Mutual funds became a dominant instrument of investments only after private sector entered this market. First mutual fund was designed in the public sector in 1962. It took the private firms 21 years to enter this market and 40 years to substantially expand their presence. From 2002 and 2008 the assets under management rose from only Rs25.34 billion to Rs335.23 billion as more and more private funds were launched on rising local and foreign investment in the stock market.
The size of assets under the industry’s management remains only a small portion of the total bank deposits and the number of investors or unit holders still at around 200,000. Huge liquidity, low interest rates and tax incentives made banks and institutional investors poured funds into the stock market and mutual funds.
Motivation to bank investments in mutual funds played a serious role in the expansion of this sector as many banks set up their own asset management firms while favorable economic conditions, dramatic rise in the stock market given some boost to mutual fund industry.
Mutual Funds Association of Pakistan (MUFAP) is currently managing funds to the tune of Rs500 billion, mostly invested in open-end schemes (Rs465.47billion). The rest of the funds are invested in voluntary pension schemes (Rs16.30 billion) and close-end schemes (Rs17.47 billion).
Shariah-compliant funds have given a big boost to the industry as the investment in this category of funds has grown to Rs124 billion. Industry sources expect the demand and appetite for Shariah-compliant funds to increase substantially over the next few years and overtake the conventional mutual funds.
Mutual funds act as a bridge between small investors. The investors neither have any knowledge of the stock markets nor time, and, sometimes, even not enough capital to invest. During the last few years, the local mutual fund industry has shown sizeable growth particularly in terms of assets as well as product offerings.
Investors have parked the biggest sum in open-end funds at Rs445 billion, followed by Rs19 billion in closed-end funds and Rs18 billion in pension funds.
Most of investors are of the opinion that the mutual fund industry is still is in its infancy stage as it holds up to just 20 percent of private sector bank deposits. The total sum in mutual funds at Rs482 billion forms just 6.4 percent of the aggregate market capitalization of the PSX at Rs7.59 trillion.
In comparison to India, the size of the Indian mutual fund industry stands at Rs13 trillion with every fourth household feeling safe entrusting their savings to the funds. In the US, 50 million people or one out of every three households invests in mutual funds.
Small investors at the local bourses who were ruined and disturbed in the stock market crashes of 2005 and 2008 are still reluctant put their trust and money in the hands of this industry. Due to price volatility, small investors with little means depend on professional competent managers of mutual fund Industry.
For accelerating the mutual fund industry in Pakistan will have to earn the unit holder’s trust by offering a guarantee of safety of their money, and better returns.
Whatever criticism may be of mutual fund industry is the number of investors in mutual funds is definitely on the rise.
Let us take the example of NIT which is the largest mutual fund in the country; with Rs91 billion under management and 17 percent of the market share. It has 55,000 investors on its roll. Taking into consideration aggregate 250,000 registered investors currently are playing in shares at the stock market, the number of NIT unit holders seems substantial.
Let us hope that total unit holders in all mutual funds combined surpass the individual investors at the stock market. The NIT-Islamic Income Fund is the third Shariah-compliant fund which has been added to the family of funds offered by the company.
According to experts of NIT-Islamic Fund it would be invested in a diversified portfolio of Shariah-compliant fixed income and money market investments.
Industry-wise, there are in all 208 mutual funds operating under 19 categories of which as many as nine constitute Islamic funds. Together they have a huge slice of Rs136 billion or about a third of the asset under management in open-end funds.
The conventional banks are either setting up separate subsidiaries of Islamic banking and are entering into mergers and amalgamations with already existing shariah complaint Islamic banks.
Pakistan’s mutual fund industry is also branching out into more of Islamic income funds that promise to provide ‘riba-free halal income’. They are truly assuring maximum possible preservation of their capital. The equity funds take the largest amount under investment by mutual funds, followed by income funds.
The total mutual funds in equity investments amounted to Rs167billion of which fund officials preferred to park the largest amounts in three sectors This includes 15 percent in oil marketing companies; 14 percent in cements and 13 percent in fertilizers.
Industry sources say numerous factors are responsible for slowing growth of mutual funds industry. There is very small base of investors as most savers tend to keep their money with banks or invest in the government saving schemes, low saving rate. Tax policies and anomalies are burdening both the asset management companies and investors, and over-regulation of the industry.
In an economy where middle class households have little to save and invest, professional in mutual fund also have to compete with government and large banks to attract investors, and to find a way of survival.
Half of the funds invested in mutual funds are generated from Karachi and the rest from the major cities of Punjab. According to MUFAP, individual investors held only a third of the assets under management (Rs431 billion) at the end of fiscal year 2015. The rest were held by institutional investors. Around 85 percent the funds invested in the mutual fund industry come from urban savers and investors and the rest from the rural areas.
The firms are increasing their penetration and presence in the rural areas as well to attract potential retail investors. They are using their affiliation with banks to take advantage of their vast network to reach out to potential small savers and investors outside the bigger cities.
The mutual fund industry has failed to develop the market and tap potential retail investors. It is primarily because of shortage of resources available with the asset management companies that work on thin margins of less than 1 percent and heavy taxation.