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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 investor.

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.