MUTUAL FUNDS, THE MOST TRANSPARENT INDUSTRY IN PAKISTAN

Mutual Funds are a pool of money invested by small, medium & large investors

By KHALIL AHMED
Mar 20 - 26, 2006

Syed Ali Abedi, Head of Retail Sales ABAMCO Limited, believes that there is no investment more transparent than Mutual Funds. He stated so during the seminar on 'Mutual Funds Industry in Pakistan' arranged by the Finance Society of the Institute of Business Management for the month of March 2006. Mr. Abedi says that Mutual Funds are about diversified investment and this type of investment is safer as well as better.

Mutual Funds are a pool of money invested by small, medium & large investors. A mutual fund is a type of investment. You can think of it as a group of people with similar goals who, instead of investing on their own, pool their money. They hire a professional manager to invest that money in securities such as stocks, bonds, and money market instruments. Talking about the history of Mutual Funds in Pakistan, Mr. Abedi said that the mutual fund industry was introduced in Pakistan by the Government in the form of National Investment Trust ( NIT). It was constituted under the trust deed dated 12th November 1962, executed between the National Investment Trust Ltd (NITL) as the Management company and the National Bank of Pakistan as the Trustee .In 1966 Investment corporation of Pakistan (ICP) — a state controlled Development Finance Institution was established through ICP ordinance 1966, with the leading financial institutions as its sponsors. The main objective of ICP was to strengthen the Capital Market in Pakistan . ICP floated 25 Mutual Funds and a State Enterprise Mutual Fund (SEMF) with a view to offer pooled Investments to Investors. Till 1994 NITL & ICP (State maintained) were the companies offering Mutual Fund.

In 1995, ABAMCO got the permission to operate as asset Management Company (under the asset management ordinance 1995. At Present there are more then twelve Asset Management companies working in Pakistan and this number will be more than double within next five years. Giving historical perspective of Mutual Funds he said that the mutual fund industry was born in the United States 80 years ago. The first open-end mutual fund, Massachusetts Investors Trust was founded on March 21, 1924 and after one year had 200 shareholders and $392,000 in assets. By the end of the 1960s there were around 270 funds with $48 billion in assets.

Mr. Abedi regretted that he did not have the latest data available about the investment in Mutual Funds across the globe but the data he produced was as following: Worldwide investment in Mutual Funds is around $14.46 trillion i.e. United States: $ 7 trillion Europe: $ 5 trillion, Japan: $ 500 billion, India: $ 18 billion, Pakistan: $ 2 billion. Giving the details about the market share in Pakistan he said that NIT had the biggest market share of around 66.62 billion rupees followed by ABAMCO which possessed 27.04 billion rupees and PICIC with the third largest market share.

There are two types of Mutual Funds: Closed End Fund, Open End Fund

Closed-end mutual funds are more like the stock of a listed company, a fixed number of whose shares are traded on an exchange. The shares of closed-end mutual funds are priced at market value determined by supply and demand and are not priced at the fund's assets per share value and thus may trade below or above the net asset value; if the shares of a closed-end fund, trade above the net asset value, the fund is said to be trading at a "premium" and if it is trading below, the fund is said to be trading at a "discount". A feature of closed-end funds is that they can be converted into open-end funds. They follow a fixed trust structure. Open-end mutual funds are also called unit trusts because they are registered as trusts. An open-end fund unit holder can redeem or issue shares at any time and is priced at its Net Asset Value (NAV) on per share basis and its share price is determined by the net increase and/or decrease in the share prices of the stocks that the fund owns along with any dividends and capital gains received. The shares of an open-end mutual fund can be bought directly or through a management company.

ABAMCO closed end funds are: BSJS Balanced Fund, ABAMCO Stock Market Fund, ABAMCO Capital Market Fund, ABAMCO Growth Fund and ABAMCO Composite Fund.

Mutual Funds generate income in two ways: The first way is through distributions - the profits earned by the fund that is passed on to you. Distributions include interest from bonds and dividends from stocks held by the fund. The second way to earn money is through an increase in the value of the units you own in a fund, also known as share appreciation.

Mutual Funds are diversified investments. Mutual Funds are, by definition diversified investments therefore they are lower-risk investments, especially when compared to individual stocks. Most investors use mutual funds in order to diversify their holdings and provide some stability to their portfolios. Mutual Funds are managed by Asset Management Companies through professional fund managers.

Mutual Funds distribute 90% of their realized income to the investors. Investors can also benefit from capital gains as the value of securities held in the funds portfolio rise. Mutual funds are right for you because of

I. Simplicity to invest
II. Diversification
III. Professional management
IV. Transparency (Most transparent form of investment. Prices can be monitored daily)
V. Liquidity (You can liquidate your investment in a short period of time. (within 6 working days)
VI. Highly Regulated (Mutual Funds are regulated by Securities & Exchange Commission of Pakistan)

When asked who can invest in mutual funds, he replied Individuals, Companies, Financial Institutions, Banks, Non-profit Organizations, Provident Funds, Pension Funds, Gratuity Funds, Foreign Nationals (fulfilling requirements of the government) and Banks.

Talking about risk disclosure he said that all investments in mutual funds and securities are subject to market risks. Their target return / dividend range cannot be guaranteed. Their price is not guaranteed and not administered / managed. It is based on the NAV, which may go up or down depending, to some extent, upon the investment strategy of funds and whether they are balanced, fixed-income or equity funds

Giving the details of UTP Islamic Fund he explicated the following:

•Public offering: December 27, 2002
•Seed capital: RS. 60 million
•Track record: 3 Years
•Net assets: RS. 1.11 billion
•Listing LSE
•Strategy: Islamic modes of Investment
•Goals: Capital preservation
Consistent returns
•Annualized return
as on Feb 28th 2006 78.25%

Mr.Talib S. Karim, Director Academics and Business Support Centre of the Institute of Business Management, emphasized the role of academia in the economic strength of Pakistan. While talking to PAGE, Mr.Talib S. Karim was of the view that Pakistan has potential of being an economic strength like China and India. According to him, China has taken over 3 decades to achieve what it is today and he is sanguine that our country will also emerge as an economic force given that the educational institutions continue producing quality individuals.

Professor Kausar Saeed and Professor Ejaz Ahmed of the Institute of Business Management while talking to PAGE expressed optimistic views about the economic growth of Pakistan.

Mr. Ali Khizar Aslam, Analyst ABAMCO, while replying to a question said 'The KSE-100 Index is a benchmark used for ascertaining market direction. The KSE-100 Index comprises the top company from each of the listed sectors on the KSE, in terms of market capitalization. The rest of the companies are then picked on the basis of their respective market capitalization ranking, without any consideration for the sector. The KSE-100 index contains a sample of 100 representative common stocks with the base value of 1,000 points. Investors can opt for either of the following two modes of equity investments:

I. Direct: by investing in Initial Public Offerings (IPO) or by trading (buying/selling) stocks in the secondary market, which includes the stock exchanges and the OTC Market.

II. Indirect: by investing in a pool of funds called "Mutual Funds" which are managed by professional Investment Management Experts.

Talking about the scope of an MBA in a mutual fund company, he said that a student who has majored in Finance can work in the Research, Investments, Risk Management, Finance and Accounts, Trading, Operations and Settlements departments. A student who has majored in Marketing can work in the Marketing, Corporate and Retail Sales, Investment Advisory Services, Business Development and Strategic Planning departments.

Mr. Ali Khizar Aslam gave the details of the Salary Package Estimates for the respective departments:

* Investment Advisory Services: Rs.18, 000-20,000
* Retail and Corporate Sales: Rs. 12,000-150,000
* Finance and Accounts: Rs. 11,000-150,000
* Strategic Planning and Business Development: Rs. 15,000-140,000
* HR and Administration: Rs.7000-60, 000
* IT: Rs.15, 000-200,000
* Internal Auditor: Rs.20, 000- 50,000
* Operations: Rs. 14,000-100,000
* Research: Rs. 30,000-200,000

Professor Jalil Anjum of the Institute of Business Management thanked the guests and appreciated the cooperation of ABAMCO for making the seminar a success. He stated that diversification in different stocks can control the risk and can bring it down even to zero.