Mutual Funds in Pakistan - Term Report

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.

Types of Mutual Funds

There are basically two types of Mutual Funds:

1.        Open-Ended Mutual Funds

2.       Closed-Ended Mutual Funds

Open-ended

These are mutual funds which continually create new units or redeem issued units on demand. They are also called Unit Trusts. The Unit holders buy the Units of the fund or may redeem them on a continuous basis at the prevailing Net Asset Value (NAV). These units can be purchased and redeemed through Management Company which announces offer and redemption prices daily.

Close-ended

These funds have a fixed number of shares like a public company and are floated through an IPO. Once issued, they can be bought and sold at the market rates in secondary market (Stock Exchange). The market rate is announced daily by the stock exchange.

 

Unit Price Determination of Mutual Funds

NAV = Current Market Value of all the Assets – Liabilities

                                Total Number of Units Outstanding

BUSINESS MODEL OF MUTUAL FUNDS:

Starting the Mutual Fund

They form as a corporation or trust and sell shares to people to raise money to invest. It's called a mutual fund because many investors or institutions own shares in it. Each share has an equal percentage of the fund. They have a board of directors but hire an outside group to invest and often a different company to handle the day-to-day service of shareholders. The fund can be open-end fund with unlimited numbers of shares, sold and redeemed through the company, or closed end where they only create a specific number of shares and trade over on a stock exchange. Unit investment trusts that have limited shares, a termination date and are bought and sold through the investment company.

Mutual Fund Investments

Look for the investment in the fund's prospectus. They use various types of investments but the main categories are stocks, bonds, money market instruments and hybrid funds that are comprised of all three. These investments might be just in a specific country or all over the globe or taxable and non-taxable. The investment advisers can only use the blend or investments that the fund describes in the prospectus. Within the main categories, there are only 33 investment objectives for the funds in the United States.

Buy and Sell

Expect the fund to make money from capital gain. The mutual fund advisers purchase the stocks, bonds or money market instruments at what they believe is a low price. The advisers, specialists in specific types of investments, use both fundamental and technical information to make the selection. They sell the investment once it made a specific profit, or the advisers believe that it is no longer a good purchase.

Dividends and Interest Make Money

Select a mutual fund that offers dividends and interest payments. Many invests give either dividends or interest. A dividend comes from the stock of a company that makes a profit. It shares the profit with the shareholders. Mutual funds that offer bonds or money market instruments collect the interest payment from the bonds or money market instruments.

Mutual Funds Have Fees and Expense Charges

Mutual Funds have a have some fee charged to the consumer designated by the share type. You need to find the fund that offers the best return on your dollar, regardless of internal fees.

 

 

Regulatory Framework for Mutual Funds in Pakistan

There are three regulatory documents governing mutual funds in Pakistan,

·         Investment Companies and Investment Advisors' Rules, 1971. (Govern closed-end mutual funds).

·         Asset Management Companies Rules, 1995. (Govern open-ended mutual funds).

·         NBFC Rules 2003 (For Establishments and Regulations).

Eligibility of the Registration for an Asset Management Company:

A company proposing to commence business as an asset management company shall be eligible for registration under these rules if,-

(a)    it is registered as a public limited company under the Companies Ordinance, 1984 (XLVII of 1984);

(b)   it has a paid up capital of not less than thirty million rupees;

(c)    no director, officer or employee of such company has been convicted of fraud or breach of trust;

(d)   no director, officer or employee of such company has been adjudicated as insolvent or has suspended payment or has compounded with his creditors; and

(e)   The promoters and directors of such company are, in the opinion of the Authority, persons of means and integrity and have special knowledge and experience of matters which the company may have to deal with as an asset management company.

Registration Process for Asset Management Company:

1.       A company eligible for registration may make an application in Form I to the Authority for registration under these rules.

o   Application processing fee of fifty thousand rupees in the form of bank draft payable to the Commission shall accompany the application.

2.       The Authority may, after satisfying itself that the applicant is eligible for registration and that it would be in the interest of the capital market so to do, grant a certificate of registration to such company in Form II.

How to introduce a Mutual Fund

Mutual Funds are operated by Asset Management Companies (AMC) which exists in the form of a corporation, owned by its shareholders. The AMC launches new funds through the establishment of a Trust Deed, entered between the Asset Management Company and the Trustee, which in most cases is the Central Depository Company of Pakistan Limited, with due approval from the SECP under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (the “Rules”). The CDC performs the functions of the custodian and trustee, whereas, the AMC can act as the registrar or can appoint an external registrar. Banking/ financial companies may be authorized to act as distributors/ sales agents. The Board of Directors must also approve and appoint a legal advisor and auditor for legal and compliance affairs (MUFAP).

Advantages and Disadvantages of Mutual Funds:

Advantages of Mutual Fund	Disadvantages of Mutual Fund
Advanced Portfolio Management You pay a management fee as part of your expense ratio, which is used to hire a professional portfolio manager who buys and sells stocks, bonds, etc. This is a relatively small price to pay for help in the management of an investment portfolio.	High Expense Ratios and Sales Charges If you're not paying attention to mutual fund expense ratios and sales charges, they can get out of hand. Be very cautious when investing in funds with expense ratios higher than 1.20%, as they will be considered on the higher cost end. There are several good fund companies out there that have no sales charges. Fees reduce overall investment returns.
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.	Management Abuses Turnover and window dressing may happen if your manager is abusing his or her authority. This includes unnecessary trading, excessive replacement and selling the losers prior to quarter-end to fix the books.
Risk Reduction (Safety) A reduced portfolio risk is achieved through the use of diversification, as most mutual funds will invest in anywhere from 50 to 200 different securities - depending on their focus. Several index stock mutual funds own 1,000 or more individual stock positions.	Tax Inefficiency Like it or not, investors do not have a choice when it comes to capital gain payouts in mutual funds. Due to the turnover, redemptions, gains and losses in security holdings throughout the year, investors typically receive distributions from the fund that are an uncontrollable tax event.
Convenience and Fair Pricing Mutual funds are common and easy to buy. They typically have low minimum investments (some around $2,500) and they are traded only once per day at the closing net asset value (NAV). This eliminates price fluctuation throughout the day and various arbitrage opportunities that day traders practice.	Poor Trade Execution If you place your mutual fund trade anytime before the cut-off time for same-day NAV, you'll receive the same closing price NAV for your buy or sell on the mutual fund. For investors looking for faster execution times, maybe because of short investment horizons, day trading, or timing the market, mutual funds provide a weak execution strategy.

CATEGORIES OF MUTUAL FUND

SECP, the Regulator has categorized the Schemes of mutual funds as under:-

Equity Scheme:

An equity scheme or equity fund is a fund that invests in Equities more commonly known as stocks. The Objective of an equity fund is long-term growth through capital appreciation, although dividends and capital gain realized are also sources of revenue.

·         Equity – 19, Islamic Equity – 6

Equity – 19, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD	MTD	Remarks
1	ABL Stock Fund	12.0728	17.79	1.31	Recommended for small investors
2	AKD Opportunity Fund	45.4886	28.97	1.33	Recommended due to payout ratio and growth
3	Alfalah GHP Alpha Fund	62.43	14.17	0.56
4	Askari Equity Fund	113.1799	13.52	1.03	Recommended due to good payout ratio
5	Atlas Stock Market Fund	418.472	20.96	1.15	Recommended for sustainable stock and return
6	Crosby Dragon Fund	92.08	16.34	2.08
7	First Habib Stock Fund	112.798	12.76	1.27
8	HBL Stock Fund	109.0226	15.90	1.13
9	IGI Stock Fund	125.4437	22.18	3.17
10	JS Large Cap Fund	71.12	18.06	1.43
11	Lakson Equity Fund	118.6491	17.44	0.90
12	MCB Dynamic Stock Fund	105.0492	22.02	0.90
13	NAFA Stock Fund	9.0444	23.74	0.82
14	National Investment Unit Trust	33.31	24.43	0.36
15	Pakistan Premier Fund	11.78	20.82	1.46
16	Pakistan Stock Market Fund	62.82	20.99	1.45
17	Pakistan Strategic Allocation	9.86	15.05	2.07
18	PICIC Stock Fund	117.2671	17.23	0.11
19	United Stock Advantage Fund	41.56	20.74	0.97

Islamic Equity – 6, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD	MTD	Remarks
1	Al Meezan Mutual Fund	12.64	18.24	0.64	Recommended due to good payout ratio and return
2	Atlas Islamic Stock Fund	384.5389	18.23	1.08	Recommended  for Big investors
3	HBL Islamic Stock Fund	124.258	15.45	1.20	Recommended
4	JS Islamic Fund	56.33	12.73	1.17
5	Meezan Islamic Fund	49	18.33	0.89	Good for Long term
6	UBL Shariah Stock Fund  (Formerly: United Composite Islamic Fund)	86.64	17.85	1.52

Balanced Scheme:

These funds provide investors with a single mutual fund that invests in both stocks and debt instruments and with this diversification aimed at providing investors a balance of growth through investment in stocks and of income from investments in debt instruments.

·         Balanced – 5, Islamic Balanced – 2

Balanced 05, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD	MTD	Remarks
1	Faysal Balanced Growth Fund	64.76	8.33	2.42	Recommended
2	HBL Multi Asset Fund	97.4918	14.93	1.84
3	NAFA Multi Asset Fund	11.5831	11.37	0.89
4	Pakistan Capital Market Fund	8.49	12.45	1.07
5	Unit Trust of Pakistan	118.89	16.07	0.95
Islamic Balanced 02, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD	MTD	Remarks
1	First Habib Islamic Balanced Fund	100.9081	0.91	0.45
2	NAFA Islamic Multi Asset Fund	11.5734	12.26	1.34

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 Fund – 11, Islamic Asset Allocation – 5

Asset Allocation 11, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD	MTD	Remarks
1	Alfalah GHP Value Fund	56.62	11.5	1.65
2	Askari Asset Allocation Fund	46.168	16.17	0.9
3	Faysal Asset Allocation Fund	68.52	3.9	-1.23
4	JS Aggressive Asset Allocation	12.16	9.06	-0.25
5	KASB Asset Allocation Fund	43.43	11.54	1.35
6	Lakson Asset Allocation Developed Markets Fund	106.0885	5.55	1.36
7	Lakson Asset Allocation Emerging Markets Fund	106.3865	5.97	1.82
8	Lakson Asset Allocation Global Commodities Fund	104.5459	4.24	0.11
9	MCB Dynamic Allocation Fund	78.7804	11.45	0.93
10	NAFA Asset Allocation Fund	11.386	10.17	0.38
11	Pak Oman Advantage Asset Allocation Fund (Formerly: Pak Oman Advantage Stock Fund)	56.83	13.5	0.62
Islamic Asset Allocation 05, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD	MTD	Remarks
1	Alfalah GHP Islamic Fund	60.24	11.78	0.99
2	Askari Islamic Asset Allocation Fund	114.8627	13.55	0.96
3	Dawood Islamic Fund	94.357	0.42	2.83
4	Pak Oman Islamic Asset Allocation Fund (Formerly: Pak Oman Advantage Islamic Fund)	56.33	7.15	0.86
5	Pakistan Int'l Element Islamic Asset Allocation Fund (Formerly: Pakistan Int'l Element Islamic Fund)	45.29	13.94	0.8

Fund of Fund Scheme:

Fund of Funds are those funds, which invest in other mutual funds.  These funds operate a diverse portfolio of equity, balanced, fixed income and money market funds (both open and closed ended).

·         Funds of Funds – 2,

Funds of Funds 02, Dec 19, 2012
S.No.	Fund Name	NAV	YTD	MTD	Remarks
1	JS Fund of Funds	91.26	9.23	1.13
2	UBL Principal Protected Fund I	117.94	17.47	0.67

Capital Protected Scheme:

In this type of scheme, the payment of original investment is guaranteed with any further capital gain which may accrue at the end of the contractual term of the Fund . Such funds are for a specific period.

·         Capital Protected – 2, Islamic Capital protected – 2

Capital Protected 02, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD	MTD	Remarks
1	ABL AMC Capital Protected Fund	10.749	7.16	0.25
2	IGI Capital Protected Fund	105.3898	4.65	0.12
Islamic Capital Protected 02, As of Dec 19, 2012
S.no	Fund Name	NAV	YTD	MTD	Remarks
1	Meezan Capital Protected Fund II	54.09	7.09	0.6

Index Tracker Scheme:

Index funds invest in securities to mirror a market index, such as the KSE 100. An index fund buys and sells securities in a manner that mirrors the composition of the selected index. The fund's performance tracks the underlying index's performance.

·         Index Tracker – 3, Islamic Index Tracker – 1

Index Tracker Fund 03, As of Dec 19, 2012
S.no	Fund Name	NAV	YTD	MTD	Remarks
1	AH Dow Jones SAFE Pakistan Titans 15 Index Fund	66.46	15.58	2.23
2	AKD Index Tracker Fund	10.5105	19.2	1.86
3	JS KSE 30 Index Fund	20.76	14.19	1.96
Islamic Index Tracker Fund 01, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD	MTD	Remarks
1	KSE Meezan Index Fund	58.98	20.79	1.51

Money Market Scheme:

Money Market Funds are among the safest and most stable of all the different types of mutual funds. These funds invest in short term debt instruments such as Treasury bills and bank deposits.

·         Money Market - 20, Islamic Money Market – 3

Money Market 20, As of Dec 19, 2012
S.No.	Fund Name	NAV	YTD	MTD	Remarks
1	ABL Cash Fund	10.0435	9.92	7.65
2	AKD Cash Fund	50.2232	10.17	8.58
3	Alfalah GHP Cash Fund	502.5	9.87	7.91
4	Askari Sovereign Cash Fund	101.0151	10.22	7.99
5	Atlas Money Market Fund	506.9158	9.86	7.98
6	BMA Empress Cash Fund	10.1757	9.97	8.21
7	Faysal Money Market Fund	102.68	9.6	8.21
8	First Habib Cash Fund	100.6289	9.85	7.95
9	HBL Money Market Fund	100.9342	10.13	8.18
10	IGI Money Market Fund	101.0457	10.22	8.58
11	JS Cash Fund	104.37	9.93	8.08
12	KASB Cash Fund	103.0226	9.73	8.29
13	Lakson Money Market Fund	100.568	9.52	7.72
14	MCB Cash Management Optimizer Fund	102.1646	10	8.09
15	NAFA Government Securities Liquid Fund	10.0909	9.27	7.55
16	NAFA Money Market Fund	10.0769	9.98	8.14
17	Pakistan Cash Management Fund	50.3444	9.62	8.02
18	PICIC Cash Fund	100.9297	9.84	7.95
19	Primus Cash Fund	101.9371	9.62	8.07
20	UBL Liquidity Plus Fund	100.9457	9.8	7.85
Islamic Money Market 20, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD	MTD	Remarks
1	HBL Islamic Money Market Fund	100.7047	9.31	8.98
2	Meezan Cash Fund	50.33	9.55	8.43
3	UBL Islamic Cash Fund	101.8541	7.36	6.97

Income Scheme:

These funds focus on providing investors with a steady stream of fixed income. They invest in short term and long term debt instruments like TFCs, government securities like T-bills/ PIBs, or preference shares.

·         Income – 26, Islamic Income – 11

Income, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD %	MTD %	Remarks
1	ABL Government Securities Fund	10.0439	13.36	8.03
2	ABL Income Fund	10.2406	12.02	9.50
3	Askari Sovereign Yield Enhancer	101.5556	13.29	11.60
4	Atlas Income Fund	516.175	11.38	8.03
5	Dawood Income Fund	70.6874	(3.33)	5.31
6	Faysal Savings Growth Fund	102.93	9.37	8.25
7	First Habib Income Fund	100.5426	9.38	7.82
8	HBL Income Fund	101.9147	7.67	10.31
9	IGI Income Fund	102.8396	9.65	9.06
10	JS Income Fund	89.3	12.26	9.51
11	Lakson Income Fund	100.9757	10.02	10.67
12	MCB Dynamic Cash Fund	103.8175	11.41	12.73
13	MetroBank Pakistan Sovereign Fund (12/12)	49.18	9.52	7.84
14	MetroBank Pakistan Sovereign Fund (Perpetual)	51.2	15.71	7.91
15	NAFA Financial Sector Income Fund	10.2961	9.52	7.40
16	NAFA Income Fund	9.2271	4.38	(22.55)
17	NAFA Income Opportunity Fund (Formerly: NAFA Cash Fund)	9.9158	5.58	42.78
18	NAFA Saving Plus Fund	10.0818	9.28	8.13
19	NAMCO Income Fund	102.5405	8.11	7.42
20	NIT − Government Bond Fund	10.4863	10.92	8.35
21	NIT − Income Fund	10.8343	11.22	13.00
22	Pak Oman Government Securities Fund	10.2691	11.28	9.23
23	Pakistan Income Fund	52.71	7.07	10.26
24	PICIC Income Fund	103.0011	10.52	8.24
25	UBL Government Securities Fund	101.4507	11.83	9.06
26	UBL Savings Income Fund	101.2381	10.73	8.68

Islamic Income, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD	MTD	Remarks
1	ABL Islamic Income Fund (Formerly: ABL Islamic Cash Fund)	10.2621	11.09	8.29
2	Askari Islamic Income Fund	100.9462	10.57	7.55
3	Atlas Islamic Income Fund	514.6106	10.50	7.72
4	Faysal Islamic Savings Growth Fund	103.13	9.81	6.92
5	IGI Islamic Income Fund	102.2193	8.83	7.18
6	MCB Islamic Income Fund	102.1112	11.05	8.35
7	Meezan Islamic Income Fund	53.67	15.90	26.86
8	Meezan Sovereign Fund	51.18	10.04	8.67
9	NAFA Riba Free Savings Fund	10.1235	9.23	8.56
10	Pak Oman Advantage Islamic Income Fund	52.5078	8.22	7.12
11	UBL Islamic Sovereign Fund (Formerly: UBL Islamic Savings Fund)	100.8744	9.63	8.96

Aggressive Fixed Income Scheme:

The aim of aggressive income fund is to generate a high return by investing in fixed income securities while taking exposure in medium to lower quality of assets also.

·         Aggressive Fixed Income – 10, Islamic Aggressive Fixed Income – 3

Aggressive Fixed Income 10, As of Dec 19, 2012
S.No.	Fund Name	NAV	YTD %	MTD %	Remarks
1	AKD Aggressive Income Fund (Formerly: AKD Income Fund)	48.0301	3.62	6.74
2	Alfalah GHP Income Multiplier Fund	48.8865	13.13	35.35
3	Askari High Yield Scheme	94.1529	(7.30)	19.87
4	BMA Chundrigar Road Saving Fund	8.0738	16.27	12.28	Recommended for Small Investors
5	Faysal Income & Growth Fund	106.74	10.76	13.59	Recommended for short term
6	IGI Aggressive Income Fund (Formerly:POBOP Advantage Plus)	43.4916	10.79	10.29
7	JS Aggressive Income Fund	104.58	13.53	(1.28)
8	KASB Income Opportunity Fund	71.7417	13.07	(8.34)
9	Pakistan Income Enhancement Fund	51.3	3.66	7.90
10	United Growth & Income Fund	78.1869	4.14	17.42

Islamic Aggressive Fixed Income 03, As of Dec 19, 2012
S.No	Fund Name	NAV	YTD	MTD	Remarks
1	KASB Islamic Income Opportunity Fund	103.477	10.37	6.97
2	NAFA Islamic Aggressive Income Fund (Formerly: NAFA Islamic Income Fund)	8.6933	2.42	12.03
3	United Islamic Income Fund	94.91	2.92	31.68

Pension Fund

Future Aspect:

Future of the mutual funds is very bright and promising and a mutual fund in Pakistan is a growing sector and gives you reasonable returns on your investment. Also, the features of the mutual funds are very attractive including the diversity and the liquidity as in today’s culture where market is so dynamic, investors don’t want to hold their investment for a longtime and mutual fund is good for those investors who wants to invest in the short run.

We need to create awareness in the general public through electronic media, print media. Also, we can do this thorugh seminar, workshops and conferences to engage the investors directly so that they can have a clear picture where they are going to invest their money. Once the public is aware of it then people will invest their idle deposit in the mutual funds as the return is so much promising. However, there are challenges facing the industry such as stiff competition among mutual funds, limited investment avenues and effective management of risk due to the recently increased volatility in the markets.

Recommendations

As Mutual Fund Industry in Pakistan is in growth stage so it is good to invest in the mutual fund industry at this point in time. You can diversify your investment in investing different categories depending on your investment objectives.

My Recommendation for those who want to earn high returns over a longer period can invest in Equity Funds whereas those who want to invest for short term with reasonable return can invest in Money Market Fund.

The Recommended Portfolio for different kind of investors:

MUTUAL FUND	Capital Appreciation	Balanced Growth	Capital Preservation	Remarks
Risk Level	H – M	M	M – L
Money Market	30 – 35 %	20 – 25%	10 – 15%	UBL Liquidity Plus, ABL Cash Fund
Aggressive Fixed Income	20 – 15%		25 – 30	Alfalah GHP, Faysal Income Growth, BMA Chundrigar, AKD Aggressive
Equity	10 – 15	20 – 25	30 – 35	ABL, AKD Opportunity Fund, NAFA Stock Fund, United Stock Advantage Fund, UBL Shariah Stock Fund, MCB Dynamic Stock Fund
Capital Protected	5 - 10%	15 – 20	25 – 30	Meezan Capital Protected Fund
Balanced	5 – 10%	10 – 15	20 – 25	Pakistan Capital Market Fund,
Asset Allocation	20 – 25%	15 – 20	5 – 10	MCB Dynamic Allocation
Pension Fund	-	5 – 10%	20 – 25 %	UBL Islamic Retirement Saving Fund

The Above Matrix Shows the portfolio Investment according to the risk level. According to my recommendation, If you are a small investor and very keen to earn money on your savings and you are thinking to invest in mutual fund then I would recommend you to start with the balanced Growth investment portfolio as you are new to the industry so in order to avoid any inconvenience, better start with the slow and steady investment. Once you get the pace then you can go for all in and earn more on investment as the rule is the same for all the investment i.e. the more the risk, More the Gain and vise versa.

I would also recommend you to create awareness amongst your friend, family and colleagues so that they have option to invest their saving for better future.

Reference

www.mufap.com.pk

Zulfiqar Azam, Senior Research Analyst, MUFA