Well poised to become a major competitor of commercial banks in attracting savings

Special Correspondent

Apr 02 - 08, 2007

Poor savings to GDP ratio and limited investment options are the gray areas of the economic regime in Pakistan. Traditionally investors were lured by the government to invest in National Savings Schemes. The second best option was term deposits with commercial banks. Even commercial banks preferred mainly to invest in government securities. With the shift in government policy investors are being told repeatedly to invest in equities market. However, a small investor often shies because of having little information about the listed companies and the way stock exchanges operate. Mutual funds are often termed the best investment option but local investors are still learning about these.

A closer look at the mutual funds sector tells heartening story but a lot more remains to be done to bring this sector at par with the global standards. The sector is growing exponentially in the wake of enormous potential of investment opportunities. At present total investment in mutual funds is estimated around Rs 200 million, which is around 2% of the bank deposits. Reportedly the scheduled banks deposits exceed Rs 3 trillion. In India the mutual funds are around 15% of the bank deposits. As against this in the USA the funds are 150% the bank deposits. Many sector experts forecast that in next five years there could be a boom.


There has been a substantial growth both in terms of number of mutual funds as well as assets under their management. Particularly the increasing number of open-end funds offers very attractive opportunities for the investors. Mainly because of daily publication of sale and redemption prices, linked with net asset value (NAV). A closer follow up of NAV allows the investors to look at the historic performance and also forecast the future outlook.

One of the factors adding to the popularity of mutual funds is the attractive return on investment. The general complaint is that the return on deposits offered by the commercial banks is negative in real terms. The average return on bank deposits is said to be even less than the rate of inflation in the country. Many analysts are of the view that mutual funds have potential to become the real competitor of commercial banks if they market their products efficiently and effectively.

They are still of the view that general awareness about mutual funds and benefits from investing in funds is still low, which is also evident from the number of investors in the funds. The general public can be encouraged to invest in mutual funds through investor education and awareness campaigns through electronic and print media as well as through seminars, workshops and conferences for wide scale public dissemination of information on mutual funds.


One of the emerging categories of funds is Islamic mutual funds. Lately, not only the number has increased but investors have shown exceptional interest. However, one of the constraints is that these funds have limited investment options. The reason being that these funds could neither investment in the shares of entities drawing bulk of the business from Riba-based operations nor undertaking businesses, not fully compliant with Shariah.

For example Al Meezan Investments manages four funds which are not only Shariah compliant but also give competitive returns to its unit holders. These funds are 1) Meezan Balanced Fund launched in December 2004 with current net asset value of more than Rs 1,394 million, 2) Meezan Mutual Fund established in 1995 with Rs 1,830 million assets under its management, 3) Meezan Islamic Fund with net assets of Rs 3,570 million and 4) Meezan Islamic Income Fund with net assets of Rs 1,424 million.

Another impediment constraining growth of mutual funds is low free float of equities and least developed secondary market for the debt instruments. It is estimated that the free float is less than 5% of the total listed capital. Though, the government has divested part of its holding in the state owned enterprises, an aggregate of around 90-95 percent of total listed capital of state owned enterprises is still held by the government.


As against a number of mutual funds floated recently, the number of fresh listing, both equities and debt instruments, has been disappointing. That is the reason quoted price of equities has been on the rise. However, with the hike in price most of scrips have become unattractive based on dividend yield.

Though, it may look a bit irrelevant it is necessary to reiterate that the government has to play a major role to facilitate fresh listing. This could be done in two ways 1) making listing compulsory when shareholders' equity crosses a benchmark and 2) creating substantial difference between the tax rates applicable on public limited and private limited companies.


The outlook of the mutual funds sector remains promising. The sector has been able to generate keen interest among the investors. It is attracting fund managers and leading players of industrial and corporate sector as sponsors. Moreover, it has been providing versatile and attractive investment avenues to the general public while paying comparatively better returns.

In the recent years regulators have also taken a number of steps to bring transparency and improve information dissemination. These measures envisage multifaceted reforms to help the industry in managing its risks prudently, give operational autonomy, and reduce fragmentation as well as to protect investors' interest. Comprehensive disclosure requirements at the time of public offering and subsequent reporting on the affairs of funds have been prescribed and enforced. The steps taken by the Securities and Exchange Commission of Pakistan (SECP) to promote equities market in general and mutual funds industry in particular are in line with overall macro-economic policies of the government.