working mutual fund in Pakistan

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Mutual funds[Type text]

Definition

A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund as a company that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

Money earn from a mutual fund in three ways:

1) Income is earned from dividends on stocks and interest on bonds.

2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.

3) 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.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the earnings and get more shares.

History of mutual funds in Pakistan

Mutual funds in Pakistan are registered and legally established in the form of a Trust, under the Trust Act of 1882. The mutual fund industry is regulated by, the Securities and Exchange Commission of Pakistan (SECP) which licenses each Asset Management Company in strict compliance with the NBFC Rules, 2003 and requires all AMC’s to obtain an independent rating.

Mutual funds introduce in Pakistan in 1962, with the public offering of National Investment T rust followed by the establishment of the Investment Corporation of Pakistan (ICP) in 1966.

MUTUAL FUND AND PAKISTAN

MUFAP (MUTUAL FUND ASSOCIATION OF PAKISTAN)

Mutual Funds Association of Pakistan (MUFAP) is the trade body for Pakistan’s multi billion rupees asset management industry. The money our members manage is in a wide variety of investment vehicles including stocks, bonds, money market instruments, government securities and bank deposits. Our role is to ensure transparency, high ethical conduct and growth of the mutual fund industry. MUFAP was formed in 1996 by Mr. Zaigham Mahmood Rizvi, ex-Chairman and founder member, and was formally licensed in 2001 as a public limited company (by guarantee) under Section 42 of the Companies Ordinance, 1984 by Ministry of Commerce (MOC) and is thus a quasi legal entity. After the


establishment of MUFAP in 1996, private and foreign firms were allowed to float open-ended funds for the general public. This time also saw the stock market’s performance scale new heights as a result of positive government policies and incentives, registering a growth of more than 15 times in the net assets of the mutual funds between 2000-2008. Mutual Funds were initially overseen by the Corporate Law Authority (“CLA”) under its Securities Wing. The CLA, then a division of the Ministry of Finance, was gradually transformed and made independent as the Securities and Exchange Commission of Pakistan (“SECP”) as part of the Capital Market Development Program (CMDP) initiative of the Asian Development Bank undertaken for Pakistan. The CMDP envisaged formation of four types of Self-Regulated Organizations (“SROs”) to function under the SECP:

• Stock Exchanges recognized as separate SROs;

• Mutual Funds Association of Pakistan (MUFAP);

• Leasing Association of Pakistan (LAP); and

• Modarbah Association of Pakistan (MAP).

MUFAP’s role is to establish the essential codes and standards within the industry to ensure the trust and confidence of investors and build the industry as a whole.

TAXATION ON MUTUAL FUNDS

The income of mutual funds is exempt from Income Tax, if not less than 90% of the income of the year, as reduced by capital gains is distributed amongst the unit holders as dividend or bonus units.

TAXATION ON UNIT HOLDERS

Holders of mutual funds are subject to Income Tax on dividend income received from a mutual fund (excluding the amount of dividend paid out of capital gains on listed securities) as under:

Public Company and Insurance Company 5%.If received by any other person, including a non-resident 10%.

Capital gain on disposition of units in a mutual fund is exempted from tax till such time that capital gain on sale of securities listed on the stock exchanges is exempt from such tax.

TAX CREDIT

As funds are listed at the stock exchanges, unit holders of the mutual funds, other than a company, are entitled to a tax credit under section 62 of the Income Tax Ordinance, 2001 on purchase of new units. The amount on which tax credit is allowed is the lower of (a) amount invested in purchase of new units, (b) fifteen percent of the taxable income of the unit holder, or (c ) Rupees Five Hundred Thousand (PKR. 500,000), and is calculated by applying the average rate of tax of the unit holder for the tax year.


Open-end fund Close-end fund

Issues redeemable units

Not necessarily listed

Does not conduct general meetings of unit holders

No voting rights of unit holders

May issue as many units and redeem them at NAV

Each time, units are directly acquired from or sold to the company through their authorized offices

License of investment advisory is required

Units are traded at NAV

Issues irredeemable shares Listed Conducts AGMs Bestow voting rights to shareholders Has fixed pool of money and does not

continuously offer shares, however may increase its capital under the Companies Ordinance

Shares are acquired from the company on initial public offer and from existing shareholders afterwards

License of asset management services is required

Shares are trades at market price rather NAV reported by the fund manager

Types of mutual funds

Growth of mutual funds in Pakistan

RULES GOVERN MUTUAL FUNDS IN PAKISTAN


There are two rules govern mutual funds in Pakistan, which are:

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

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

Difference between conventional investments in banks from investments in mutual fund

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-End Fund holders is that they can redeem their funds anytime they want too 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.

Encourage general public to invest in mutual funds

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 compared to the other types of conventional investments such as bank deposits they would undoubtedly invest in mutual funds.

Impact of volatile stock market on Fund Managers

Fund managers backed by strong research and risk management function uses 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

Portfolio management

Portfolio management is the art and science of making decisions about investment (asset) mix and


policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk vs. performance. Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and numerous other tradeoffs encountered in the attempt to maximize return at a given appetite for risk.

Size of Mutual Funds Sector in terms of investments in rupees and number of funds

Mutual Funds As of September – 06 (source MUFAP):

Steps are taken by MUFAP to protect interests of its members

MUFAP has developed 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 aimed at promoting a self regulatory structure within the Mutual Fund Industry of Pakistan, which in turn, will ensure clarity, honesty & integrity in all matters of advertising, marketing and promotions.

MUFAP has also adopted the CFA Institute Asset Manager Code of Professional Conduct. This Code sets forth minimum ethical and professional standards for providing asset 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.MUFAP is striving to achieve inter alia the following:

To promote a well trained Agents and distributors and to implement a program of training and certification for all intermediaries and other engaged in the industry.

To promote best practices in the mutual fund industry.

To interact with the Government, Securities and Exchange Commission of Pakistan (SECP), State Bank of Pakistan and other bodies on all matters relating to the Mutual Fund industry.

Impact of global funds sector on the Pakistani industry.


Not much impact of global funds sector on the Pakistani industry because international funds who come to Pakistan don’t exactly invest in mutual funds, rather they invest in stocks directly, therefore I don’t see any direct link between the two, however Pakistani mutual fund industry cannot remain isolated from developments taking place internationally and is adapting the international trends and best practices.

Current issues of funds management

Inadequate regulatory framework to cater for new products and growing needs of investors.

Limited investment options.

Lack of awareness among the general public.

Future of mutual fund sector in next ten years?

The future outlook of the mutual funds industry is very promising and encouraging. 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. In the recent years, SECP has also taken 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 to protect investors’ interest. Comprehensive disclosure requirements at the time of public offering and subsequent reporting on the affairs of funds have been prescribed and enforced. In addition, managers have been given flexibility to establish their trusts or companies as well as to float equity, debt or hybrid funds. The steps taken by the Securities and Exchange Commission of Pakistan (SECP) to promote equity markets in general and mutual funds industry in particular are in line with overall macro-economic policies of the government and will help boost investment in mutual fund sector in years ahead.

Mutual funds have bright future ahead 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.

Role of government to promote mutual fund’s sector

Mutual Funds Association of Pakistan is playing a pioneering role in the promotion of mutual fund sector in Pakistan by acting as a facilitator between the market participants and the regulators. It disseminates essential information on various funds, the fund managers, the stock market as well as the regulatory environment under which open and closed-end.

MUFAP is also striving to achieve the following:

· 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


· To provide a centre of excellence for the development of knowledge and understanding of the Mutual Fund industry

· To promote public understanding of mutual funds and engage in promotional activities to ensure ongoing education of the public on Mutual Fund related issues.

Approaches to Portfolio Management (Fund Management Style)

Mutual funds can be broadly classified into two categories in terms of the fund management style i.e. actively managed funds and passively managed funds (popularly referred to as index funds).

ACTIVELY MANAGED FUNDS

Actively managed funds are the ones wherein the fund manager uses his skills and expertise to select invest-worthy stocks from across sectors and market segments. The sole intention of actively managed funds is to identify various investment opportunities in the market in order to clock superior returns, and in the process outperform the designated benchmark index. In active fund management two basic fund management styles that are prevalent are-

Growth Investment Style This investment style would make the fund’s manager pick and choose those shares for investment whose earnings are expected to increase at the rates that exceed the normal market levels. They tend to reinvest their earnings and generally have high P/E ratios and low Dividend Yield ratio.

Value Investment Style funds manager looks to buy shares of those companies which he believes are currently undervalued in the market, but whose worth he estimates will be recognized in the market valuation eventually.

PASSIVELY MANAGED FUNDS

On the contrary, passively managed funds/index funds are aligned to a particular benchmark index like KSE 100 index KSE 30 index. The endeavor of these funds is to mirror the performance of the designated benchmark index, by investing only in the stocks of the index with the corresponding allocation or weight age.

MUTUAL FUND COMPANIES IN PAKISTAN

Some of the mutual fund company’s details are given below:

NATIONAL INVESTMENT TRUST LIMITED


The National Investment Trust Limited (NITL) is the first Asset Management Company of Pakistan, formed in 1962, had Funds under management of Rs. 81.301 billion, with approximately 59,619 unit holders as on June 30,2011. NIT's distribution network comprises of 22 branches, various Authorized bank branches all over Pakistan and Arab Emirates Investment Bank (AEIB) in Dubai (UAE).

PRODUCTS & INVESTMENT STRATEGY

The National Investment Unit Trust (NIUT) is the Pakistan’s largest and oldest Mutual Fund. As on June 30, 2011, NIUT had funds under management of around Rs. 40.464 billion invested in over 440 listed companies and had approximately 56,195 unit holders. NITL's distribution network comprises of 22 NIT branches, various Authorized bank branches all over Pakistan and Arab Emirates Investment Bank (AEIB) in Dubai (UAE). The Trust constituted under the Trust Deed dated 12th November 1962, executed between National Investment Trust Ltd (NITL) as Management Company and National Bank of Pakistan as Trustee.

MEEZAN BALANCED FUND

Meezan Balanced Fund is the first Shariah compliant balanced fund in Pakistan. MBF is a closed-end balanced fund constituted under Non-Banking Finance Companies (Establishment Regulation) Rules, 2003. It was launched on December 20, 2004 with the objective to provide stable income stream along with equity upside.

The investment objective of MBF is to generate long term capital appreciation as well as current income by creating a balanced portfolio that is invested both in high quality equity securities and MBF invests 40-60% of the funds in stocks which provides capital appreciation.

Asset management companies in Pakistan

• NATIONAL INVESTMENT TRUST

• NBP FULLERTON ASSET MANAGEMENT LIMITED

• ABAMCO LIMITED

• AKD INVESTMENT MANAGEMENT LTD.

• AL FALAH GHP INVESTMENT MANAGEMENT

• AL-MEEZAN INVESTMENT MANAGEMENT LIMITED

• AMZ ASSET MANAGEMENT LTD.

• ARIF HABIB INVESTMENT MANAGEMENT LTD.

• ASIAN CAPITAL MANAGEMENT (PVT.) LTD


• ASKARI ASSET MANAGEMENT LTD.

• ATLAS ASSET MANAGEMENT LTD.

• BMA ASSET MANAGEMENT LTD.

• HABIB ASSETS MANAGEMENT LTD.

• HBL ASSET MANAGEMENT LTD

• KASB FUND LIMITED

• NATIONAL ASSET MANAGEMENT COMPANY LIMITED

• NATIONAL FULLERTON ASSET MANAGEMENT LIMITED – NAFA

• NATIONAL IINVESTMENT TRUST LTD.

• NBP CAPITAL LIMITED

• NOMAN ABID INVESTMENT MANAGEMENT LIMITED

• SAFEWAY MANAGEMENT LTD.

• UBL FUND MANAGERS LTD.

• WE INVESTMENT MANAGEMENT LIMITED

• DAWOOD CAPITAL MANAGEMENT LTD.

• FAYSAL ASSET MANAGEMENT LIMITED

• FIRST CAPITAL INVESTMENTS LTD


working mutual fund in Pakistan

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