the role of mutual funds in Pakistan topic

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Remarkable Growth Of Mutual Funds Industry

Authored By: FOZIA ISHAQUE (fozia.ishaque@hotmail.com) - (Pakistan & Gulf Economist) Created On: Thursday, April 03, 2008 Last Updated: Thursday, April 03, 2008 Mutual funds industry in Pakistan has shown remarkable growth in recent years both in terms of numbers of funds as well as in net assets under management. The future outlook of the mutual funds industry is very promising and encouraging. Financial risks are well contained. Growing macroeconomic imbalances unless addressed urgently could threaten the financial stability in the country. One of the major risks to Pakistan's financial stability is its overall lack of financial sector diversification. Out of the total financial sector assets, insurance companies account for barely 3%, mutual funds are largely sponsored by banks, while other non-bank financial companies account for 2% of the system and holders of listed private bonds for less than 1%. According to latest report of State Bank of Pakistan the scheduled banks deposits have expanded to around 4 trillion. In India the Mutual Funds have 15 per cent of the banking sector deposits while in the United States the Funds have 150 per cent more deposits than banks. We are optimistic that in next three to four years the Mutual Funds would see a boom in deposits and would be able to increase deposits to around 10 billion dollars equivalent. Mutual funds industry is in its infancy and there are challenges ahead such as stiff competition among mutual funds, limited investment avenues and effective management of risk due to the recently increased volatility in the markets. Some of the grey areas cordoning the industry are as follows: * An issue that calls for urgent attention is inadequate regulatory framework to cater for new products and growing needs of investors. SECP has to take a number of steps to promote the development of mutual funds industry. These measures envisage multifaceted reforms to help the industry in managing its risks prudently, give operational autonomy, and reduce fragmentation as well as protect investors" interest. Comprehensive disclosure requirements at the time of public offering and subsequent reporting on the affairs of funds should be prescribed and enforced. In addition, managers should be given flexibility to establish their trusts or companies as well as to float equity, debt or hybrid funds. These steps by the Securities and Exchange Commission of Pakistan (SECP) to promote equity markets in general and mutual funds industry in particular should be in line with overall macro-economic policies of the government and help boost investment in mutual fund sector in years ahead. Mutual Funds Association of Pakistan should also disseminate essential information on various funds, the fund managers, the stock market as well as the regulatory environment under which open and closeended funds get operated. It should also strive to achieve the following: 1-To enhance the professional and ethical standards in all areas of operation of Mutual Fund industry to ensure that they are in line with international best practices 2-To provide a centre of excellence for the development of knowledge and understanding of the Mutual Fundindustry. 3-To promote public understanding of mutual funds and engage in promotional activities to ensure ongoing education of the public on Mutual Fund related issues. * Limited investment options for prospective buyers also narrow the scope of industry and repel investors with specific demands. For further development of the mutual fund industry in the country, fund managers should develop specialized products aimed at niche markets. Products that cater to the requirements of different types of investors ranging from ultra conservative to the risk seekers. There lies a responsibility on the mutual funds

sector to introduce schemes for retirement planning, pension funds and provide market based effective returns to this class of savers. Industry must also explore the possibility of launching more Islamic mutual funds given the vast untapped potential in this sector * Abrupt fluctuations in capital markets pose a threat to the asset management business. This element is to be addressed by the policy makers as well as the fund managers. Fund managers backed by strong research and risk management function use various tools and strategies to mitigate volatility in returns and provide better returns to investors even in time of market volatility. The fund managers generally hold a medium to long term perspective of the market and therefore may be subject to temporary fluctuations in prices of stocks, which tend to stabilize over the medium to long term. The mutual fund industry plays a vital role in the operations of stock market and consequently contributes significantly to the economy of a country. It is receiving recognition as a credible investment vehicle for pension funds, provident funds and other such schemes of employers" terminal benefits. Equity markets are providing superior returns as compared to all other alternatives, even on a riskadjusted basis. Although the stock market in Pakistan has shown an impressive performance in previous years, it has a long way to go in terms of growth and expansion. In developed countries the market capitalization to GDP ratio ranges from 137 percent in the United States to 152 percent in the United Kingdom whereas in Pakistan it has hovered around only 15 percent in past few years, which indicates the growth potential in the stock market in the country. This means that there is a strong need to widen and deepen the Pakistan stock market by making it more accessible to general public through educating them about the benefits and better returns as compared to return on bank deposits. * All major economic indicators at present show a positive outlook of the country's economy and further enhancement of confidence of local and foreign investors in the economy is anticipated. Global scenario of mutual funds industry is not impacting the local market. Foreign investors entering Pakistan are directly pouring money in the stocks and are reluctant to invest in mutual funds. It is imperative to boost confidence and build trust of these potential buyers so as to encourage the industry and improve statistics. * There is dearth of knowledge, awareness and clear perception amongst masses regarding the pros and cons of dumping money in mutual funds. This factor adds largely to sluggish growth of the industry. Need of the hour is to educate people regarding the comparative benefits of investing in funds instead of keeping the deposits in NSS or banks. One of the main differences is that Mutual Fund returns are tax-free returns whereas conventional investments in banks are subject to 10% withholding tax, which means in real terms you get less than the quoted returns. Other main advantages offered to Mutual Fund Open-Ended Fund holders is that they can redeem their funds anytime they want to except for certain specialized funds (at the prevailing Redemption price of the fund which is quoted on the daily basis), whereas in Banking Sector you can't withdraw your invested money before maturity without paying a penalty. Moreover, investment banks generally offer fixed rates on Certificate of Deposits or Investments; whereas mutual fund returns are variable; thus giving the investor the opportunity to earn beyond expected returns. All these features are to be publicized so as to allure more segments of investment prone individuals. The general public can be encouraged to invest in mutual funds through investor education and awareness campaigns through electronic and print media as well as through seminars, workshops and conferences for wide scale public dissemination of information on mutual funds. Once the public is aware of the advantages of investing in mutual funds as compared to the other types of conventional investments such as bank deposits they would undoubtedly invest in mutual funds. * Fund management companies should focus increasingly on asset management and they should use third party distributor as much as possible, to sell funds. This step will help to multiply retail outlets and ensure easy accessibility to general public. Confining the whole market to one window can not make the instruments widely accepted and trusted. * Mutual Funds Association of Pakistan has to play its due role and develop guidelines in the area of advertising and communications for Asset Management, Investment Advisory Services & Mutual Funds in Pakistan to promote fair competition among investment firms. The Standards are to be aimed at promoting a self regulatory structure within the Mutual Fund Industry of Pakistan, which in turn, can ensure clarity, honesty & integrity in all matters of advertising, marketing and promotions. MUFAP has recently adopted the CFA Institute Asset ManagerCode of Professional Conduct. This Code sets forth minimum ethical and professional standards for providingasset management (including investment advisory) services to clients. The goal of this Code is to provide a useful framework for all asset managers to provide services in a fair and professional manner and to adequately disclose key elements of these services to clients. CONCLUSION: Due to sound economic growth, higher corporate earnings and a buoyant stock market, it is expected that mutual funds would continue to be an attractive investment avenue for retail investors. The industry holds several exciting opportunities for both corporate and individual investors including the retired persons. These days, the mutual fund industry is generating keen interest among a growing number of investors.

It is attracting fund managers and leading players of industrial and corporate sector as sponsors. Moreover, it has been providing versatile and attractive investment avenues to the general public while paying comparatively better returns based on dividend yields and capital gains.

Not too many years ago, mutual funds were simply broad-based investment instruments created to simplify the intricacies involved in investing in separate securities. They also provided a greater measure of safety through broad diversification and the kind of top notch professional management that is usually out of reach for the small investor. Today, however, mutual funds are highly specialized and offer almost unlimited diversity. The types of mutual fund portfolios available run the gamut from conservative to aggressive, from stocks to bonds, from domestic to international portfolios, from taxable to tax-free, and from virtually no-risk money market funds to high-risk options funds. The great variety of mutual funds available makes it possible to select a fund, or several funds, which precisely various types of funds and their primary objectives are described below. (They are arranged in order of increasing risk factors) Money Market Fund We begin with a discussion of money market funds for several reasons: 1. They are the safest for the novice investor; 2. They are the easiest, least complicated to follow and understand; 3. Almost without exception, every mutual fund investment companyoffers money market funds; 4. Money market funds represent an indispensable investment tool for the beginning investor. 5. They are the most basic and conservative of all the mutual fundsavailable; Money market funds should be considered by investors seeking stability of principal, total liquidity, and earnings that are as high, or higher, than those available through bank certificates of deposit. And unlike bank cash deposits, money market funds have no early withdrawal penalties. Specifically, a money market fund is a mutual fund that invests its assets only in the most liquid of money instruments. The portfolio seeks stability by investing in very short-term, interest-bearing instruments issued by the state and local governments, banks, and large corporations. The money invested is a loan to these agencies, and the length of the loan might range from overnight to one week or, in some cases, as long as 90 days. These debt certificates are called "money market instruments"; because they can be converted into cash so readily, they are considered the equivalent of cash. To understand why money market mutual funds is recommended as an ideal

investment, let me reemphasize just seven of the advantages they offer: 1. Safety of principal, through diversification and stability of the short-term portfolio investments 2. Total and immediate liquidity, by telephone or letter 3. Better yields than offered by banks, 1% to 3% higher 4. Low minimum investment, some as low as $100 5. Professional management, proven expertise 6. Generally, no purchase or redemption fees, no-load funds Income Funds The objective of income mutual funds is to seek a high level of current income commensurate with each portfolio's risk potential. In other words, the greater the risk, the greater the potential for generous income yields; but the greater the risk of principal loss as well. The risk / reward potential is low to high, depending upon the type of securities that make up the fund's portfolio. The risk is very low when the fund is invested in government obligations, blue chip corporations, and short-term agency securities. The risk is high when a fund seeks higher yields by investing in long-term corporate bonds, offered by new,undercapitalized, risky companies.

Who should invest in income funds? Investors seeking current income higher than money market rates, who are willing to accept moderate price fluctuations Investors willing to "balance" their equity (stock) portfolios with a fixed income investment Investors who want a portfolio of taxable bonds with differing maturity dates Investors interested in receiving periodic income on a regular basis. Income and Growth Funds The primary purposes of income and growth funds are to provide a steady source of income and moderate growth. Such funds are ideal for retirees needing a supplement source of income without forsaking growth entirely. Growth and Income Funds The primary objectives of growth and income funds are to seek long-term growth of principal and reasonable current income. By investing in a portfolio of stocks believed to offer growth potential plus market or above - market dividend income, the fund expects to investors seeking growth of capital and moderate income over the long term (at least five years) would consider growth and income funds. Such funds require that the investor be willing to accepts some share-price volatility, but less than found in pure growth funds. Balanced Funds

The basic objectives of balanced funds are to generate income as well as long-term growth of principal. These funds generally have portfolios consisting of bonds, preferred stocks, and common stocks. They have fairly limited price rise potential, but do have a high degree of safety, and moderate to high income potential. Investors who desire a fund with a combination of securities in a single portfolio, and who seek some current income and moderate growth with low-level risk, would do well to invest in balanced mutual funds. Balanced funds, by and large, do not differ greatly from the growth and income funds described above. Growth Funds Growth funds are offered by every investment company. The primary objective of such funds is to seek long-term appreciation (growth of capital). The secondary objective is to make one's capital investment grow faster than the rate of inflation. Dividend income is considered an incidental objective of growth funds. Growth funds are best suited for investors interested primarily in seeing their principal grow and are therefore to be considered as long-term investments - held for at least three to five years. Jumping in and out of growth funds tends to defeat their purpose. However, if the fund has not shown substantial growth over a three - to five-year period, sell it (redeem your shares) and seek a growth fund with another investment company. Candidates likely to participate in growth funds are those willing to accept moderate to high risk in order to attain growth of their capital and those investors who characterize their investment temperament as "fairly aggressive." Index Funds The intent of an index fund is basically to track the performance of the stock market. If the overall market advances, a good index fund follows the rise. When the market declines, so will the index fund. Index funds' portfolios consist of securities listed on the popular stock market indices. It is also the intent of an index fund to materially reduce expenses by eliminating the fund portfolio manager. Instead, the fund merely purchases a group of stocks that make up the particular index it deems the best to follow. The stocks in an index fund portfolio rarely change and are weighted the same way as its particular market index. Thus, there is no need for a portfolio manager. The securities in an index mutual fund are identical to those listed by the index it tracks, thus, there is little or no need for any great turnover of the portfolio of securities. The funds are "passively managed" in a fairly static portfolio. An index fund is always fully invested in the securities of the index it tracks. An index mutual fund may never outperform the market but it should not lag far behind it either. The reduction of administrative cost in the management of an index fund also adds to its profitability.

Sector Funds As was noted earlier, most mutual funds have fairly broad-based, diversified portfolios. In the case of sector funds, however, the portfolios consist of investment from only one sector of the economy. Sector funds concentrate in one specific market segment; for example, energy, transportation, precious metals, health sciences, utilities, leisure industries, etc. In other words, they are very narrowly based. Investors in sector funds must be prepared to accept the rather high level of risk inherent in funds that are not particularly diversified. Any measure of diversification that may exist in sector funds is attained through a variety of securities, albeit in the same market sector. Substantial profits are attainable by investors astute enough to identify which market sector is ripe for growth - not always an easy task! Specialized Funds Specialized funds resemble sector funds in most respects. The major difference is the type of securities that make up the fund's portfolio. For example, the portfolio may consist of common stocks only, foreign securities only, bonds only, new stock issues only, over - the - counter securities only, and so on. Those who are still novices in the investment arena should avoid both specialized and sector funds or the time being and concentrate on the more traditional, diversified mutual funds instead. Islamic Funds In case of Islamic Funds, the investment made in different instruments is to be in line with the Islamic Shairah Rules. The Fund is generally to be governed by an Islamic Shariah Board. And then there is a purification process that needs to be followed, as some of the money lying in reserve may gain interest, which is not desirable in case of Islamic investments.
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Mutual fund industry gets back on its feet

By Kazim Alam Published: March 31, 2012

Nonetheless, it is also a reality that after growing rapidly between 2001 and 2007, the mutual funds industry collapsed in the financial crisis of 2008.

KARACHI: In one of his recent articles, editor of TIME MagazineFareed Zakaria encouraged his American readers to invest in productive financial instruments instead of putting their money on unusable but reliable assets like gold. Gold isnt a stock with real earnings. It isnt a bond with interest payments. It isnt oil, he wrote.

But perhaps Zakaria was preaching to the choir, as Americans already invest in financial instruments overwhelmingly. For example, their investment in mutual funds is over 80% of the US gross domestic product (GDP). In contrast, the total investment in mutual funds in Pakistan is only 0.49% of its GDP while the country is the 11th largest consumer of gold in the world. Why is that so? People are uncertain due to the ongoing political and economic crisis. Hence, financial planning

has become short-term and limited to traditional mediums. Ordinary investors are unaware (of mutual funds), although they offer much higher returns with versatile features, UBL Fund Managers CEO Mir Muhammad Ali told TheExpress Tribune. A mutual fund is an investment programme funded by shareholders that trades in diversified holdings such as different stocks and is professionally managed by an asset management company. As of February 2012, Pakistans mutual funds industry is worth Rs360 billion with about 25 asset management companies operating in the country. According to a conservative estimate, there are around 150,000 investors in the countrys mutual funds market. Saying that they offer both convenience and better returns on investment, Ali adds thatmutual funds dont require a huge lump sum investment and offer high liquidity. Real estate is an illiquid investment and depends largely on the state of the economy. Gold is also becoming an expensive investment vehicle. But more importantly, the tangible nature of the metal itself poses a huge security threat. The returns are fairly high on mutual funds. Nonetheless, it is also a reality that after growing rapidly between 2001 and 2007, the mutual funds industry collapsed in the financial crisis of 2008. The fund size decreased from Rs390 billion as on April 2008 to Rs186 billion by December 2009. Investors panicked, as the total amount pulled out from the industry reached Rs467 billion in 2008 as opposed to Rs134 billion in the preceding year. The recession was a global phenomenon. It affected everyone. Our first and foremost priority was to ensure that our clients dont panic. Naturally, there were clients who wanted to pull their money out. Even then, we managed the liquidity position very well, servicing all client requests for withdrawal of funds during the stipulated time. We coped with the situation by helping our clients see our institutional strength and maintaining their confidence in our management, Ali said. The industry has since consolidated its position. The month-on-month increase in the size of the mutual funds industry in February 2012 remained 5.6%. Similarly, during the first eight months of fiscal 2012 (Jul-Feb 12), the mutual funds industry grew by 44%, as the size of the industry was about Rs250 billion in June 11. Ali says his marketing strategy is largely based on creating awareness about savings and investments through mutual funds. We feel that 90% job is over if people are aware of investment opportunities inmutual funds because of their attractive benefits, such as attractive returns, tax benefits and easy encashment. Published in The Express Tribune, March 31st, 2012.

List of Mutual funds in Pakistan

>> APRIL 17, 2010

Following is the list of Pakistan's largest mutual fundproviders. They offer to public to invest in these mutualfunds. In these providers include the companies of banking sector, non-banking sector, insurance sector and finance sectors. There are 10 Top companies who are the providers of mutual funds. 1st Al-Meezan Mutual Fund

Al Meezan Mutual Fund Limited (AMMF) was the first fund launched by Al Meezan Investments and is one of the oldest mutual funds in the private sector. It is a closed endequity fund that invests in Shariah compliant equity instruments to provide investors with Pure Profit. During its long and illustrious journey of 12 year AMMF has been paying regular dividends to its investors. Maintaining that tradition, AMMF announced 10% cash dividend i.e., Re. 1 per share for its shareholders for the year 2nd ended Asian June Stocks 30, 2008. Fund

Asian Stocks Fund Limited is a public limited company incorporated in June 1994 under the Companies Ordinance, 1984 and has been registered with the Securities and Exchange Commission of Pakistan (SECP) as an Investment Company under the Investment Companies and Investment Advisers Rules, 1971 to carry on the business of a closed endinvestment company. The company is also registered under rule 38 of the Non-Banking Finance Companies (Establishment and Regulation) Rules, 3rd Atlas Fund 2003 of (NBFC Rules). Funds

Atlas Fund of Funds (ATFF) is a closed-end fund established by a Trust Deed dated May 29, 2004 between Atlas Asset Management Limited (AAML), as the investment adviser and Central Depository Company 4th of Pakistan Limited (CDC), as the Trustee. Fund

Dominion Stock

These DOMINION STOCK FUND company profiles provided detailed financial data and key credit information. 1971 5th to DOMINION STOCK carry First out the FUND predominantly business of operates a closed ltd in the Investment Offices sector. Investment Company under the Investment Companies and Investment Advisers Rules. end investment Mutual company. Fund

Capital

Investment

First Capital Investments Limited (FCIL), a subsidiary of First Capital Securities Corporation, is a Non-Banking Finance Company licensed to carry out Investment AdvisoryServices as under the NBFC Rules 2003 and is regulated by the Securities and Exchange Commission of Pakistan (SECP).

6th

First

Dawood

Fund

The Fund has been established through a trust deed (Trust Deed or Deed) under the Trusts Act, 1882, executed between Dawood Capital Management Limited (DCM), 1500-A Saima Trade Towers, I. I. Chundrigar by Road, & Karachi-74000, Exchange which has been licensed (SECP), to vide undertake investment its letter No.NBFCadvisory services the Securities Commission of Pakistan 17/IA/02/2004 dated May 26, 2004 under Non-Banking Finance Companies (Establishment & Regulations) Rules, 2003 (the Rules) and Central Depository Company of Pakistan Limited (CDC) Karachi, duly approved by the SECP to act as the Trustee, vide its letter No. NBFC-II/JD(R)/DCMLFDMF/976 7th dated December Golden 2, 2004. Arrow

Golden Arrow Selected Stocks Funds Limited (GASSFL) is a Pakistan-based, closed-end mutual fund. The Companys principal activity is to make investment in marketable securities. The Companys investment 8th manager is Meezan AKD Investment Balanced Management Limited. Fund

Meezan Balanced Fund (the Fund) is a Pakistan-based closed-end balanced fund. The investment objective of the Fund is to generate long-term capital appreciation, as well as current income. It invests in equity securities and Islamic income instruments, such asSukuk (Islamic bonds), Musharaka and Murabaha instruments, Shariah compliant spread transactions, certificate of Islamic investments, Islamic bank deposits and other Islamic income products. Al Meezan Investment Management Limited (AMIML) serves as the Funds management company and Central Depository Company of Pakistan Limited (CDC) is its trustee.

9th

JS

Growth

Fund

JS Growth Fund (the Fund) is a Pakistan-based, closed-end investment company. The Funds investment objective is to enable the certificate holders to participate in a diversified portfolio by prudent investment management (investment return being of a combination of capital appreciation and 10th income). JS Investments Limited is the management Premier company of the Fund. Fund

Pakistan

Pakistan Premier Fund Limited (PPFL) is a Pakistan-based closed-end equity fund. The Company is engaged in providing investors long term capital appreciation from investments primarily in Pakistani equities. It primarily invests in shares of listed companies, term finance certificates and short-term reverse repurchase transactions. Arif Habib Investments Limited is the Companys investment advisor.