LOW PENETRATION OF MUTUAL FUNDS

Despite impressive growth for last 3 years, it still remains almost 8% of total banking deposits

HAMADULLAH ABRO
Research Analyst, PAGE
Mar 17 - 23, 2008

After the end of financial repression and, economic and financial reforms undertaken in Pakistan, Pakistan's financial industry has been progressing like never before, generally called an economic turnaround. As a result, all constituents of financial sectors, be it bank or Non-Banking Finance Company (NBFC), have benefited from astounding growth due to their positive correlation with economic growth.

Till date lack of investment options has been the major problem that Pakistani investors have been facing for many years. Investments in equity are very risky since stock markets do not operate on fundamentals, Real State require large cash amount, banks are earning handsome profits but pay negative return on deposits and NSS schemes do not offer attractive return.

Mutual Funds are the other area of an investment. Although Pakistan is pioneer in the field of mutual funds in the South Asia, when it launched the National Investment Trust (NIT) first open-end fund in 1962 and Investment Corporation of Pakistan (ICP) in 19622 which was series of close-end funds, but performance of mutual fund industry had been dormant due to changing economic policies and flood of risk free instruments. Due to economic turn around mutual funds industry has shown a remarkable growth in recent years, both in terms of number of funds as well as in net assets under management. At present, there are 30 Asset Management Companies AMCs) managing 82 mutual funds in Pakistan 22 closed and 60 open ended funds with net assets Rs 295bn as of 30 June 2007. Despite impressive growth for last 3 years, it still remains almost 8% of total banking deposits. At present number of unit holders are one tenth percent of 1% of total population which is quite low.

I conducted a survey and talked to several diversified bank account holders to know their preferences and to figure out reasons of low penetration of mutual fund in Pakistan. I found out there are two segments one which knew about mutual funds as investment vehicle and other unaware of it completely. Following are the few reasons which inferred from their responses.

REASONS OF LOW PENETRATION

1. DIVERSIFIED PRODUCTS CONFUSE INVESTORS

Segment which knows about mutual funds as vehicle of investment, are confused among the different products being offered, they exactly do not know the differences among different funds like what is money market fund, how capital protected fund works etc. They were of view that bank accounts (saving and term) and differences among them are simple to understand. It can be inferred that it is the process between them (bank account and mutual fund) which is resisting mutual funds to grow.

2. LACK OF AWARENESS ABOUT BENEFITS MUTUAL FUND OFFERS

Educated segment was unaware of benefits mutual funds offers as compared to bank account. There is misconception among accounts holders and what they actually understand is that mutual fund invest pool of funds in stock market which is quite volatile, therefore it very risky option where as in bank account their money is save.

3. LACK OF CONFIDENCE OR TRUST OF INVESTORS ON MUTUAL FUNDS

This point is linked with above reason; account holders have trust on banks i.e. their money is in save hands where as mutual fund is risky option. They were totally unaware of impact of inflation. It can be inferred mutual funds have to gain investors confidence to achieve mainstream investment option.

4. LACK OF PROPER ADVERTISING

Mutual funds do not undertake proper marketing campaign. They use communication mediums which reach to small chunk of total target market and use difficult jargons or terminologies which are not understandable by an investor; these are the major reason of lack of awareness.

5. LACK OF SKILLED WORK FORCE

There is also a dearth of professional and dedicated fund managers in Pakistan which is detriment to the growth of mutual funds in Pakistan.

6. PRESENCE IN URBAN AREAS WHERE AS MAJORITY POPULATION IS LIVING IN RURAL AREAS

Pakistan's 2/3 population is living in rural areas and rest in urban areas. Mutual funds are catering are mainly catering to urban market due to lack of distribution network, in which majority is unaware of it, which is one of the major reasons of low penetration of mutual fund in Pakistan.

SUGGESTIONS

Mutual funds have a progressive future in Pakistan but the mutual funds industry should take steps to create the much needed public awareness about the benefits mutual fund offers. These are the few suggestions to improve mutual fund penetration.

1. Mutual funds can initiate investor education and awareness campaigns through electronic and print media as well as through seminars, workshops, conferences for wide scale public dissemination of information on mutual funds and educate them about advantages of investing in mutual funds compared to the other types of conventional options.

2. Marketing campaign should be simple to understand for general masses. In spite of using jargons, use simple words in advertisement to educate investors. Unless public do not understand the products and their benefits compared to conventional products, they would reluctant to invest in mutual funds.

3. To improve outreach, mutual funds should open their branches in other major cities of Pakistan rather than just concentrating on few and make specialized workforce that interacts with the individuals and rural population in vicinity of those cities to create awareness and generate business.

4. Dedicated professional fund management courses should be designed by business school of Pakistan in collaboration with players in mutual fund industry according to needs of the industry to overcome the problem of lack of professional fund managers.