MUTUAL FUNDS POISED TO ATTAINED NEW HEIGHTS IN PAKISTAN
The Mutual Fund Industry in Pakistan has registered tremendous growth
SHAMIM AHMED RIZVI Bureau Chief, Islamabad
June 05 - 11, 2006
Despite phenomenal growth during the last few years, Mutual Fund industry relatively is a new industry in Pakistan. The way it is growing there are chances of its development to an international standard during the next couple of year are quite bright.
Pakistan was the pioneer in the field of Mutual Funds in the South Asia Region, when it launched National Investment Trust (NIT), an open ended mutual fund in 1992, followed by the establishment in 1996 of Investment Corporation of Pakistan (ICP), which launched a series of close ended mutual funds. Both NIT and ICP were established in the public sector.
However, during the last 5 year after 2001, the Mutual Fund Industry in Pakistan has registered tremendous growth both in number and size of funds. The number of Mutual Funds has increased from 12 in 2001`-02 to 50 in 2005-06. The size of funds under the management of operators has grown from about Rs. 25 billion to Rs. 180 billion during this period.
Following main reasons are attributed for the sluggish growth of mutual funds industry in Pakistan during the last decade from 1991-2001:
i) Frequent changes in economic policies
ii) High rates of alternative investment such as National Saving Schemes (NSS)
iii) Capital outflow
iv) Limited investment options
v) Profusion of risk free investment options in Government securities.
vi) Lack of aggressive marketing and distribution network
In the early nineties, after the countries capital market witnessed an upsurge, the private sector mutual funds were first time launched in Pakistan. However, the industry could not make substantial progress due to the long and deep recession during the period from 1996 to 2000 and instead suffered badly due mainly to lack of investment philosophy and prudent decision making and as a result Net Asset Values (NAVs) dropped, growth got frozen and concept got badly hit. However, by the turn of the century particularly from the Fy-02 onwards, Pakistan market witnessed an unprecedented growth spurned due to many factors, but mainly due to segregated divesture of ICO to private sector, remarkable improvements in country's economic and financial indicators, global trends and favourable regulatory environment.
Explaining the scenario specially the phenomenal growth during the last 5 years, Director of Mutual Funds in the Securities & Exchange Commission of Pakistan, Mr. Omer Hyat in a written reply to the question by Page claimed SECP is responsible, among other things, for providing legal framework for the establishment and regulation of mutual funds. Since 2000 onwards, the commission has been working to bring about qualitative changes in the practices and policies concerning establishment, operations and management of mutual funds. As a result of proactive approach adopted by the Commission the mutual industry, which was lying dormant particularly since 1996, has successfully taken off and has attracted attention of professionals, entrepreneurs and investors alike. The enabling environment created has led to phenomenal increase in the number of mutual funds in the backdrop of far less growth in the listing of other capital. The facilitation and consultation provided by the officers of the Commission have made it possible for the industry to accumulate inventory of products satisfying the needs of different categories of investors. The industry is on the path of steady progress and competing with the banks in attracting savings besides supporting and underpinning the stock market activities. The range of products made available to the industry meet the demands of aggressive to conservative, secular to religious and risk takers to risk aversive strata of society. Options of mergers, conversions and floatation of funds in different structures have facilitated the funds operators and work to the advantage of investors. The size of funds under the management of operators has proliferated from around 24 billion rupees to more than 180 billions rupees within the past four years. The momentum of good work generated by the officers of the Commission is still going on and the new products are in the pipeline. Review of rules is again in progress with a view to enable the industry to fine tune its products and practices and meet the challenges of competitive environment.
SECP has advised Privatization Commission on matters regarding execution of transaction of privatization and transfer management rights of 26 ICP Mutual Funds and the restructured the Fund and brought them within the ambit of rules. The success of that transaction is being emulated the privatization of NIT by the Government.
Relevant information is given below:
Total number of Asset Management Companies (AMCs) and Investment advisors (IAS): 34
Closed End Funds
Open End Funds
Total Mutual Funds:
YEAR-WISE GROWTH OF MUTUAL FUNDS SINCE 2001-02 ONWARDS.
NO OF MUTUAL FUNDS
NET ASSETS APPROX.
The recent years have not only seen the revival of the mutual fund industry in Pakistan but also the activity shifting from the public sector to the private sector coupled with increase in the attractiveness of open ended funds as compared to closed end funds.
The future outlook of the mutual funds industry is very promising and encouraging. The industry holds several exciting opportunities for both corporate and individual investors including the retired persons in view of the following factors:
i) At present, the mutual funds sector is set to attract growing public attention owing to better investment prospects and effective role in bringing about betterment in the national economy. An improvement in economic fundamentals particularly during the past three years and achievement of GDP growth of 8.4% during FY-05 have provided a platform to mutual funds industry to grow exponentially.
ii) These days, mutual fund sector is becoming popular among the investors due to the fact that the sector is now focusing on specialized financial products aimed at niche markets with a view to cater to the requirement of all types of investors ranging from ultra conservative to the risk seekers. These specialized products are expected to attract greater public attention for investment in mutual fund sector in year ahead.
iii) A market based interest rate structure has already been put in place. The high level of interest rates available on short term, risk free government papers and bank deposits in the past had acted as a disincentive for conservative investors. However, the said rationalization of interest rates has improved the prospects of investment by individual investor in mutual fund sector as an attractive mode of investment in comparison to traditional National Saving Schemes (NSS) and bank deposits. The recent increase of around 2% in interest rate on various NSS instruments may impact on the investment of mutual funds industry but it is expected that this impact is to be very minor in view of all round progress made by mutual fund industry during the last three years and as a result attractive pay outs were declared by the mutual funds for their investors.
iv) The performance of the mutual funds industry is generally kept pace with the performance of the stock market. During the past 3&4 years, the stock markets in Pakistan have performed extremely well and if they continue this performance they would attract investment both from corporate and small investors.
v) The effective monitoring of operations of mutual funds and other Non Banking Finance Companies (NBFCs) by SECP has improved the confidence of investors in Pakistan to a great extent. SECP has brought in a sea change in regulations under which mutual funs managers are vetted with a fine toothcomb, their responses and management staff have to meet stringent standards and there is a continuing monitoring of not only their performance but also of how they do business. The confidence thus improved will pave they way for further investment in mutual fund sect or.
vi) It has been established in stock market crisis occurred in March 2005 that small investors who had made investment through mutual funds have comparatively not suffered much in terms of erosion of share prices as compared to those involved directly in the market. This has enhanced investors/E confidence in mutual funds, which as a result will attract more investments in the mutual funds sector.
vii) The permission granted by SBP to local mutual funds to invest 30% of their assets abroad with a cap of US$15 million has enhanced the image of mutual funds among the investors and as a result the investor confidence which will lure them to make large investments in the mutual fund sector who will in turn in a better position to offer attractive returns out of their earnings from the investment portfolio to be developed on the basis of independent and prudent investment decisions.
viii) The mutual funds industry is at present looking at the retirement savings market in terms of options like the defined benefits to ensure a predetermined pension to a retiree or defined contribution schemes to determine the benefits for retiring persons depending upon the profitability of investments by the mutual funds. The government is keen to develop pension schemes and is encouraging mutual funds industry to come forward and develop such schemes.
With the superior performance of this sector in the past few years and the recent provision of attractive and specialized products, it is expected that, mutual funds will continue to experience healthy growth and in the not too distant future will make greater contribution towards the economy of the country.
However, there is still a long way to go as the current size of Pakistan's Mutual Fund Industry of about $3 billion is much lower than the comparative figures in the region. India over $44 billion, China $96 billion, Taiwan $59 billion, Japan $468 billion and Korea $ 198 billion as on December 31, 2005.