May 28 - June 3, 20

It sounds strange and indicates market unawareness or fear of being hoodwinked that retail investors are yet to ring up windfalls on investments in the incomparably high profitable mutual funds being currently offered in Pakistan. The low investment in mutual fund industry can be gauged from its ratio as percentage of total gross domestic product (GDP), which comes around meagrely 0.5 per cent as compared to the neighbouring India's three per cent.

Annual rate of return on some of the funds floated in the market carry up to unbelievingly 40 per cent. This can be compared with the minimum rate of return of six per cent on bank's saving products as well as the average compound rate of return on defence savings certificate of 12.33 per cent per annum.

JS Islamic Fund, issued by a local asset management company namely JS Investments, has been widely acclaimed for its giving out 40.23 per cent annual return.

Pakistan's mutual funds industry is growing impressively against all odds. Comprising 25 asset management companies, the industry's assets touched the mark of Rs360 billion as of February 2012, up 44 per cent since June 2011.

The evident attractions for investors in the mutual funds in Pakistan include liquidity at investor's will. That means investors are not bound in any kind of commitment with the asset manager to not to withdraw funds before maturity invested for long term. Nor they are discouraged to seek exit and are provided with an option to make redemption on daily basis. Since the government wants to lure investments in the industry, presently mutual funds are exempted from tax. Simply, a unit holder-investor of mutual fund-gets amnesty from paying tax on his/her return on investments. And, on top of all, an important attraction for small investors is the little investment that can turn them into unit holders. For example, JS Investments says, "an investor can invest as little as Rs100".

In spite of all these, why then mutual funds industry fails to attract as much traffic of investors as banks and national saving schemes do despite the fact that latter offer the low rate of return, even if one shrugs off comparisons with their substitutes? There are many reasons. Some are related to the investor behaviour in the market and others belong to the financial sector.

National savings decreased at 13.8 per cent of GDP in 2010-11 from 20.8 per cent in 2002-03 while domestic savings plunged to 9.5 per cent from 17.6 per cent, according to Pakistan economic survey. Private investment was 11.3 per cent of GDP in 2002-03 and 8.5 per cent last fiscal year.

Firstly, this partly indicates the trend of investment in Pakistan. Secondly, depositors/savers in the country are generally driven by a herd mentality. That said they would prefer to invest in avenues flocked by the people in general. This, however, interplays with other unavoidable factors including low-profile operation of financial companies. Asset management companies (AMCs) have yet to become a familiar name to majority of its potential customers especially retailer investors.

In general, people want security of their investments and because of the past scams under which bloated rate of return were promised to rip investors off, they would put up with low returns than to put in money in unfamiliar ventures offering high profits. Unquestionably, public road shows should be organized to make people aware of diversified options through which they can rake up good money.

As far as mutual fund industry is concerned, such public campaigns should begin only with the collaboration of SECP or from the very platform of the regulator. When it comes to banks, they even in the private sector have gotten popularity and public trust subsequently. Public sector investment securities and conventional big banks do not need to splash money on advertising to mobilize funds as private sector does. Unconsciously, people have confidence about protection of their funds in banks as well as national savings scheme.

Mutual fund industry has not only to publicise industrial structure including allocations of funds and risks to become a household name but it also ought to take small investors into confidence and change their perception. Without the regulator's full support to promote the alternative and profitable sources of investments in public, the efforts cannot come to fruition.

The 2008 KSE debacle debilitated the investors interest in the mutual fund industry and since then the industry saw a major downfall, according to the SBP's financial stability review 1st half 2011.

As of June 30, 2011, number of mutual funds reached 136 compared to 127 in June 2010, said the SECP's annual report 2011. Assets posted growth mainly because of the investors' movement towards money market funds that offered 'competitive returns with safety of capital and capital protected schemes', noted the report. Majority of the funds floated in the last financial year belonged to the safer classes of money market and capital protected schemes that allocate their substantial investments to the government securities including treasury bills and healthy financial institutions. High yields on debt securities have also improved the competitiveness of money market funds as compared to other asset classes.

Globally, mutual fund assets grew 2.4 per cent to $23.78 trillion at the end of the fourth quarter of 2011, according to investment company institute (ICI). Mutual funds raised $85 billion in the December quarter all over the world whereas there was a net outflow of $171 billion in the preceding quarter.

There were 72,657 mutual funds in the world at the end of 2011. Of them, 39 per cent were equity funds, 23 per cent balanced/mixed funds, 18 per cent bond funds, and four per cent were money market funds, noted a latest report of the North Wellington, Washington D.C.-based association of U.S. investment companies.

Asia and Pacific region and Africa account for only 13 per cent of the worldwide mutual fund industry's assets while Americas rule the roost with 57 per cent share and Europe with 30 per cent.