INVESTMENT IN MUTUAL FUNDS

Compared to developed markets, the mutual fund industry in Pakistan is still in its nascent stage

MARIAM NASIR, Manager Research
Apr 02 - 08, 2007

Mutual Funds were introduced in Pakistan in 1962, with the public offering of National Investment (UNIT) Trust (NIT), which is an open-ended mutual fund in the public sector. This was followed by the establishment of the Investment Corporation Pakistan (ICP) in 1966, which subsequently offered a series of closed-ended Mutual Funds. ICP was privatized in 2003 by splitting into three funds. Latest by 30 Dec 06, there are 28 asset management companies in Pakistan. These companies are managing 63 funds, 40 open-end and 23 closed-end sector with total net assets under management at Rs 174 billion with an average growth of 19% per annum.

INDUSTRY POSITION

CATEGORY

NO. OF FUNDS

NET ASSETS - BN

Open End Funds

40

132

Closed End Funds

23

42

Total

63

174

INDUSTRY AS % OF GDP -

BILLION

USD

Real GDP

4,880

$.39

FUM 30.12.06

174

$ 3

Industry as % of GDP

3.56%

.

T. Real GDP - %

96.44%

.

INDUSTRY AS % OF BANK DEPOSITS

BILLION

USD

Bank Deposit

2,987

$ 49.21

FUM 30.12.06

174

$ 2.86

Industry as % of Bank Deposit

5.81%

.

Bank Deposit - %

94.19%

.

It is clear from the graph that mutual funds industry in Pakistan has shown phenomenal growth in the past couple of years increasing its assets under management from Rs.47 billion in 1994 to over Rs.174 billion as of 30th Dec 2006.

Compared to developed markets, the mutual fund industry in Pakistan is still in its nascent stage. The savings to GDP ratio is already low in Pakistan currently stands at 3.56% of the GDP, adding 5.81% of bank deposit. In India it's about 10% and other developed economies like US it exceeds their total bank deposits.

WORLDWIDE MUTUAL FUND ASSETS AND FLOWS

Mutual fund assets worldwide increased 4.1 percent to $20.22 trillion at the end of the third quarter of 2006. Net new cash flow to all funds worldwide increased to $252 billion in the third quarter, from $206 billion in the second quarter of 2006.

On a year-to-date basis, net cash flow to all funds was $895 billion, $208 billion higher than in the first three quarters of 2005.

WORLDWIDE MUTUAL FUND ASSETS

Assets of equity funds grew 4.1 percent, with $9.6 trillion in assets at the end of the third quarter of 2006. Bond funds were up 2.1 percent and money market funds grew 3.6 percent in the quarter. Assets of balanced/mixed funds continued to grow at a faster pace than other categories, increasing 6.7 percent to $1.9 trillion at the end of the third quarter.

TOTAL NET ASSETS - Q3, 2001-2006

.

2001

2002

2003

2004

2005

2006
. . . . .

Q3

Q4

Q1

Q2

Q3

All Reporting Countries

11,655

11,324

14,048

16,165

17,285

17,771

19,113

19,416

20,218

Equity

5,134

4,204

5,923

7,219

7,953

8,333

9,229

9,180

9,554

Bond

2,212

2,534

3,047

3,313

3,517

3,450

3,591

3,636

3,711

Money Market

2,986

3,190

3,206

3,323

3,279

3,364

3,413

3,557

3,685

Balanced/Mixed

942

918

1,198

1,445

1,535

1,566

1,717

1,802

1,923

Other

190

229

311

398

481

512

567

602

619

*billions of U.S. dollars

POTENTIAL OF RETURNS:

Returns in the mutual funds are generally better than any other option in any other avenue over a reasonable period of time. People can pick their investment horizon and stay put in the chosen fund for the duration. However, due to the low key investor awareness, the inflow under the industry is yet to overtake other inflows. Rising inflation, falling interest rates and a volatile equity market make a deadly cocktail for the investor for whom mutual funds offer a route out of the impasse. The investments in mutual funds are not without risks because the same forces such as regulatory frameworks, government policies, interest rate structures, performance of companies etc. that rattle the equity and debt markets, act on mutual funds too.

INDUSTRY FUTURE AND PROSPECTS

As mentioned above USA mutual funds form 121 % of total bank deposits. On the contrary in Pakistan the ratio is only 5.81% so there is a great potential of mutual fund in our society so only there is need to educate our society. The curve is climbing and the expectation of much more growth in the near offing cannot be ruled out provided people start accepting mutual funds as a crucial investment option" that too by the middle class number.