Growing in size and offering wider choice

Nov 08 - 14, 2004

The size of mutual fund sector can be gauged from the value of listed capital as well as the assets being managed. The number of closed-end mutual funds may appear larger, for the time being, but it looks certain that open-end funds will be the dominant players in the long run.

Before going further, it is necessary to understand the difference between a closed-end and an open-end fund. A closed-end fund has a fixed paid-up against which shares are floated and then traded in the secondary market. The quoted price may or may not be the same as the par value. As against this, an open-end fund is that where subscription and redemption of units is allowed on a continuous basis. The subscription and redemption prices are determined on the basis of net asset value after adjusting for any sales load or redemption fee.

In order to meet the appetite of various investor groups, the fund managers have developed a variety of products. These products are normally available in three broad categories: Growth Funds, Balanced Funds and Income Funds. The Growth Funds offer potential for appreciation in share value, while the current income may be low. The fluctuation in share price may also be high. Such funds normally invest in stocks and have tendency to outperform other funds and other modes of savings over a period of time.

Balanced Funds offer some stable income to the investors mainly because their investment portfolio comprise of a variety of products that include stocks, debt instruments and money market instruments. The diversity of portfolio helps in generating predictable and stable income and also hedging the risk.

Income Funds normally invest in fixed income securities, mostly offering return on regular intervals, quarterly and half yearly. The instruments include term finance certificates and government securities in Pakistan.

Lately, another breed of mutual funds has appeared on the horizon, Islamic Funds. These funds invest only in those instruments, which are Shariah compliant or offer Riba-free income. The basic rule is that the companies in which money is invested should not be involved in a business prohibited by the Shariah or bulk of the income is not drawn from Interestbased transactions.

Having understood the various types of mutual funds, it is also important to understand the sources of income for these funds. The money mobilized by a fund is invested in a variety of financial products to earn dividend income and make capital gains. While the key objective remains to the generation of regular income through dividend income, capital gains are also made through trading.

A debateable point is, should the mutual funds indulge in active trading of shares or debt instruments? The rule of thumb suggests that the objective of funds should never be to make capital gains by indulging in day trading. However, portfolio can always be adjusted promptly keeping in view the earning potential of the securities. And dividend payout should never be based on such one time gains.

Saying this, it must also be kept in mind that dividend income from the portfolio companies and the divided payout by the fund may lead to surplus cash, which has to be deployed in revenue generation activity. Therefore, the short-term investment perspective should always be 'buy on weakness and sell on strength'. However, the investment policy of two fund managers cannot be identical.


Till recently the sector was dominated by the funds established in the public sector. These included the open-end fund managed by the National Investment Trust (NIT) and about two dozen closed-end funds sponsored by the Investment Corporation of Pakistan (ICP). Now the situation has changed completely because of sale of management rights of ICP funds to ABAMCO and Pakistan Industrial Credit and Investment Corporation (PICIC). At present NIT is the only fund in the public sector, which is also on the privatisation list. The various funds acquired by ABAMCO and PICIC have been merged and renamed. Thereby, reducing the total number of funds listed at the local stock exchanges. However, the paid-up capital of these funds has increased due to issue of right shares.

Another development is that the number of open-end funds is on constant increase. Now the assets of open-end, including NIT far exceeds the assets being managed by the closed-end funds. The NIT still enjoys the distinction of being the manager of largest assets. Yet another positive development is that now the investor has a wider choice to pick any investment option to suit his/her needs.

One of the observations is that the regulatory framework to oversee the operations of mutual funds, is highly inadequate in the country. This inadequacy allows the fund mangers to operate in the grey area. The two issues have been pointed out time and again. First, a large number of asset management companies are the associate companies of brokerage houses. This often leads to parking of bad investment into the investment portfolio of the funds. Second, a release of net asset value by the open-end funds after long intervals does not depict the real NAV. The delay in disclosure of right value and/or following managed price mechanism often proves fatal for the fund as well as the unit holders. This was identified as one of the major issues faced by the NIT in the past, which resulted in sale/redemption of units at unrealistic price and caused huge losses to the unit holders.

According to some critics, one of the key reasons for the slow development of mutual funds in Pakistan has been the stubbornness of the regulators and lack of confidence in the private sector. For decades, the regulators were not convinced about the ability and the integrity of private sector to successfully manage the open-end funds. Only the time has proved that they were wrong. It may also be said that while they did not allow the private sector to float open-end funds, they also kept their eyes closed and hardly noticed the worst performance of the closed-end funds managed by the private sector.


It is often said that investors should invest in equities to earn better return rather than being contended with pathetically low payouts on bank deposits or national savings schemes. However, it is also a fact that an ordinary investor neither has the adequate knowledge for investing in equities nor the time to manage his/her investment portfolio efficiently. Therefore, the best option for the small investors is to invest in equities market through mutual funds.

However, investors face a situation, which can be best described by an old saying 'once bitten twice shy'. Unfortunately, the past experience has been un-rewarding because small investors lost their life savings by investing in the equities market as well as the mutual funds. While the regulators were mostly responsible for the poor governance, the blame should also go to the investors, who invested their money with closed eyes and ears. They hardly made any effort to find out the credentials of the sponsors or the dividend payouts by the entities managed by them.

Going one step forward, it may also be said that hardly any thing is being done, at the institutional level, to create awareness regarding making investment in equities market. The figures stated about the size of assets being managed by mutual funds in Pakistan and other countries should be the eye opener for the regulators as well as the players. Let us not compare Pakistan with the US market. Even the comparison of the size of mutual funds of India with Pakistan proves a big disappointment. While in India mutual funds are 20% of bank deposits, the percentage is as low as 4% in Pakistan.


Substantial capital is needed for accelerating the economic development process in the country. The stock market has the potential to meet this demand. However, the objective cannot be achieved without bringing in the small investments to the stock markets. Mutual funds have the ability and the capacity to bring small savings to the stock markets. However, this cannot be done without convincing the small investors that their savings are in safe hands and that they will also get the corresponding return on their investment. As another old saying tells 'seeing is believing' only the good payouts can convince the small savers to invest their money in the mutual funds.

It is also said that small investors shy away from the equities market due to its high volatility. May analysts are of the view that higher volatility of the Pakistani equities market is due to a very small investors' base and highly illiquid market. Both the problems can be overcome by enhancing the size of the mutual fund sector. One of the reasons for the higher market volatility is that some investors have attained the capacity to set the market direction. If the number of quality scrips and their market float is increased, their power to manipulate the market can also be contained.

One may say that creation of large mutual funds will also give them the power to manipulate the market. At the face value it may appear a problem, but if efficiently and effectively monitored, the probability can be reduced to almost zero level. One of the many available tools is proper classification of the portfolio and strict monitoring. The State Bank of Pakistan has recently issued a circular for the commercial banks regarding classification of investment. A similar circular can also be issued for the mutual funds. Some of the problems have emerged in the past only because mutual funds became the day traders. The proposal in no way suggests that mutual funds should be bared from trading but it certainly implies that once a security has been classified in a particular category, there should be restriction on moving it from one head to another.

AS OF 30TH JUNE, 2004


Net Assets
(Rs in million)


Net Assets
(Rs in million)


Al-Meezan Mutual Fund


Unit Trust of Pakistan


Asian Stocks Fund


Faysal Balanced Growth Fund


ABAMCO Stock Mkt Fund


Bond/Income Fund


ABAMCO Composite Fund


Metro Bank - PSF


ABAMCO Capital Fund



BSJS Balanced Fund


Dominion Stock Fund


Crosby Dragon Fund


First Capital Mutual Fund


Pakistan Stock Market Fund


Golden Arrow Stocks Fund


National Investment Trust


Investec Mutual Fund



4th ICP


Meezan Islamic Fund


PICIC Growth Fund


UTP Islamic Fund


PICIC Investment Fund


Money Market Fund

Pakistan Cap. Market Fund


Dawood Money Mkt Fund


Pakistan Premier Fund


Pakistan Income Fund


Prudential Stock Fund


UTP Income Fund


Safeway Mutual Fund


United Money Market Fund


Tri-Star Mutual Fund


Atlas Income Fund










1. Al-Meezan Mutual Fund


2. Asian Stocks Fund

3. ABAMCO Composite Fund


4. ABAMCO Stock Mkt Fund

1. Atlas Income Fund

5. ABAMCO Capital Fund

2. Crosby Dragon Fund

6. 4th ICP

3. Dawood Money Market Fund

7. BSJS Balanced Fund

4. Faysal Balance Growth Fund

8. Dominion Stock Fund

5. Pakistan Income Fund

9. First Capital Mutual Fund

6. Pakistan Stock Market Fund

10. Golden Arrow Stock Fund

7. MetroBank-Pakistan Sovereign Fund

11. Investec Mutual Fund

8. Meezan Islamic Fund

12. ICP Lot 'B' (13 funds managed by PICIC)

9. Unit Trust of Pakistan

13. ICP SEMF managed by PICIC

10. UTP Income Fund

14. Pakistan Premier Fund

11. UTP Islamic Fund

15. Pakistan Capital Mkt Fund

12. United Money Market Fund

16. Prudential Stock Fund

17. Safeway Mutual Fund

18. Tri-Star Mutual Fund