INVESTMENT IN MUTUAL FUNDS PREVAILS ALONG THE SAFE ROUTE
CAUTIOUSNESS IN STOCK, BALANCED OR HYBRID FUNDS NEEDED
TARIQ AHMED SAEEDI (firstname.lastname@example.org)
Aug 11 - 17, 2008
Mutual funds are considered to be secured options of indirect investment in money and equity market, protecting investment through diversifying and reinvesting it into multiple securities that general investment can not take direct exposure to or bear risks for direct exposure. For example individual investor can not buy term finance certificate which is an appropriate mode of reinvesting income or money market fund. Similarly giving investment direct exposure to equity market may be valuable to profit margin, but spreading it into diversified stocks to trade off poor performance of a scrip evokes heavy outlays that are possibly accumulated through pooled funding thereby intensity of net devaluation minimizes.
National Investment Trust is the oldest mutual fund company in Pakistan. Mainly dealing in open end funds, it manages mutual funds of approximately Rs. 80 billion which is near to an amount of Rs. 82 billion the overall size of assets under management in mutual fund sector in the country five years ago in 2003. Recently to support index fall or as an opportunity cost, NIT floated in Rs. 20 billion equity fund in the national main bourse KSE with colossal capitalization of trillion of rupees. Not to this tune of value, however, domestic mutual fund companies manage as near as 50 open and close end mutual funds of various types such as 23 equity, 3 bond, 7 balanced, 10 money market, and other fund of funds.
Unlike Pakistan where mutual funds constitute mere 8 to 10 percent of total bank deposits implying that there is a plenty of space to encompass expanding mutual fund sector and manage assets of Rs. 3 trillion till end of December last, cumulative assets under management of US mutual fund industry are 150 times higher than deposits in banks. In terms of security local money market fund has set bloodline of slight probability of principal cut-down in the challenging economic slow down. Despite its past trend in offering limited rate of return, unit value of income fund rarely slashed principal because of its core dependence for earning on money market instruments which have been showing stable performance in comparison with equity market.
During fiscal year 2007-08, average annual return on income funds revolved around minimum 9.0% and maximum 10.3%. Out of 22 income funds, only three funds became able to offer over 10% return. AMZ Plus Income Fund distributed annualized profit margin on principal of 10.3%, Dawood Money Market Fund 10.14%, and KASB Liquid Fund 10.10%.
According to Fund Select's evaluation of standard deviation or consistency in monthly performance of returns IGI emerged as steadfast in offering consistent returns on income funds while based on sharp ratio assessment for best money market funds KASB clinched the top position followed by AMZ and NAFA income funds.
During last financial year, bourses witnessing insipid performance recorded descending moves. Marred by worsening economic conditions, indexes declined to all time lows. Rather stock exchanges are presently seeking financial succour from different sources. One can not deny the pressure exerted by global economic slowdown on domestic equity markets. The notorious US sub-prime mortgage crisis sparked by massive mortgage related debts write-off trickling down impact on bottom line financial institutions in US culminated in drastic downfall in economic growths of its trading partners. And the effectual impact could not slide past Pakistan's financial sector.
In addition to this, global rise in prices of crude oil, gold, and other commodities shifted focus of traders towards commodities from equity trading. Coupled with restructured trading, debt servicing immunization basically rendered standstill to profitability of almost entire financial structure worldwide. According to Bloomberg, main bourses of the world were engulfed in frightening bearish sentiments during last fiscal. Indices of NASDAQ and Dow Jones were declined by 10% in concurrence.
Locally too the situation was not variable. Decreases in index points of all three stock exchanges made history in the country. Adding insult to the injury, instability of economic policies extremely undermined the performance of stock exchanges. Capital flight from foreign portfolio investment proved a last nail in the coffin.
Amidst such precarious conditions, rate of returns on stock funds could not be determined on ideal parameters and generally stock funds underperformed. Barring two funds that recorded positive reruns, average returns on unalloyed equity fund strode in the negative zone by 4.3%. Particularly these under review two funds outperformed both benchmark indexes of KSE-100 declined by 10.8% and KSE-30 by 15.6% in last fiscal. Crosby Dragon fund with its total return of 31.2% outperformed all its counterparts by enormous margins while AKD Opportunity Fund emerged as second top equity fund in FY08.
Otherwise, United Stock Advantage, HBL Stock, NAFA Stock, Pakistan Stock Market, NIT, Atlas Stock Market, MCB Dynamic Stock, and KASB Stock all positioned at negative zone in returns graph of last fiscal.
Besides, balanced or hybrid funds which are partly invested in money and equity markets offered significant returns in financial year 08. In fact, capital protected and hybrid funds crossed over average returns on income market fund and lingered around 11%. JS funds of fund is the only open end fund which can take exposure in equity as well as in money markets.
Islamic mutual funds also offered positive returns last year. Dawood Islamic fund outfoxed its competing three funds on account of annual return as well as performance consistency on standard deviation.
Investment in open or close end funds prevails along the safe route since it welcomes financial advisory of third party which is well versed in managing capital market instruments. Therefore, given the uncertain market behaviour general investors are advised to on board mutual fund bandwagon to prevent the accident of capital loss. Cautiousness in selecting stock, balanced or hybrid funds is highly needed.