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Emerging prospects of investment amid declining interest rates scenario

Basic mind set of any type of investor is to manage the risk and maximize the returns. The common phenomenon in managing the risk is diversification or, in other words, not putting all the eggs in one basket. The diversification requires choosing which baskets to put your eggs in; and most importantly how much? This gap of lack of knowledge and expertise to invest in the financial markets lead the experts to come up with solutions for investment and minimizing the risk through efficient management of large portfolios consisting of debt and equity instruments.

The investors are primarily concerned with the management of their assets and it proves to be a tough task because it requires a careful selection of such securities, which should turn out to be an optimal combination. Fear of loss generally dominates the joy of gain. This fear is even larger for those who do not possess enough expertise in the management of assets. An individual finds it difficult to have someone who may look into his affairs efficiently.

The investment portfolio usually consists of listed shares, corporate debt bonds (TFCs), money market instruments and National Savings Schemes. A portfolio can have the possibility of reducing the risk through diversification. The phenomenon is quite simple; normally all the small saving holders put their money in one large kitty with a sizeable worth that can afford to invest in riskier and non-riskier financial market products managing a moderate return or even higher returns from the market returns. Instead putting all eggs with a small saving in one basket and exposing to high risk of breaking all the eggs, it is good alternatively putting the investment at very low risk and low returns by investing in the low risk securities.

A vibrant and robust capital market has a pivotal role in the economic growth and development of a country. There is strong evidence that economies with large stock market capitalization to GDP ratio fare much better as compared to economies having low investment to GDP ratio. A prerequisite to the growth of investments is the level of domestic savings and access to supply of tradable stocks and bonds.

Pakistan has a robust capital market infrastructure and adequate regulatory framework. Pakistan Stock Exchange is still amongst the best performing stock exchanges in the world. However, the capital market capitalization and investment ratios are low. For growth of the capital markets, Pakistan needs to promote domestic savings; foreign investors can only supplement the growth.

The effects of easing of monetary policy are being reflected in the economy and capital/bond markets are no exception. As the interest rates started to decline, money market instruments became less and less attractive for the investors. The outflow from money market funds has been large enough to more than offset the inflows observed in the rest of the funds categories. Consequently, the sector has observed overall increase in net redemptions. In light of the prevailing low interest rate scenario, investor interest is expected to move further towards high yielding equity funds. Some volatility may persist in the equity market in the near term but equities are expected to perform better relative to money market over the medium term. Investors with relevant risk profiles and investment horizons may profit from investing in the equity funds category while yield on debt instruments are expected to remain subdued due to soft inflation outlook.

 

A few decades ago, worldwide, buyers and sellers were mostly individual investors, such as wealthy businessmen, usually with long family histories to particular corporations. Over time, markets have become more ‘institutionalized’; buyers and sellers are largely institutions (e.g. pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banks and various other financial institutions). The rise of the institutional investor has brought with it some improvements in market operations. There has been a gradual tendency for ‘fixed’ (and exorbitant) fees being reduced for all investors, partly from falling administration costs but also assisted by large institutions challenging brokers’ oligopolistic approach to setting standardized fees.

INVESTMENT IN MUTUAL FUNDS

The mutual fund is a pool of resources filled with various small investors, and managed by professionals who try to use it in the most effective manner to get the highest possible results out of it by selecting the most suitable investments carefully. Mutual funds continue to remain an important alternate avenue for investments due to their comprehensive suite of products with multiple investments classes like equity, money market and income funds. However, despite rising share of retail investors in funds market, their share is still low by international standards where retail participation is, generally, to the tune of 80 percent. Mutual funds are, therefore, a long way away from establishing themselves as a worthwhile alternate savings avenue in Pakistan as is the case internationally. Developments in the regulatory and operating environment indicate a strong potential for the mutual funds sector to continue its growth momentum albeit the challenges faced by the sector need to be addressed expeditiously.

REAL ESTATE INVESTMENT TRUST (REIT)

Real Estate Investment Trust (REITs) invests in a pool of properties/mortgages bundled together and offered as a security in the form of unit investment trusts. These units can then be traded on stock markets. Each unit in a REIT represents a proportionate fraction of ownership in each of the underlying properties/mortgages providing its holders a simple way to invest in real estate without the cost or illiquidity associated with owning a property directly. There are two main types of REITs: equity REITs and mortgage REITs (mREITs). Equity REITs invest in real estate by acquiring properties and developing or renting them. Mortgage REITs invest in the debt required to finance real estate, including mortgage loans and Mortgage Backed Securities (MBS).

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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