV x management fee rate/number of days in the year

(2) The fund custodian fee refers to the fund assets custodian fee charged by the custodian, and is generally calculated based on the fund's daily NAV and is deducted regularly.

Daily custodian fee = current NAV x custodian fee rate/number of days in the year

(3) Other fees include registration fees, seat rental, securities transaction commission, lawyer fees, accountant fees, information disclosure fees and fund holder general meeting fees.

Currently, the annual management fee rate in China ranges between 1.25% and 1.5%. The custodian fee rate is 0.25%, which is the average level of developed markets.

The above fees and details are described in the fund prospectus.

Tax policy for securities investment fund

A securities investment trust fund management company is different from other registered corporations. A fund management company is a trustee who does not operate the trusts, and is only responsible for the investment and operation of fund assets, which is held by the trust settler nominally and owned by investors. The profit brought by investment of the trusts in securities will be distributed to fund holders in proportion to their holdings after deducting the management, custodian and other fees. Given that the income is only derived from the trusts, fund management companies are exempted from taxation in many countries to support the industry's development. Investors' income from funds is taxable, which is either withheld by fund management companies or paid by investors.

Citizens and legal bodies have the obligation to pay tax. Investors should learn the tax policies relating to various funds.

Currently, taxes relating to fund investment are collected in China in accordance with the Notice on Securities Investment Fund Tax issued by the State Administration of Taxation of the Ministry of Finance (August 6, 1998 Finance and Taxation Doc. [1998] No.55). The policies include:

(1) Business tax

1.
Business tax does not apply to raising funds by issuing a fund.
2.
The price differential income from stock and bond transactions generated by a fund management company was exempted from business tax before the end of 2000.
3.
The business applies to the price differential income in fund transactions managed by financial institutions (including banks), but not to transactions by individual and non-institution investors.

(2) Stamp duty

1.
A 0.4% stamp duty is imposed on stock exchange by fund management companies.
2.
Fund investors (including individuals and corporations, the same below) are exempt from the stamp duty before the end of 1999.

(3) Income tax.

1.
Income from funds' securities investments is temporarily exempt from business income tax, including stock and bond price differential income, stock dividends, bonuses, bond interest and other income.
2.
The capital gains from fund transactions by individual investors is exempt from personal income tax before it is imposed on the capital gains from the stock exchange by individual investors. Capital gains from fund transactions by institutional investors is accrued as taxable income and is subject to business income tax.
3.
Listed companies and bond issuers withhold 20% for personal income tax when paying stock dividends, bonuses and interest to fund investors. Fund management companies withhold no individual income tax for stock dividends, bonuses and interest paid to individual investors.
4.
Investors' interest from treasury bonds and deposits and capital gains from the stock exchange in fund investment is exempt from income tax before it becomes payable for the said income again.
5.
Personal income tax is payable for individual investors' capital gains from corporate bonds in a fund investment. The tax is withheld when the income is distributed to investors. Corporate investors are exempt from the business income tax for their difference price income bonds currently in a fund investment.

(4) Business and other applicable taxes are payable for the income of fund management companies and fund custodians from fund management activities.

Subscribing to new open-ended funds

The subscription process described in this chapter only serves as a reference. It may vary between different funds. Investors should refer to the fund prospectus for the specific subscription process.

Subscription process

On the issuance of an open-ended fund, investors can subscribe for the newly issued close-ended fund according to the following three steps:

Step 1: Opening an account

(1) Individual investors

Individual investors should provide the following materials to open a fund account:

1.
ID card;
2.
A bank current deposit account or corresponding bank card in the city where the fund sales agency is located;
3.
The investor must fill out the New Account Application.

(2) Institutional investors

Institutional investors can open accounts at the direct sales center of a fund management company or sales agencies designated by the fund management company.

Institutional investors should provide the following materials:

1.
New Fund Account Application;
2.
Duplicate and photocopy of the Business License, original copy and photocopy of the registration certificate issued by the civil administration or governing authorities to public institutions, social, and other organizations;
3.
Original copy and photocopy of the Account Opening License for the specific bank account or Bank Account Opening Application;
4.
Juristic Representative Authorization Letter;
5.
Reserved card sealed with the reserved stamp;
6.
Original ID card of the person authorized to apply for the account

Notice

The process varies between different funds. Therefore, investors should refer to related announcements for the specific account opening procedure.

Step 2: Subscription

(1) Individual investors

Individual investors should provide the following materials to subscribe for a fund:

1.
ID card;
2.
Fund account card (issued after a fund account is opened);
3.
The investor's debit card opened in the city where the sales agency is located (the card must have sufficient balance for the subscription);
4.
Bank Fund Subscription Form (Individual)

(2) Institutional investors

Subscription process at a direct sales center.

Institutional investors should provide the following materials:

1.
Fund Subscription Form;
2.
Fund account card;
3.
Photocopy of the subscription fund transfer or remittance certificate;
4.
Original copy of the ID card of the applicant

Payment

To subscribe for an open-ended fund, institutional investors should first transfer or remit the subscription fund from the specified bank account to the fund management company’s fund subscription account within the required time period.

Subscription process at a sales agency

Institutional investors should provide the following materials:

1.
Bank Fund Subscription Form;
2.
Fund account card;
3.
Deposit sufficient money in the bank deposit account;
4.
Original copy of the applicant's ID card

Step 3: Confirmation

After the fund is established, investors can check the subscription result and print the subscription confirmation sheet at a fund sales agency. The fund management company will mail the Customer Information Confirmation Letter and Transaction Confirmation Letter to the address provided by the investor.

·
Fund subscription and redemption

Unlike subscribing to a close-ended fund, open-ended fund transactions include fund subscriptions (buy) and redemption (sell).

Principles for subscription and redemption

1.
The "unknown price" principle, i.e., the subscription and redemption price is the fund's unit NAV on the subscription and redemption date;
2.
"Amount-based subscription, share-based redemption", i.e., fund shares are subscribed to based on the amount of money and then redeemed based on the amount of shares;
3.
During the duration of a fund, one fund account can hold 10% of the aggregate fund shares at most. If an account holds over 10% of the aggregate fund shares due to under-subscription during the opening period, redemption by other investors or reinvestment of dividends, the investor will not be forced to redeem shares in excess of the limit, but will be restricted from subscribing for additional shares of the fund.
4.
For the duration of the fund, the number of shares subscribed to by an investor in one day plus the shares held by the investor on the final trading day must not exceed the aggregate number of shares on the final trading day.

Subscription and redemption process

The detailed process is as follows:

1. Applying for subscription or redemption

Investors must complete required formalities at fund sales agencies and apply for fund subscription or redemption to fund sales agencies during market hours.

2. Confirming subscription and redemption applications

The date on which the subscription or redemption application is received by the fund management company is taken as the subscription or redemption application date, or T day. The fund management company will confirm the application within 2 days after T days, i.e., by T+2 day. Investors can check the application result at fund sales agencies after the T+2 day (inclusive).

3. Payment for fund subscription and redemption

When an investor applies for a subscription, the subscription fund is transferred to the specified account. If the fund is not transferred in full, the subscription will fail and the received amount will be refunded. After an investor applies for redemption, the fund is transferred to the investor within seven days of day T.

Subscription and redemption rules

The following example describes the HuaAn Innovation and China Southern Solid Growth fund.

Scope of investors	Domestic individual and institutional investors
Subscription and redemption organization	Direct sales center of the fund management companies and its authorized sales agents (see the fund's prospectus)
Time of subscription and redemption	Investors can only redeem shares upon three months after the fund is established. The time period for subscription and redemption is the same as the market hour of Shenzhen Stock Exchange and Shanghai Stock Exchange, i.e., 9:30 -11:30, 13:00 – 15:00.
Subscription and redemption channel	Investors can subscribe to or and redeem fund through telephone, fax or Internet.
Subscription basis	Amount
Redemption basis	Fund shares
Subscription limit	The subscription amount by each investor should be a minimum of RMB10,000 each time; The number of shares held by each investor must not exceed 500 million.
Redemption limit	The number of shares redeemed each time should not be less than 1,000. If the number of remaining shares is less than 1,000, they must be redeemed in full.
Subscribed and remaining share calculation method	The effective number of shares subscribed to is calculated by deducting the related fees from the confirmed subscription amount, dividing it by the current unit NAV, and correcting the result to two decimal places, with the remainder accounted to the fund's assets.
Redeemed amount calculation method	The redeemed amount is calculated by multiplying the effective redeemed share number by the current unit NAV and deducting the related fees from the rounded result.
Fund share registration	After fund shares are subscribed to, the fund registration and transfer registrar record and register the investor's ownership to the shares on day T+1. The investor can redeem the shares after day T+2 (inclusive). After the shares are redeemed, the fund registration and transfer registrar will delete the investor's ownership to the shares on day T+1.
Transaction arrangement	Investors can subscribe to and redeem shares after three months upon the release of the fund prospectus.

Notice

1.
The reinvestment of current dividends is not subject to the lowest limit for fund subscription.
2.
The number of shares held by one investor may exceed the highest limit when shares are transferred to the account for non-transaction reasons or when the investor reinvests dividends.
3.
The fund management company may adjust fund subscription and redemption limits according to market conditions.

Fund subscription amount calculation methods

The fund subscription amount includes the subscription fee and net subscription amount.

Including:

Subscription fee = subscription amount x subscription fee rate

Net subscription amount = subscription amount – subscription fee

Number of shares subscribed to = net subscription amount/unit NAV on T day

Note:

1.
The unit NAV is denominated in RMB and is rounded to the number of decimal places determined by the fund management company;
2.
The subscription fee is denominated in RMB and is rounded to the number of decimal places determined by the fund management company;
3.
The number of shares subscribed to is rounded to an integer, with the remainder accounted as fund assets;
4.
The subscription fee rate is determined by the fund management company.

Take HuaAn Innovation for example:

The subscription fee rate is either 1.2% or 1.5%:

1.
The subscription fee rate is 1.5% for subscription between RMB10,000 (inclusive) and RMB10 million (non-inclusive).
2.
The subscription fee rate is 1.2% for subscriptions above RMB10 million (inclusive).

Assuming that an investor subscribes to fund shares with RMB10,000 and the current unit NAV is RMB1.200,

Subscription fee = 10,000 x 1.5% = RMB150

Net subscription amount = 10,000 – 150 = RMB9850

Number of shares = 9,850/1.200 = 8,208

Assuming another investor subscribes to fund shares to the value of RMB300,000,

Subscription fee = 300,000 x 1.5% = RMB4,500

Net subscription amount = 300,000 – 4,500 = RMB295,500

Number of shares = 295,000/1.200 = 246,250

Assuming another investor subscribes to fund shares to the value of RMB10 million,

Subscription fee = 10,000,000 x 1.2% = RMB120,000

Net subscription amount = 10,000,000 – 120,000 = RMB9,880,000

Number of shares = 9,880,000/1.200 = 8,233,333 Fund redemption calculation

The redemption payment amount is the redemption amount minus the redemption fee.

Including:

Redemption amount = redeem share number x unit NAV on T day

Redemption fee = redemption amount x redemption fee rate

Payment amount = redemption amount – redemption fee

Note:

1.
The fund unit NAV is denominated in RMB yuan and rounded to three decimal places.
2.
The redemption fee and payment amount are denominated in RMB yuan and rounded to two decimal places.
3.
The redemption fee rate is determined by the fund management company.

The following uses HuaAn Innovation as an example:

The redemption fee rate for HuaAn Innovation is 0.5%.

Assuming an investor redeems 1,000 shares and the unit NAV is RMB1.255 n T day,

Redemption amount = 1,000 x 1.255 = RMB1,255

Redemption fee = 1,255 x 0.5% = RMB6.28

Payment amount = 1,255 – 6.28 = RMB1248.72

Disclosure of Fund Unit NAV

The fund unit NAV on T day is calculated after the day trading and disclosed on day T+1.

Rejection or Suspension of Subscription Applications

The fund management company must not reject or suspend subscription applications unless the following circumstances apply:

1.
Force majeure;
2.
Abnormal market closure during market hours;
3.
The fund's assets size is too large for the fund management company to invest in suitable products or offsets the fund's performance and damages the fund holders' interests;
4.
The fund management company believes that additional subscriptions will harm existing fund holders' interests;
5.
Technical or personnel failures of the fund management company, custodian, sales agencies, or ownership and transfer registrar;
6.
Other scenarios agreed by China Securities Regulatory Commission;
7.
The amount paid for a rejected subscription will be refunded fully to investors.

Rejections or Suspension of Redemption Applications

A fund management company must not reject or suspend redemption applications unless the following circumstances apply:

1.
Force majeure;
2.
Abnormal market closure during market hours;
3.
The fund is heavily pressured by a massive redemption amount caused by a violent market fluctuation or other reasons;
4.
Other scenarios as agreed by law and regulations or other circumstances mentioned in the Trust Deed and approved by China Securities Regulatory Commission

In any of the above scenarios apply, the fund management company must immediately report to China Securities Regulatory Commission. After a redemption application is received, the fund management company will pay the amount in full. If the fund management company is temporarily unable to pay the amount in full, it should pay the amount in proportion to the number of shares to be redeemed by each investor as part of the aggregate number of shares to be redeemed, and then pay the remainder at a later date. In point 3 above applies, the fund management company can postpone the payment for the received redemption application for up to 20 trading days, and should announce the postponement through the appropriate media.

Massive redemption

If investors apply for net redemption (the number of shares to be redeemed minus those yet to be subscribed to) of over 10% of the aggregate fund shares, this constitutes a massive redemption.

Handling approach

If a massive redemption scenario occurs, the fund management company can accept all redemption applications or postpone part of the redemption according to the fund's current asset portfolio.

(1) If the fund management company chooses to accept all redemption applications, the shares are redeemed through the redemption process.

(2) If the fund management company chooses to postpone part of the redemption, the share of the units that will be redeemed in the aggregate must not be lower than 10%, with the remainder to be redeemed later.

The number of units to be redeemed should be determined based on the share of the units to be redeemed in each account based on the total number of units to be redeemed on the current day;

The remainder is automatically redeemed on the next trading day unless this is explicitly rejected by investors when filing their applications. Redemption applications postponed to the next trading day do not enjoy redemption priority, and are processed based on the unit NAV on the day of processing.

(3) If redemption is postponed due to a massive redemption, the fund management company must issue a statement within three working days through an appropriate media.

Non-transaction transfer

The fund registration and transfer registrar only receive applications for non-transaction transfer such as inheritance, donations and judicial enforcement.

1.
Inheritance refers to inheritance of fund units of a deceased fund holder by its lawful inheritor;
2.
Donation refers to donation of fund units held legally by the donator to a charity foundation or other charity;
3.
Judicial enforcement refers to enforcing the fund holder to transfer its fund units to other nature persons, juridical representative, social groups or organizations.

Non-transaction transfer must provide related materials required by the fund sales agency. Non-transaction transfer applications that comply with all requirements are processed within two months of the application receipt date, and a transfer fee is charged by the fund registration and transfer registrar.

Fund conversion

Fund conversion enables fund investors to convert units of a fund into units of another fund provided that the fund management company concurrently operates multiple open-ended funds, i.e., investors redeem units of a fund and subscribe to units of another fund managed by the same fund management company. Generally, fund conversion has a low conversion fee or no fee.

Transaction fees

The transaction fee for an open-ended fund varies between different funds. The fee rate of the same fund may differ with the transaction volume. However, the fund prospectus will disclose the upper limit and calculation method of the fund's transaction fee.

Specifically, the transaction fee of an open-ended fund includes:

1. Initial subscription fee

This is charged for the fund subscription when it is initially released. For example, HuaAn Innovative's initial subscription fee rate differs with the subscription amount: The subscription fee rate is 1.5% for an initial subscription between RMB10,000 (inclusive) and RMB10 million (non-inclusive) and 1.2% for an initial subscription over RMB10 million (inclusive). China Southern Solid Growth's initial subscription fee rate is fixed at 1%.

2. Subscription fee

This is charged for a fund subscription after the lock-up period of the fund. The fee rate must not exceed 5% according to the Trial Measures for Open-Ended Securities Investment Fund. The fee rate differs with the transaction amount.

The following table uses China Southern Solid Growth as an example:

Subscription amount (M)	Subscription fee rate
M < RMB1 million	2.0%
RMB1 million ≤ M < RMB5 million	1.8%
RMB5 million ≤ M < RMB10 million	1.5%
M ≥ RMB10 million	1.0%

HuaAn Innovative's subscription fee is outlined as follows:

The subscription fee rate is 1.2% or 1.5%:

The subscription fee rate is 1.5% for a subscription between RMB10,000 (inclusive) and RMB10 million (non-inclusive); the subscription fee rate is 1.2% for a subscription above RMB10 million (inclusive).

3. Redemption fee

The redemption fee rate must not exceed 3% according to the Trial Measures for Open-Ended Securities Investment Fund. The actual rate is determined by the fund management company.

4. Dividend reinvestment fee

A dividend reinvestment fee is charged for reinvesting a fund’s dividends. To encourage investors to reinvest dividends, the dividend reinvestment is low or there is no charge.

5. Conversion fee

This is charged for converting units of a fund into units of another fund managed by the same fund management company. Investors can convert units of a fund into units of another fund managed by the same fund management company. Most funds charge no conversion fee.

·
Income and Distribution

Fund income

Fund income refers to the part in excess of its value generated during the operating process. Specifically, it includes bonus, dividends, bond interest, price differences in securities transactions, deposit interest and other incomes.

Composition of fund income

Fund income is mainly derived from interest rate income, dividend income, and capital gains. The composition of fund income is as follows:

The fund income comprises:

1.
Price difference in securities transactions;
2.
Bonuses, dividends and bond interest;
3.
Interest on band deposits;
4.
Other legal sources of income

Generally, a fund's capital gain accounts for a large part of the generated income. To achieve high capital gains, the fund management company must have a deep knowledge of securities and fully understand the trends of securities prices. Generally, fund management companies are more professional and well-informed compared to individual investors, and thus are more likely to generate high capital gains.

Distribution mode

With the rise in the fund income and unit NAV, the fund income is distributed to investors.

(1) Close-ended fund

Close-ended fund investors can only choose the distribution mode of cash dividends as the size of close-ended funds is fixed.

(2) Open-ended fund

Open-ended funds provide two distribution modes:

1. Cash dividends

A cash dividend is paid to investors, and this is the most widely adopted distribution mode.

2. Dividend reinvestment

This mode reinvests the distributable income to investors by converting it into the corresponding number of fund units. Similar to cash dividends, it converts distributable income into the corresponding amount of new fund units. Many funds charge low or no subscription fees for dividend reinvestment to encourage investors to choose this distribution mode.

Investors should refer the fund prospectuses for income distribution principles and the modes of different funds.

Distribution Principles

(1) Close-ended fund

Distribution principles for close-ended funds are as follows:

1.
The share of the distributed income in the fund's net income must not be lower than 90%;
2.
The distribution adopts the cash dividend mode on an annual basis. The income is distributed within four months of the end of the fund’s fiscal year.
3.
The fund's current income can only be distributed after covering the previous year's losses;
4.
If the fund records a loss for the current year, no distribution is made;
5.
Each fund unit enjoys equal rights for income distribution.

(2) Open-ended fund

Distribution principles for open-ended funds are as follows:

1.
Fund income is distributed as cash: Investors can choose cash dividends or reinvest these cash dividends in the fund to obtain the corresponding number of fund units based on the unit NAV on the dividend distribution day;
2.
Provided that related dividend distribution requirements are satisfied, the fund income should be distributed at least once a year at least. If the fund was established less than three months ago, its income cannot be distributed;
3.
The fund's current income can only be distributed after covering the previous year's losses;
4.
The unit NAV of the fund after the distribution cannot be less than its par value;
5.
If the fund records a net loss for the current year, no income will be distributed;
6.
Each fund unit enjoys the equal rights for income distribution.

Terms of Payment

1. Close-ended funds

The registration organization of Shenzhen Stock Exchange or Shanghai Stock Exchange transfers the income distribution into investors' accounts directly through securities companies.

2. Open-ended funds

For investors who choose cash dividends, the fund management company authorizes sales agencies or custodians to transfer the cash dividends to the beneficiaries' bank accounts;

For investors who choose dividend reinvestment, the registration organization designated by the fund management company will transfer the converted units directly to the investors' fund accounts.

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Note:

All the contents stated above are for your reference only. Please consult the local branch of China Merchants Bank for further information. China Merchants Bank reserves the ultimate right of interpretation for the contents in this page.