Mar 17 - 23, 2008

Mutual funds industry in Pakistan has shown remarkable growth in recent years both in terms of numbers of funds as well as in net assets under management. The future outlook of the mutual funds industry is very promising and encouraging. Financial risks are well contained. Growing macroeconomic imbalances unless addressed urgently could threaten the financial stability in the country. One of the major risks to Pakistan's financial stability is its overall lack of financial sector diversification. Out of the total financial sector assets, insurance companies account for barely 3%, mutual funds are largely sponsored by banks, while other non-bank financial companies account for 2% of the system and holders of listed private bonds for less than 1%. According to latest report of State Bank of Pakistan the scheduled banks deposits have expanded to around 4 trillion. In India the Mutual Funds have 15 per cent of the banking sector deposits while in the United States the Funds have 150 per cent more deposits than banks. We are optimistic that in next three to four years the Mutual Funds would see a boom in deposits and would be able to increase deposits to around 10 billion dollars equivalent.

Mutual funds industry is in its infancy and there are challenges ahead such as stiff competition among mutual funds, limited investment avenues and effective management of risk due to the recently increased volatility in the markets. Some of the grey areas cordoning the industry are as follows:

* An issue that calls for urgent attention is inadequate regulatory framework to cater for new products and growing needs of investors. SECP has to take a number of steps to promote the development of mutual funds industry. These measures envisage multifaceted reforms to help the industry in managing its risks prudently, give operational autonomy, and reduce fragmentation as well as protect investors" interest. Comprehensive disclosure requirements at the time of public offering and subsequent reporting on the affairs of funds should be prescribed and enforced. In addition, managers should be given flexibility to establish their trusts or companies as well as to float equity, debt or hybrid funds. These steps by the Securities and Exchange Commission of Pakistan (SECP) to promote equity markets in general and mutual funds industry in particular should be in line with overall macro-economic policies of the government and help boost investment in mutual fund sector in years ahead. Mutual Funds Association of Pakistan should also disseminate essential information on various funds, the fund managers, the stock market as well as the regulatory environment under which open and close-ended funds get operated. It should also strive to achieve the following:

1-To enhance the professional and ethical standards in all areas of operation of Mutual Fund industry to ensure that they are in line with international best practices

2-To provide a centre of excellence for the development of knowledge and understanding of the Mutual Fund industry.

3-To promote public understanding of mutual funds and engage in promotional activities to ensure ongoing education of the public on Mutual Fund related issues.

* Limited investment options for prospective buyers also narrow the scope of industry and repel investors with specific demands. For further development of the mutual fund industry in the country, fund managers should develop specialized products aimed at niche markets. Products that cater to the requirements of different types of investors ranging from ultra conservative to the risk seekers. There lies a responsibility on the mutual funds sector to introduce schemes for retirement planning, pension funds and provide market based effective returns to this class of savers. Industry must also explore the possibility of launching more Islamic mutual funds given the vast untapped potential in this sector

* Abrupt fluctuations in capital markets pose a threat to the asset management business. This element is to be addressed by the policy makers as well as the fund managers. Fund managers backed by strong research and risk management function use various tools and strategies to mitigate volatility in returns and provide better returns to investors even in time of market volatility. The fund managers generally hold a medium to long term perspective of the market and therefore may be subject to temporary fluctuations in prices of stocks, which tend to stabilize over the medium to long term. The mutual fund industry plays a vital role in the operations of stock market and consequently contributes significantly to the economy of a country. It is receiving recognition as a credible investment vehicle for pension funds, provident funds and other such schemes of employers" terminal benefits. Equity markets are providing superior returns as compared to all other alternatives, even on a risk-adjusted basis. Although the stock market in Pakistan has shown an impressive performance in previous years, it has a long way to go in terms of growth and expansion. In developed countries the market capitalization to GDP ratio ranges from 137 percent in the United States to 152 percent in the United Kingdom whereas in Pakistan it has hovered around only 15 percent in past few years, which indicates the growth potential in the stock market in the country. This means that there is a strong need to widen and deepen the Pakistan stock market by making it more accessible to general public through educating them about the benefits and better returns as compared to return on bank deposits.

* All major economic indicators at present show a positive outlook of the country's economy and further enhancement of confidence of local and foreign investors in the economy is anticipated. Global scenario of mutual funds industry is not impacting the local market. Foreign investors entering Pakistan are directly pouring money in the stocks and are reluctant to invest in mutual funds. It is imperative to boost confidence and build trust of these potential buyers so as to encourage the industry and improve statistics.

* There is dearth of knowledge, awareness and clear perception amongst masses regarding the pros and cons of dumping money in mutual funds. This factor adds largely to sluggish growth of the industry. Need of the hour is to educate people regarding the comparative benefits of investing in funds instead of keeping the deposits in NSS or banks. One of the main differences is that Mutual Fund returns are tax-free returns whereas conventional investments in banks are subject to 10% withholding tax, which means in real terms you get less than the quoted returns. Other main advantages offered to Mutual Fund Open-Ended Fund holders is that they can redeem their funds anytime they want to except for certain specialized funds (at the prevailing Redemption price of the fund which is quoted on the daily basis), whereas in Banking Sector you can't withdraw your invested money before maturity without paying a penalty. Moreover, investment banks generally offer fixed rates on Certificate of Deposits or Investments; whereas mutual fund returns are variable; thus giving the investor the opportunity to earn beyond expected returns. All these features are to be publicized so as to allure more segments of investment prone individuals. 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. Once the public is aware of the advantages of investing in mutual funds as compared to the other types of conventional investments such as bank deposits they would undoubtedly invest in mutual funds.

* Fund management companies should focus increasingly on asset management and they should use third party distributor as much as possible, to sell funds. This step will help to multiply retail outlets and ensure easy accessibility to general public. Confining the whole market to one window can not make the instruments widely accepted and trusted.

* Mutual Funds Association of Pakistan has to play its due role and develop guidelines in the area of advertising and communications for Asset Management, Investment Advisory Services & Mutual Funds in Pakistan to promote fair competition among investment firms. The Standards are to be aimed at promoting a self regulatory structure within the Mutual Fund Industry of Pakistan, which in turn, can ensure clarity, honesty & integrity in all matters of advertising, marketing and promotions. MUFAP has recently adopted the CFA Institute Asset Manager Code of Professional Conduct. This Code sets forth minimum ethical and professional standards for providing asset management (including investment advisory) services to clients. The goal of this Code is to provide a useful framework for all asset managers to provide services in a fair and professional manner and to adequately disclose key elements of these services to clients.

CONCLUSION: Due to sound economic growth, higher corporate earnings and a buoyant stock market, it is expected that mutual funds would continue to be an attractive investment avenue for retail investors. The industry holds several exciting opportunities for both corporate and individual investors including the retired persons. These days, the mutual fund industry is generating keen interest among a growing number of 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 based on dividend yields and capital gains.