Mutual Funds in Pakistan

Mutual funds in Pakistan are a profitable investment option, but many people believe that it is not an easy mode of investment for an ordinary person. I will guide you in a very simple and effective way to diversify your portfolio and show you how it will secure your finances in the future. 

Mutual funds are the vehicle for pooling together the savings of multiple investors to invest in securities like stocks, shares, and bonds. Mutual Funds are managed by government licensed Asset Management Companies. The Security and Exchange Commission of Pakistan (SECP) licensed the asset management companies in Pakistan.

Mutual funds offer different ways for the shareholder to invest in stocks for portfolio diversification, which helps to minimize the risk exposure for the individual investor. These funds are managed by highly professional managers on behalf of investors to get the maximum return on investment (ROI).

By structure, the mutual funds can be divided into two types.

a) Open-End Funds

Open fund funds are a more flexible type of fund. They can buy and sell throughout the year at the current Net Asset Value (NAV). The open-end has market risk due to high liquidity ratios and changes in the price of shares or stocks on a daily basis. Open-end funds are also called trusts.

b) Closed End Funds

Closed-end funds are a fixed number of shares or certificates that are not available for buying and selling throughout the years. The shares are issued through Initial Public offerings (IPO). The subscription of these funds is issued at a specific period. Once these are issued, the shares can trade on the stock market, i.e. Pakistan Stock Exchange (PSX).

These categories of mutual funds are according to the investment objectives.

(1) Income Funds

Income funds based on current income on either a monthly or quarterly basis and suitable for are investors looking for low risk and steady returns on investment. They aim to generate income by investing in bonds or fixed income securities. Mutual funds require 25% of the net assets of cash to meet the liquidity requirement.

(2) Shariah Compliant Funds

Shariat complaints or Islamic Funds invest in instruments that totally comply with Shariah or Islamic laws. Islamic Funds avoid investing in businesses that are considered prohibited or Haram in Islam and are against the Islamic values. These funds are free from Riba.

(3) Equity Funds

 Equity funds primarily invest 70% in stocks or equities. They are high-risk and volatile funds depending upon the market conditions. The return on investment is high but still different risks are involved in equity funds. The remaining 30% of assets are invested in bank deposits or T-bills. Equity funds aim to focus on long term growth through capital gains.

(4) Balanced Funds 

Balanced Funds mainly invest in bonds, stocks and Fixed Income securities. They are medium risk funds and provide a balance between growth and returns. They provide a high degree of investment diversification for the investors.

(5) Index Tracker Fund

Index tracker funds often track the performance of a famous index of the stock market to give the investor insight about the performance of the stock. It is a low risk and highly volatile fund. The index fund manager usually buys all the stocks or bonds in the index he tracks. If one stock in the index does not perform well, the other can perform better. The chance of Return on Investment (ROI) is high.

(6) Asset Allocation Funds

Asset Allocation Fund lets the investor own a variety of equity and fixed income securities. These are high-risk and less volatile funds. It provides the investor with a well diversified portfolio along with income and growth potential.

(7) Growth Funds

Growth funds are high risk funds with high returns on investment. These funds suit investors who are aiming for long-term investment and have healthy risk tolerance. These funds invest in stocks or companies having a high revenue or growth rate to gain capital appreciation.

(8) Funds of Funds

Funds are the type of mutual fund that invests in other mutual funds rather than invest directly investing in stocks, bonds or securities. They are also called multi-management funds. They are highly diversified portfolios, giving the investors indirect exposure to portfolios of assets. FoFs are low funds as the investment is spread across multiple funds.

(9) Money Market Funds

Money market funds are low-risk-short term investment funds like government bonds, treasury bills, bank deposits, commercial paper etc. Money Market Funds are less volatile and have a high liquidity ratio and are considered to be the safe type of investment in Pakistan.

There are some important key points that you have to keep in mind before starting investment in any Mutual Funds in Pakistan.

• The best mutual fund is the one that shows great performance and ratings in the market consistently in previous years.
• Before investing in any mutual funds, keep in mind the purpose and financial goal that you want to achieve after investment in mutual funds.    
• Analyze the long, medium and short term risks involved in mutual fund investment. .
• The management quality of the mutual fund should be high, and we must have professional and qualified staff. 
• If you think you need money within two years, then a mutual fund is not the best option for your investment.
• If you do not have a risk tolerance ability, you try to avoid investment in mutual funds.
• You must do detailed research before investing in any Asset Management Companies and find out which Mutual Fund Companies are performing highly on the basis of Net Asset Value (NAV).

If you want to invest in mutual funds in Pakistan, the first step is to open an account with an established and reputable mutual fund company, having more than 25 years of experience in management.

Diversification

Mutual Funds provide diversification of portfolios by providing multiple investment opportunities in bonds, stocks and cash. The multiple investments help to lower the risk factors for the investors.

Low Cost

Mutual Funds companies charge a minimum cost called expense ratio to provide the investors with professional management services. In mutual funds, many small investors can participate in purchasing diversified portfolio assets or securities. It leads to a lower cost of fee for each investor, as equality among all investors, which leads to long-term investment returns.

Professional Management

Investors may not have professional expertise, time and knowledge to purchase stocks, bonds and securities. Mutual funds are managed by a team of highly qualified and full-time professional managers who have great experience in trading and investing. These professionals monitor the investment on a daily basis to provide benefits to the investors of mutual funds at this cost. This helps investors to diversify their portfolio without any hesitation.

Affordability

Most mutual funds set a low initial amount of investment. Investors having low savings can easily invest in mutual funds. You can open a mutual funds account with an investment of Rs.1000 to Rs.5000.

Highly Regulated

The Security and Exchange Commission (SECP) is the primary monetary and regulated body in Pakistan that publishes reports of the Asset Management Companies (AMC) on its website on a regular basis to encourage investors’ investment in mutual funds. The SECP also audits the asset management companies on an annual basis to protect the interests of the investors in the capital market.

Tax Benefits

Mutual funds provide investors with the opportunity to get credit for tax benefits under the Income Tax Ordinance, 2001. It helps investors to enhance the returns on investments. The tax credit may be different for salaried, non-salaried or pension fund holders.

Liquidity

Mutual Funds possess a high liquidity value and can be converted into cash at the current net asset value (NAV) within the six days of average time. The mutual funds redeem at current market value.

Transparency

      Mutual agencies provide transparency to build trust among investors. Investors can easily monitor the performance of mutual funds. Mutual fund companies are bound to publish their financial reports at regular intervals to inform the investors about their objectives and net value of assets. The publications and reports not only provide transparency but also help investors to make informed decisions about purchasing shares.

There are some risks involved in all types of investment. There are some factors affecting a mutual fund’s investment market, like currency devaluation, market liquidity, reducing the share or stock price, time period, government monetary policy, the economic and political situation in the country etc.

Market Risk

The price of stock funds depends upon the different factors affecting the capital market in the country. If the stock market declines, the value of the mutual funds also decreases in the market. These changes in the prices involve market risk.

Credit Risk

The credit risk depends upon the stability of the company or bonds in which you invested your income. The credit risk arises when the issuer of the mutual funds or securities fails to pay interest on time or defaults at the time of maturity of the funds. Government securities are less risky than corporate bonds.

Liquidity Risk

Liquidity of bonds and securities depends upon the market condition at the time of converting them into cash without incurring any loss. Some mutual funds carry the risk of not being bought or sold in the market at the time when asset management companies want to liquidate. Therefore, mutual bond companies have to sell these securities or bonds below the fair market value, to secure the company’s portfolio.

Interest Rate Risk

In the interest rate risk, the value of an investment and the interest rate have a reciprocal effect on each other. When the interest rate increases during the time of investment, the price of securities drops and the interest rate decreases, the price of securities increases.

Inflation Risk

Inflation risk arises when the purchasing power of investors decreases due to high inflation in the country’s financial market.  During inflation, the prices of consumer goods rise and in return, investment capacity in mutual funds decreases.

Taxation Risk

The change in the government tax policy affects the investment in mutual funds. The investor must acknowledge the tax risk levied on their income before investment in mutual funds.

Manager Risk

The performance of the mutual funds depends upon the knowledge, experience and expertise of the manager. If the manager lacks decision-making and uses poor investment skills and techniques, it leads to loss of financial capital and the under performance of the mutual funds.

Currency Risk

Some mutual funds may invest the assets in foreign currencies. The change in the exchange rate of foreign currency can impact the return on investment of local investors when trading in foreign currency.

In Pakistan, mutual fund companies provide a wide range of investment opportunities in financially-led Pakistan. Before investing in any mutual fund, keep in mind your financial goals, the associated risks, and the nature of the mutual fund. Additionally, track the previous performance of the particular mutual funds in which you are going to invest. Always choose the funds that are led by professional financial advisors.

 If you are looking for long term investment and high returns, you have to invest in equity funds. In contrast, if you are seeking to invest in the short term and at lower risk, then you have to invest in income or money market mutual funds.

The main key is to find the balance between the level of the risk you are willing to handle and the potential return on investment( ROI) you want to achieve.