In more developed economies
Mutual Funds have overtaken commercial bank deposits in terms of size
By Yasir Qadri
May 20 -June 02, 2002
Loss of purchasing power is a phrase we have been
hearing a little too often for our liking and perhaps far too long. Most
people save up with an intention to have the ability to provide for
objectives such as education or marriage of children, starting a
business, buying a car or even a vacation. However, it is becoming
increasingly difficult with the available saving tools to outpace the
rate Rupee sheds value on its purchasing power. The purpose of this
brief write up is to review and perhaps evaluate quickly, some of the
opportunities available for individual and institutional investors and
the role the upcoming open-end mutual funds can play.
In Pakistan the National Saving Schemes have
historically yielded higher returns; with the security of sovereign risk
attached, National Saving Schemes by and large were amongst the most
popular form of investments for individual and institutional investors.
As a part of the current Government's drive for economic revival, one of
the steps expected to be taken, with a longer-term perspective, is the
tie-up of rates of return on National Saving Schemes with 10-year PIBs,
making one of the most lucrative and popular means of investment far
less attractive. This would not only create a level playing field for
various financial institutions seeking investments, but will also help
anchor raising inflation rates. Yes it would apparently severely cut
down investment opportunities for an average investor but will surely
have more far reaching positive effects. The current scenario offers
Mutual Funds as perhaps the most attractive choice for investors,
specially longer term.
While the economic down turn had started in the last
decade it had never really confronted the investor as starkly as it has
in the post nuclear blast era. The early nineties took the investor on a
roller coaster ride, touching extravagant highs but ending in rather
modest lows; a period which would hardly be remembered as a joy ride by
most. To follow up was an unusual hype in the properties market in the
mid nineties, much to the same effect. The post nuclear blast era has
been largely uneventful or even stagnant to a large extent. The Kargil
episode has only added to the problems and deepened the crisis even
further. The scenario has restricted opportunities of investments and
has created a no win situation for investors.
The declining discount rates have also resulted in a
decline in rates of returns banks have to offer. The falling borrowing
rates by institutions more than flattens out the average rate of return.
A spate of TFCs in recent times have offered decent enough rate of
returns, however, these TFCs are not actively traded in the market and
an average investor does not have access to them. Money Markets in
reality are an exclusive domain of banks and other financial
institutions. Also, subscribing to TFCs directly puts the investor in an
inefficient tax status. The profit would be subject to a 10% withholding
tax besides being taxed on the tax bracket he/she falls in.
The fact that the current establishment has certainly
indicated that they do recognize the role mutual funds play in
streamlining investments into the capital markets, to make for larger
volumes and more stable markets.
Open-end Mutual Funds puts the asset management
company under an obligation to redeem the units at the current NAV based
price of that day. This does not allow the asset management company to
relax and keeps them on their toes.
Mutual Funds are built on the concept of shared
resources. A pool of investment usually provides the unit holders with
the leverage that is typically unique to larger investors and an
opportunity to capitalize on the expertise and knowledge of the fund
manager. Also, Mutual Funds spread the risk over a range rather than a
single security. At a more macro Mutual Funds could potentially provide
new avenues to the investors and provides the markets with much needed
liquidity, while playing a role of a financial intermediary which
stabilizes the markets and brings more efficiency to resource
allocation. In more developed economies Mutual Funds have overtaken
commercial bank deposits in terms of size.
The Securities & Exchange Commission of Pakistan
(SECP) as the regulatory body is responsible to register and monitor
Asset Management Companies (AMC). In the best interest of the consumer,
the SECP has developed a stringent system to ensure that only the most
capable and best reputed companies are licensed to manage mutual funds.
The advent of new Asset Management Companies into the
market, in the near future, is likely to provide the individual and
institutional investors with an array of investment opportunities. In
the meanwhile investors could continue looking forward to launch of new
mutual funds managed by capable professionals who can not only be deft
with asset allocation but also have a focus on consumer marketing to
provide easier access to the individual investors.
In the wake of all this Arif Habib Investments
launched its two open-end Mutual Funds the Pakistan Stock Market Fund (PSM)
and the Pakistan Income Fund (PIF), with a core capital of Rs.500
million. As expected the funds have done reasonably well and are already
being recognized as viable investment choices by both the corporate and
the retail sector.
Having two funds in place provides Arif Habib
Investments with competitive edge in terms of offering opportunity to
not only invest in specialized equity and debt funds but also customized
and optimal hybrids of both; through the range of retail products. These
products range from Monthly Saving and Pension Plans, which can be
started with as little as Rs.1,000 a month, to a Monthly Income Plan
which would provide monthly returns to portfolio plans. Plans like the
Smart Portfolio provides efficient and modern investing solutions by
allocation of money to both, the more aggressive equity fund and the
conservative debt fund. It also has a state of the art switching element
which ensures that the market volatility is used to the advantage of the
Arif Habib Investments would also be announcing the
net asset value based prices every day, which would enable the investor
to track the investment on a daily basis. The net asset valuation also
allows the investor to know the current and actual value of the
investment, as it is calculated on the basis of the day's prices of the
securities in the portfolio less liabilities.
The advent of the Pakistan Stock Market Fund (PSM)
and Pakistan Income Fund (PIF), managed by Arif Habib Investments and
some other funds on the verge of launching certainly marks a good omen
for investors of all sizes.
Yasir Qadri works for Arif
Habib Investments looking after Business Development. He has a Masters
degree from University of Central Oklahoma and has strengths in areas
such as market research and product positioning.