It is expected that mutual funds will continue experiencing healthy growth and in the not too distant future will make greater contribution to the country's economy.

SHAMIM AHMED RIZVI, Bureau Chief, Islamabad
Apr 02 - 08, 2007

The mutual fund industry in Pakistan has witnessed phenomenal growth during the last 4/5 years. During this period the industry has not only been revived, but has seen its shifting from the public to the private sector coupled with the increase in the attractiveness of open-ended funds as compared to close-ended funds.

The rapid growth of the mutual fund industry in Pakistan in recent years can be jugged from the fact that its total assets of Rs 25 billion on June 30, 2002 has increased to over Rs. 180 billion by June, 2006, showing about 600 percent increase. The industry has gained this popularity due to its improved and disciplined behaviour, government support, development of specialized innovative products and investment-friendly environment.

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 1962 followed by the establishment of Investment Corporation of Pakistan (ICP) in 1966, which launched a series of close-ended mutual funds. Both NIT and ICP were established in the public sector. However, the country subsequently failed to maintain the tempo of the initiative taken in the field until early 90s, mainly due to following reasons:

i) Frequent changes in economic policies.
ii) High rates of alternative investment such as National Savings Schemes (NSS).
iii) Capital outflow
iv) Limited investment options
v) Profusion of risk free investment

During the last couple of years, the industry has made a remarkable and phenomenal growth not only in its size and category (open-end funds and close-end funds) but also in product diversification and market penetration due to sprouts mutual funds on its horizon. As per latest figures provided by the Securities and Exchange Commission of Pakistan (SECP), the total number of funds operating in Pakistan as on March 1, 2007 was 62 as against 46 in June 2006, which included 38 open-end and 24 close-end funds. Besides, 19 more were in the pipeline.

New and innovative products are being designed and offered in the market for both corporate and individual investors. The new products so far offered also include Shariah-complaint products, sector-specific products, etc. Besides, more new products derived from variable and fixed income securities are proactively being developed to suit investors risk and return profile, their cash flow needs, etc. The new products to be offered in the near future include Pension Funds, Real Estate Funds, Infrastructure Funds, etc.

It is heartening to note that private sector has now come to play an important role in the market and due to their active participation and introduction of reforms from time to time; the mutual funds industry during the past one-decade, particularly after FY 02, has recorded tremendous and significant growth in its net assets.

According to the Securities and Exchange Commission of Pakistan (SECP), the regulatory authority 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. This enabling environment 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 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 fund operators and worked 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 Privatisation Commission on matters regarding execution of transaction of privatisation and transfer management rights of 26 ICP Mutual Funds and the restructured Funds and brought them within the ambit of rules. The success of that transaction is being emulated for the privatisation of NIT by the government.

However, there is a long way to go as the current size of the industry (at US $ 2.80 billion equivalent) is much lower than the comparative figures in the region (India US $ 44.33 billion; China US $ 58.13 billion, Taiwan US$ 59.76; Japan US $ 468 billion; Korea US $ 198.80 billion as on December 30, 2005) let alone those of the global mutual funds industry. All stakeholders are therefore striving hard and making serious and sincere efforts to utilize the resources available at their disposal to get maximum out of the untapped potential of the industry to achieve its size at least comparable with its counterparts in the region.

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.

1. 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.

2. These days, mutual funds 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 funds sector in the years ahead.

3. 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 investors in mutual fund sect or as an attractive mode of investment in comparison to traditional National Savings Schemes (NSS) and bank deposits. The recent increase of around 2% in interest rate on various NSS instruments may cast 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.

4. The performance of the mutual funds industry has 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 to perform better they may attract investment both from corporate and small investors.

5. 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 funds 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 the way for further investment in mutual fund sector.

6. It has been established in stock market crisis occurred in March 2005 that small investors who had made investment through mutual funds did not comparatively suffered much in terms of erosion of share prices as compared to those involved directly in the market. This has enhanced investors' confidence in mutual funds, which as a result will attract more investments in the mutual funds sector.

7. 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 investment in the mutual fund sector will be, 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 decision after taking proper assessment of the markets abroad and various risks associated with them.

8. At present the mutual funds industry is 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 the 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 toward the economy of the country.