Dec 19 - 25, 20

Over the years, mutual fund industry in Pakistan has been growing. It cannot be termed as an exponential growth though some thought it so basing the argument on the growth in the industry's net asset value over a decade. Opponents, who are in majority, however do not find the argument valid when they make comparison of this industry with the other sections of the financial sector including Islamic financial system that has a close relation with mutual funds in Pakistan, and has relished at meteoric progress in last five years.

According to the Mutual Funds Association of Pakistan (Mufap), the industry's net asset value (NAV) gained traction rather splendidly to Rs247 billion as of September 2011 from mere Rs21 billion in 2001.

Islamic financial services industry is also seeing a fabulous growth of 30 per cent per annum in Pakistan. By the end of June this year, alone Islamic banking managed to grab 7.3 per cent share in conventional banking system and its assets size reached Rs560 billion, said a report of state bank of Pakistan. Similarly, its branch network has crossed 800 branches.

It may be noted that mutual fund's history dates back to 1960s. Investment corporation of Pakistan launched first open-end fund namely national investment unit (NIT) in 1962.

Mutual fund managers aggregate funds from varied investors and invest in the securities including equity and fixed income. Capital gains or dividend yields are payouts announced for the unit holders periodically by asset management companies.

Minimum risk exposures are the core of both open- and close-end funds. Rate of returns of mutual funds are variable.

Despite having a host of competitive advantages over banking investment products, mutual funds have not made inroads in the mass market in the country.

Exemption from withholding tax is the primary benefit of investment in funds. Saving accounts in banks restrict depositors from withdrawing money until the maturity. In case of withdrawal, a penalty is imposed. Contrastingly, fund holders can take out their investment anytime without incurring penalties in certain types of funds.

Open-end fund does not have a cap on issuance of units that may continue to swell up on market demand while a company to raise fixed capital floats close-end fund.

Both open- and close-end funds have been showing up and down in performance in relation to their dividend yields and capital gains.

Years 2008 and 2009 were the nightmarish years for both assets management companies and investors since constant dips or losses in return on equity were triggered perhaps due to economic downturn and political volatility in Pakistan.

The following year started to note a revival, albeit the two hitches remain there with perhaps low intensity.

The performance of the industry in first quarter (July-Sep) of financial 2011-12 was good with money market funds the top performer.

Government securities are the repository of at least 70 per cent of money market funds. An annualised return on money market, an open-end fund, was near 11.94 per cent in the first quarter and that of Islamic money market was 11.60 per cent.

According to the Mufap's quarterly newsletter, the open-end fund and pension funds registered 0.5 per cent and three per cent increment in July-Sep FY12. In contrast, close-end funds recorded a sharp decline of seven per cent. Net assets of open-end funds stood at Rs222 billion, net assets of close-end funds Rs23 billion, and pension Rs1.6 billion at the end of first quarter.

In the three months under review, eight funds were launched. Of them, three were asset allocation and two income while rest were Islamic capital protected, capital protected, and income funds. Two capital protected funds including Alfalah GHP Principal Protected Fund II and JS Principal Secure Fund II reached maturity during this period.

There are tremendous investment opportunities for retail investors and corporate sector in the mutual funds. Similarly, pensioners and retired persons can cash in on the potential of the industry.

Experts said retail investments in mutual fund equity portfolio could improve the performance of stock funds and most importantly address the liquidity constraints faced by the fund managers. Since fund managers have to disinvest holdings in stock or sector after crossing a ceiling under the existing regulations, they need liquidity in the market to buy out what they are selling. Individual/retail risk taker can extend the helping hand in such a situation, wrote managing director Karachi stock exchange (KSE), Nadeem Naqvi, in an article.

"In India and Bangladesh, retail investors constitute 60 to 80 per cent of market volume. In Pakistan today, they account for 40 per cent of market volume," he continued. According to him, retail investors can play very important role in propping up liquidity condition in a stock market.

Lack of awareness, regulatory limitations, and limited diversification are recognised as the barriers in the way of progress of mutual fund industry in Pakistan.

Mufap, the sole body of assets management companies in Pakistan, seems to playing an active role in strengthening the industry by removing issues facing it. The association has joined forces with security and exchange commission of Pakistan (SECP) to formulate nonbanking financial companies (NBFCs) regulations.

In its 'Five Year Plan' presented to the regulator, the association has called for 'pension reforms, developments of bond market, real estate investment trusts (REITs), and corporate governance'.

Asset management companies can meet the money requirements of the government and thus can save banking liquidity for the underfunded private sector. Excessive public borrowing from banking system do not only crowd out borrowers of private sector but also lead to high inflation.

Majority of mutual fund categories are liquid and thus do not invite penalties on withdrawal as opposed to bank fixed-deposits or national saving certificates. In this relation, returns on investment in this investment's avenue seem attractive clearly.