Mutual funds

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Mutual funds
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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 AMCs 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 Pakistans 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
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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 markets 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).
MUFAPs 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.

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Types of mutual funds
Growth of mutual funds in Pakistan

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
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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 cant 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


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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.
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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 dont exactly invest in mutual funds, rather they invest in stocks directly, therefore I dont
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 funds 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.

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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 funds 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.


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MUTUAL FUND COMPANIES IN PAKISTAN
Some of the mutual fund companys 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 Pakistans 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
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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