Legal Frameworks of Mutual funds

• Mutual funds are operated by AMCs

• Agreement between Trustee and AMC under supervision of SECP
under Non-Banking Finance Companies Rules, 2003
• The trustee ensures that the Fund Manager takes the investment
decisions within the defined investment policy of the mutual fund.
• Central Depository Company of Pakistan (CDC) is acting as Trustee of
most of the funds of the industry.
Following is the list of governing ordinance for mutual
fund establishment
• Non-Banking Finance Companies (Establishment &
Regulation) Rules, 2003 Non-Banking Finance Companies
& Notified Entities Regulations, 2008
• Part VIII of The Companies Ordinance, 1984
• Circulars and Directives issued by the SECP under the
provisions of the Ordinance.
• MUFAP (Mutual Funds Association of Pakistan) is a trade body of the
mutual funds industry in Pakistan.
• It is setup with a role to ensure transparency, high ethical conduct
and growth of the mutual funds industry.
• Represented by professionals working in various AMCs in Pakistan.
How Mutual funds Work?
• A separate Non banking company (AMC) under the
Companies ordinance 1984 is set up.
• The fund sponsor(AMC) raises money from the
investing public.
• It then invests the proceeds in securities like in Stocks,
bonds and money market instruments related to
fund’s investment objective.
Money from investments in a mutual fund
may be earned in three ways
Dividend / Interest income
A mutual fund may earn income in the form of dividend, interest or profit on the
assets held in its portfolio.
Capital Gains
The value of any asset or security held by a mutual fund may increase subsequent
to its investment or acquisition. When a fund sells an asset or security at a price
higher than its acquisition cost, the fund earns capital gain.
Increased net asset value
If the market value of a fund’s portfolio increases after deduction of expenses and
liabilities, then the value (NAV) of the fund increases. The higher NAV reflects the
higher value of your investment.
Types of Mutual Funds
Funds used in Pakistan are
• Money Market Fund:
Money market is that type of market in which short term debt
instruments of 1 or less than 1 year are traded like Treasury bills so
become the safe place to invest your money. You wont get enough
return but there is no risk of losing your principal money. The return is
little more than amount we put in savings account and little less than
the average CD.
Examples in Pakistan are UBL Money market fund, Al meezan Money
market fund.
• Income Funds
Income funds are type of mutual funds that seek to generate an
income stream for mutual fund holders by investing in securities that
offer dividends or interest payments. The funds can hold bonds,
preferred stock, common stock or even real estate investment trusts
(REIT).
Many income funds do not make regular distributions, instead they
make special payments when they see fit.
Examples in Pakistan are Pakistan Income Fund , Meezan Islamic
Income Fund etc.
• Bond Funds
A bond fund is a fund invested primarily in bonds and other debt
instruments. Bond funds are often actively managed and seek to buy
relatively undervalued bonds in order to sell them at a profit. For
example, a fund specializing in high-yield junk bonds is much more
risky than a fund that invests in government securities.
Example is UBL Income Opportunity Fund(UIOF). Formerly known as
UBL Financial Sector Bond Fund (UFBF).
• Balanced Funds
A balanced fund is another option for intermediate-term investors. Balanced
funds, which are often called hybrid funds, own both stocks and bonds. The
strategy of balanced funds is to invest in a portfolio of both fixed income and
equities. A typical balanced fund will have a weighting of 60% equity and
40% fixed income. The weighting might also be restricted to a specified
maximum or minimum for each asset class, so that if stock values increase
much more than bonds, the portfolio manager will automatically rebalance
the portfolio back to 60/40.
Examples are Meezan Balanced fund, UBL Balanced fund, NBP Balanced
Fund
• Equity Funds
An equity fund is a mutual fund that invests principally in stocks. Equity
funds are also known as stock funds. Stock mutual funds are principally
categorized according to company size, the investment style of the
holdings in the portfolio and geography. There are, however, many
different types of equity funds because there are many different types
of equities.
Examples are Al-meezan equity funds, UBL Equity Fund, MCB Equity
fund
• International Funds
A type of mutual fund that can invest in companies located anywhere
in the world. These funds provide more international opportunities for
diversification and act as a hedge against inflation and currency risks.
• They can, as part of a well-balanced portfolio, actually reduce risk by
increasing diversification since the returns in foreign countries may be
uncorrelated with returns at home.
• Examples are UBL Funds International