What is Mutual Fund


 Mutual Fund

“A mutual fund is a collective investment scheme,

which specializes in investing a pool of money collected
from investors for the purpose of investing in securities
such as stocks, bonds, money market instruments and
similar assets”
 MUFAP

 Mutual Funds Association of Pakistan (MUFAP)
Mutual Funds Association of Pakistan is the trade body
duly licensed by the Government of Pakistan for the
mutual fund industry in Pakistan. All Asset
Management Companies (AMCs) and Investment
Advisory ( IAs ) licensed by SECP to launch Mutual
Funds and perform Investment Advisory Services are
required under NBFC Rules 2008 to become Members
of MUFAP.
 This slide is not including just for knowledge

 •

A company/corporation that pools money from many investors and invest the
money in securities such as stocks, bonds and short term debts.
 • The combine holdings of a mutual fund are known as its portfolio.
 • Investors who buy shares in mutual funds become entitled to ownership in the fund
and the income it generates.
 • A mutual fund is managed by a management company (Asset Management
Company)
 • The management company is a bank of human resources, considered to be
professionally qualified personnel
 • The portfolio of mutual fund is managed by a "Portfolio Manager", whose
responsibility is to be invested in, and satisfies the desire of the investors
 • Every day, the fund manager/ portfolio manager counts up the value of all funds
holding, figures out how many shares have been purchased by shareholders, and then
calculates the Net Asset Value (NAV) of the mutual fund, the price of a single share of the
fund on that day.
 • NAV (Net Asset Value) A funds NAV fluctuates along with the value of its
underlying investments. The formula for NAV is:
 NAV = (Market Value of All Securities Held by Fund+ Cash and Equivalent Holdings -
Fund Liabilities) / Total Fund Shares Outstanding
 • EXAMPLE:
 lets assume at the close of trading yesterday that a particular mutual fund held $10,500,000
worth of securities, $2,000,000 of cash, and $500,000 of liabilities. If the fund had 1,000,000
shares outstanding, then yesterdays NAV would be NAV = ($10,500,000 + $2,000,000 -
$500,000) / 1,000,000 = $12.00
Diagrammatically

Fund
Investors
Managers

Returns Securities
 Types of Mutual Funds
by Maturity Period

Structurally there are Two types of Mutual Funds

 Open-Ended Mutual Fund

 Closed-Ended Mutual Fund
 Types of Mutual Funds

 Open-Ended Mutual Fund
An Open-Ended fund is a type of mutual fund that
does not have restrictions on the amount of shares the
fund will issue. If demand is high enough, the fund will
continue to issue shares no matter how many investors
there are.
Open-end funds also buy back shares when investors
wish to sell them.
 Types of Mutual Funds

 Closed-Ended Mutual Funds
A closed-end fund is a publicly traded investment
company that raises a fixed amount of capital through
an initial public offering (IPO). The fund is then
structured, listed and traded like a stock on a stock
exchange.

Also known as a "closed-end investment" or "closed-

end mutual fund."
 Mutual Funds
Companies In Pakistan

 NATIONAL INVESTMENT
 NATIONAL ASSET TRUST MANAGEMENT COMPANY
 NBP FULLERTON ASSET LIMITED MANAGEMENT LIMITED
 NATIONAL FULLERTON
 ABAMCO LIMITED ASSET MANAGEMENT
 AKD INVESTMENT LIMITED - NAFA MANAGEMENT LTD.
 NATIONAL IINVESTMENT
 AL FALAH GHP INVESTMENT TRUST LTD. MANAGEMENT
 NBP CAPITAL LIMITED
 AL-MEEZAN INVESTMENT
 AMZ ASSET MANAGEMENT
 SAFEWAY MANAGEMENT LTD. LTD.
 ARIF HABIB INVESTMENT
 MU Companies

 UBL FUND MANAGERS LTD. MANAGEMENT LTD.
 WE INVESTMENT
 ASIAN CAPITAL MANAGEMENT LIMITED MANAGEMENT
(PVT.) LTD
 DAWOOD CAPITAL
 ASKARI ASSET MANAGEMENT LTD. MANAGEMENT LTD.
 FAYSAL ASSET
 ATLAS ASSET MANAGEMENT LIMITED LTD.
 FIRST CAPITAL
 BMA ASSET MANAGEMENT INVESTMENTS LTD
 HABIB ASSETS MANAGEMENT LTD.
 HBL ASSET MANAGEMENT LTD
 KASB FUND LIMITED
 Types of Mutual Funds
by Investment Objective

Through investment point of view SECP the Regulator has
categorized the Schemes of mutual funds as under.
 Equity Fund
 Balanced Fund
 Asset Allocation Fund
 Fund of Fund Scheme
 Shariah Compliant Fund (Islamic)
 Money Market Fund
 Fixed Income Fund
 Index Fund
 Income Fund
 Specialty Fund
 Types of Mutual Funds

 Equity Mutual Fund

An Equity fund is an open or closed-end fund that invests

primarily in stocks, allowing investors to buy into the fund
and thus buy a basket of stocks more easily than they could
purchase the individual securities.
The objective of an equity fund is long-term growth through
capital appreciation, although dividends and capital gain
realized are also sources of revenue.
Example: Growth funds (usually not
pay dividend)
 Types of Mutual Funds

 Balanced Fund
These funds invest in a mix of equities and fixed income
securities. They try to balance the aim of achieving higher
returns against the risk of losing money. They tend to have
more risk than fixed income funds, but less risk than pure
equity funds.
Balanced funds tend to stick to a relatively fixed allocation of
stocks and bonds. They hold more equities and fewer bonds.
Example: Income funds (seek to generate income but give
some attention to capital appreciation)
Balanced Fund

 Types of Mutual Funds

Asset Allocation Fund
These Funds may invest its assets in any type of
securities at any time in order to diversify its
assets across multiple types of securities &
investment styles available in the market.
Asset allocation funds, invest in more than one
financial market at a time.
It is appropriate for the average investor
because it gives you diversity and risk
management.
Asset Allocation Fund

 Types of Mutual Funds

 Fund of Fund Scheme
These funds invest in other
funds. Similar to balanced
funds, they try to make asset
allocation and
diversification easier for the
investor.

Example: Hedge funds

 Types of Mutual Funds

 Shariah Compliant Fund (Islamic)
Islamic funds are those funds which invest in Shariah
Compliant securities.
i.e. shares, Sukuk, Ijara sukuks etc. as may be
approved by the Shariah Advisor of such funds. These
funds can be offered under the same categories as those
of conventional funds.
 Type of Mutual Funds

Money Market Funds
They are generally a safer
investment, but with a
lower return than other
type of mutual funds.
These funds invest in
short-term fixed income
securities.

Example: Government
bonds, Treasury bills etc.
 Type of Mutual Funds

 Fixed Income Funds
These funds buy investments that pay a fixed rate of
return. They aim to have money coming into the fund
on a regular basis, mostly through the interest rates.

Example: Investments that are bought are government

bonds, investment corporate bonds and high-yield
corporate bonds.
 Type of Mutual Funds

 Index Funds
These funds aim to track the performance of a specific
index. The value of the mutual fund will go up or down
as the index goes up or down. Index funds typically
have lower costs than actively managed mutual funds.

Example: KSE,
PSE (Pakistan stock Exchange)
 Types of Mutual Funds

 Bond Funds

A bond fund or debt fund is a fund that invests

in bonds. They typically pay periodic dividends that
include interest payments on the fund's underlying
securities plus periodic realized capital appreciation.
 Types of Mutual Funds

 Specialty Funds
These funds focus on specialized mandates such
as real estate, commodities or socially responsible
investing.
 Example: a socially responsible fund may invest in
companies that support environmental stewardship,
human rights, and may avoid companies involved in
alcohol, tobacco, gambling, weapons and the
military.
Measuring Mutual fund
Performance

A mutual fund can be measured in various ways. Three
common metrics are:

 Net Asset Value (NAV) change

 Yield
 Total Return
 Net Asset Value (NAV)

 The NAV is the share price of the fund, obtained by
dividing the value of the fund's holdings by the number
of outstanding shares. The share price is what you would
have to pay to buy into the mutual fund, plus any fees.
The change in NAV, reported at the end of every market
day, reflects the increase or decrease in the value per
share.

Net Asset Value (NAV) Formula

Value of Fund

Net Asset Value (NAV) =

Number of Shares
 Net Asset Value(NAV)

 Example:

Net Asset Value (NAV) Example

$100,000,000 total fund value

= $10 per share

10,000,000 shares
 Yield

 Yield percentage is the amount of income from
dividends and interest divided by the NAV, or price
per share. A mutual fund yield can be easily
compared to a bond yield.

Mutual Fund Yield Formula

Income Distribution per Share

Yield % =
Price per Share
 Yield Example

 Example:

Mutual Fund Yield Example

$.60 income per share

= 6% yield
$10 per share
 Total Return

 Total return is the current value of shares plus all
distributions taken as cash minus the initial
investment.

Mutual Fund Total Return Formula

Total Profit or Loss = Current Value of Shares + Cash Distributions - Initial

Investment
 Total Return Example

 Example:

Mutual Fund Total Return Example

$12,000 current value of shares + $3,000 total cash distributions - $6,000 initial
investment = $9,000 Profit
 Tax Benefit of MF

Like shares of any stock, selling Mutual Fund shares may cause you
to realize a capital gain or loss. Mutual Funds also distribute
dividends received and their own realized capital gains, usually at
the end of the year; these distributions, if in cash are taxable.
 Annual profits are distributed in the form of bonus units. Bonus
units (tax-free) are not considered as income under the Income
Tax Ordinance 2001.
 Individuals will be subject to with holding tax of 10% on dividends
and Income tax of 10% (excluding the amount of payout from
capital gains.)
 Public and Insurance Company will be subject to with holding tax
of 5% on dividends and Income tax of 5% (excluding the amount
of payout from capital gains.) However unit holders will be allowed
a tax credit on the purchase of units as per the prevailing tax law.
 Benefits of Indexation

 If you hold units beyond one year, you get the
benefits of indexation. Simply put, indexation benefits
increase your purchase cost by a certain portion,
depending upon the yearly cost-inflation index (which
is calculated to account for rising inflation), thereby
reducing the gap between your actual purchase cost
and selling price. This reduces your tax liability.
 Zakat Implications on
MF

 The units will be liable to zakat just like any other
financial instrument; however if the unit holder
provides an affidavit then no zakat will be deducted.
 Note

 Before you invest, you have to understand the fund’s
investment goals and make sure you are comfortable
with the level of risk. Even if 2 funds are of the same
type, their risk and return characteristics may not be
identical
 How to Invest in MF

 For Individuals:
The individual investor is required to provide the
following at the designated sales points of the Asset
Management Company
 Copy of CNIC
 Application / Account opening Form
 Purchase of Units Form
 Zakat Affidavit (Optional)
 KYC Form
 FATCA Form
 Cheque in favor of Trustee of the Fund
 Hoe to Invest in MF

 Corporate:
The corporate/ Provident/ Pension Fund investors are
required to provide the following:
 Memorandum and Article of Association/ Trust deed
 Board / Trustee Resolution approving the investment
 Application/Account Opening Form
 Purchase of Units Form
 Power of Attorney and/or relevant resolution of board of
directors/ trustee delegating authority to any of its officer
to invest
 NTN of the institution with tax status
 CNIC of the officer to whom the authority has been
delegated
 Cheque in favor of Trustee of the Fund
How to Disinvest in MF

 Redemption payments are made to the investors
within a period of a maximum 6 working days,
either through a cross-cheque or through a bank
transfer by submitting the Redemption form at
designated Sales Points of an AMC (Asset
Management Company).
 How Investors Earn
Through MF

Investors earn through Mutual Funds in three ways:
 Dividend Payment
Dividend is paid in the form of cash on
monthly/quarterly/ annual basis depending upon the
category of the fund and from AMC to AMC.

 Change in Price
If fund holdings increase in price but are not sold by the
fund manager, the fund's shares increase in price. You
can then sell your mutual fund shares for a profit
 How Investors Earn
Through MF

 Capital Gains Tax
Mutual funds are required to withhold Capital Gains
Tax (CGT) as per below:
 12.5%, where holding period of a security is less than
twelve months.
 10%, where holding period of a security is twelve
months or more but less than twenty-four months.
 Zero, where holding period of a security is twenty-
four months or more
Advantages &
Disadvantages

 Advantages of Mutual
Funds

 Some advantages of Mutual funds are:

 Accessibility
Mutual funds units are easy to buy.

 Dividend Reinvestment
As dividends and other interest income is declared for
the fund, it can be used to purchase additional shares in
the mutual fund, thus helping your investment grow.
 Advantages

 Diversification
Investing in a diversified portfolio can be very
expensive. The nice thing about mutual funds is that
they allow anyone to hold a diversified portfolio. The
reason why investors invest in a diversified portfolio is
because it increases the expected returns while
minimizing the risk.
 Liquidity
Mutual funds are considered liquid assets since there is
high demand for many of the funds in the marketplace.
Since this is the case, an investor can convert the asset
to cash by quickly selling it to another investor.
 Advantages

 Professional management
Mutual funds do not require a great deal of time or
knowledge from the investor because they are managed
by professional fund managers. This can be a big help
to an inexperienced investor who is looking to
maximize their financial goals.
 Convenient Administration
Investing in a Mutual Fund reduces paperwork and
helps you avoid many problems such as bad deliveries,
delayed payments and follow up with brokers and
companies. Mutual Funds save your time and make
investing easy and convenient
 Advantages

 Choice of Schemes
Mutual Funds offer a family of schemes to suit your
varying needs over a lifetime.
 Disadvantages of
Mutual Funds

 Cost
One downside to mutual funds is that they have a high cost
associated with them in relation to the returns they produce.
This is because investors are not only charged for the price of
the fund but they will often face additional fees. Depending
on the fund, commission charges can be significant.
 Fees
The fees that are charged will depend on the type of mutual
fund purchased. If a fund is riskier and more aggressive, the
management fee will tend to be higher. In addition, the
investor will also be required to pay taxes, transaction fees as
well as other costs related to maintaining the fund.
 Disadvantages

 Fluctuating Returns
Mutual funds are like many other investments without
a guaranteed return. There is always the possibility that
the value of your mutual fund will depreciate. Unlike
fixed-income products, such as bonds and Treasury
bills, mutual funds experience price fluctuations along
with the stocks that make up the fund
 Disadvantages

 Management Risk
 When you invest in a mutual fund, you depend on
the funds manager to make the right decisions
regarding the funds portfolio. If the manager does
not perform as well as you had hoped, you might
not make as much money on your investment as you
expected. Of course, if you invest in Index Funds,
you forego management risk, because these funds do
not employ managers