MUTUAL FUNDS
GROWING SECTOR OF FINANCIAL MARKET

MFs are considered a good route to invest and earn returns with reasonable safety

By KHURRAM AMANULLAH*
Mar 01 - 07, 2004

In Pakistan, an average investor may not be well versed of the capital market. Either he does not have access to adequate information to invest successfully or simply may not have the time to acquire information and analyse it. The concept of Mutual Funds has emerged, which allow the investors to benefit from the collective efforts of their professional expertise.

A Mutual Fund (MF) is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The MF has a fund manager who is responsible for investing the pooled money into specific securities usually stocks or fixed income bonds/securities. When one invests in a MF, he/she buys shares or units of the MF and become a shareholder/unitholder of the fund. MFs are one of the best investments ever created because as these are cost efficient and easy to invest in, where one does not have to explore which stocks or bonds to buy. MFs are considered a good route to invest and earn returns with reasonable safety.

Small as well as big investors have both invested in instruments that have suited their needs and benefited in terms of reduced risk and higher returns arising from professional expertise of fund managers employed by such investment vehicle. This has been the original appeal of MFs that offer a path to stock market far simpler and safer than the traditional call a broker and buy securities route. Therefore, the MFs may be called an ideal vehicle for investment by retail investors in the stock market for many reasons. By pooling money together in a MF, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it at their own. The biggest advantage of MFs is diversification. It pools the investments of small investors together, increasing thereby the participation in the stock market. Secondly, MFs can diversify the portfolio in a better way as compared to individual investors due to the expertise and availability of funds.

STRUCTURE OF MUTUAL FUNDS

A typical MF in Pakistan has a number of constituents.

FUND SPONSOR: A sponsor is any person who, acting alone or in combination with another corporate body, establishes a MF. It obtains the certificate of registration as a MF from Securities and Exchange Commission of Pakistan (SECP). The sponsor of a fund is similar to the promoter of a company. In accordance with SECP Regulations, the sponsor appoints a Trustee, and also generally appoints an Asset Management Company (AMC) as fund manager.

MUTUAL FUND: A MF is constituted in the form of a trust under Trusts Act, 1882. The instrument of trust i.e. Trust Deed is made between the AMC and Trustee and is registered under the NBFC Rules, 2003. The fund invites investors to contribute their money in the common pool, by subscribing to units issued by various schemes established by the trust. The trustee for the benefit of unit holders, who are the beneficiaries of the trust, holds the assets of the Trust. Under the Trusts Act, the trust or the fund has no independent legal capacity; it is the trustee(s) who have the legal capacity.

TRUSTEES: The trustee as per NBFC Rules means, a company appointed as a Trustee and includes a bank licensed under the Banking Companies Ordinance, 1962 or a trust company which is a subsidiary of such a bank or a banking institution incorporated outside Pakistan acceptable to the SECP or a Central Depository Company approved by the SECP or a NBFC carrying out investment finance services, provided it has been approved by SECP to act as trustee. The trustees being the primary guardians of the unit holders' funds and assets have to be persons of high repute and integrity. The Trustees, however, do not directly manage the portfolio of securities. The portfolio is managed by the AMC as per the defined objectives, in accordance with the trust deed and NBFC Regulations. Central Depository Company of Pakistan Limited is playing a major role in the Mutual Fund sector by providing trusteeship services to majority of mutual funds in Pakistan.

ASSET MANAGEMENT COMPANY: The Asset management Company (AMC), which is appointed by the sponsor or the Trustees and approved by SECP, acts as the investment manager of the Trust. As per the NBFC Rules, AMC provides services for management of open-ended schemes which include offering of investment schemes under trust deeds and issue of redeemable securities. It functions under the supervision of its Board of Directors, and also under the direction of the Trustees and SECP. In Pakistan, the major AMCs are NIT Management Company, ABAMCO and Arif Habib Invetment Management Company.

INVESTMENT ADVISOR: Investment advisor provides services for management of closed-end funds, which include the business of advising as to the value of securities for investing in, and purchasing or selling of securities for remunerations. Major investment advisors in Pakistan are ABAMCO, and PICIC.

TYPES OF FUNDS

There are many types of MFs / schemes of funds available to investors. Broadly, they can be classified as open-ended schemes or closed-ended funds.

OPEN-ENDED SCHEMES: An open-ended scheme (also called open-end fund) gives the investors an option to redeem and buy units at any time from the fund. They can conveniently buy and sell units at Net Assets Value (NAV) related prices, which are declared on a predetermined basis. This can be on daily, weekly and monthly basis. Some of the open-ended schemes that are major market players are NIT and UTP.

CLOSED-END FUNDS: Closed-end funds include Investment Company or a closed-end scheme. An Investment Company is an entity registered with the SECP to engage in buying and selling securities of other companies, but does not include a bank, an insurance company and a corporate member of a stock exchange.

Closed-end scheme as per NBFC Rules means, a scheme constituted by way of trust to raise funds through issue of certificates to the public for investing in securities including money market instruments for a definite or indefinite period that does not continuously offer certificates which entitle the holder of such certificates, to receive, on demand, his proportionate share from the net assets of the closed-end scheme. It is mandatory for closed-ended funds to get themselves listed on a stock exchange.

Though it is in initial stage, the concept of investing through mutual funds is growing rapidly; small as well as big investors prefer to invest in funds rather than investing directly in the capital market.

CLOSED-END MUTUAL FUNDS AS ON JANUARY 30, 2004

FUND

PAID UP CAPITAL

QUOTED RATE
(RS IN MILLION)

Al-Meezan Mutual Fund

775.00

14.45

Asian Stocks Fund

100.00

5.50

BSJS Balanced Fund

1,054.00

12.95

Dominion Stock Fund

50.00

2.95

First Capital Mutual Fund

150.00

7.00

Golden Arrow

100.50

11.00

Investec Mutual Fund

100.00

3.05

1st ICP Mutual Fund

125.00

14.50

2nd ICP Mutual Fund

57.50

16.50

3rd ICP Mutual Fund

122.50

16.50

4th ICP Mutual Fund

122.50

36.50

5th ICP Mutual Fund

57.50

16.65

6th ICP Mutual Fund

57.50

34.00

7th ICP Mutual Fund

57.50

17.30

8th ICP Mutual Fund

126.25

28.80

10th ICP Mutual Fund

57.50

24.00

11th ICP Mutual Fund

123.75

18.20

12th ICP Mutual Fund

123.75

14.85

13th ICP Mutual Fund

57.50

45.50

14th ICP Mutual Fund

57.50

15.80

15th ICP Mutual Fund

121.25

15.30

16th ICP Mutual Fund

57.50

14.20

17th ICP Mutual Fund

57.50

17.50

18th ICP Mutual Fund

57.5

15.40

19th ICP Mutual Fund

122.50

18.50

20th ICP Mutual Fund

122.50

17.45

21st ICP Mutual Fund

100.00

6.80

22nd ICP Mutual Fund

230.00

13.90

23rd ICP Mutual Fund

200.00

7.35

24th ICP Mutual Fund

400.00

10.10

25th ICP Mutual Fund

400.00

14.50

ICP SEMF

1,260.00

51.80

Pakistan Premier Fund

675.00

15.25

Prudential Stocks Fund

60.00

2.55

Safeway Mutual Fund

165.00

8.00

Tri-Star Mutual Fund

50.00

2.50

 


 

OPEN-END MUTUAL FUNDS FUND

NAV

Dawood Money Market Fund

Rs 104.27

Meezan Islamic Fund

57.60

NIT

28.00

Pakistan Income Fund

53.37

Pakistan Stock Market Fund

102.31

United Money Market Fund

103.29

UTP

82.45

UTP - Income Fund

521.5

UTP - Islamic Fund

641.75

*The author is Asstistant Manager Finance (Trustee Operations) at Central Depository Company of Pakistan Limited