5 replies to this topic

[AbDuLmAtEeNkHaN]

Mutual Funds: catching up as an attractive investment option

by Sana Abdullah Khatri
The advent of mutual funds in Pakistan dates back to 1962, when Pakistan’s first open end unit trust scheme The National Investment Trust (NIT) came into existence. Being a public sector fund, it managed to dominate the market by the backing of the state government. However it failed to create a market for mutual funds in the retail segment. This was mainly due to attractive rates of returns on National Savings Schemes (NSS), frequent political and economic policy changes, and simply because of lack of awareness in the general public.

But during the last five years the mutual funds industry has witnessed phenomenal growth. From PRs 16bn in June 1998, the total industry size now stands at around PRs215bn in March 2007. At present there are 34 Asset Management Companies registered and licensed by SECP, and a total of 67 funds operating in the market, out of which 43 funds are open end and the remaining 24 are close end funds.

Although the industry has seen unparalleled growth in the last five years, a relatively larger section of this growth has come in the open-end funds category. These open-end funds have become more popular mainly due to their exceptional returns and operating structure. Open-end funds present an investor with the ease of entry and exit as the asset manager stands to redeem the invested amount at the net realizable value of the investment. On the other hand, close end fund’s investors have to depend on the demand supply dynamics of the stock exchanges to redeem their investment. Usually close end funds trade at a discount of around 20% to 30% of their Net Asset Values. As at 31st March 2007, total investment in open-end funds stands at around PRs168.917bn, which is around 78.6% of the total industry size. Nonetheless it is very low compared to the bank deposits, which amount PRs3.33trillion. Open-end funds are currently 5.07% of the bank deposits and only 3.46% of GDP. The total mutual fund industry size (including close end funds) stands at around 6.45% and 4.41% of the Bank deposits and GDP respectively. This shows that the mutual funds industry in Pakistan is evolving.

Pakistan only had one open-end fund until 1997, NIT, which is a public sector equity fund. ABAMCO Limited then launched Pakistan’s first private sector open-end balanced fund in Pakistan, namely Unit Trust of Pakistan (UTP). Third to join the industry was Arif Habib Investment Management. They came up with an income fund namely Pakistan Income Fund and a stock market fund called Pakistan Stock Market Fund. The market for open-end funds kept evolving and more than 40 funds were launched in a short span of 5 years. As these funds started becoming popular, more and more business groups and large commercial banks joined this industry.

Asset Managers have come up with specialized financial products to tap niche markets, to cater to the requirements of all types of investors, from the ultra-conservative to the highly aggressive risk seekers. Pakistan’s open end funds industry can be divided into eleven sub-divisions or categories, based on a funds particular investment strategy, these categories are Money Market Funds, Income funds, Hybrid income funds, Gilt Funds, Capital Protected Funds, Balanced Funds, Fund of Funds, Asset Allocation Funds, Equity Funds, Islamic Funds and Index Tracker Funds. Different fund types are best suited to different investors, as each of these are based on a different risk/ return strategy. Equity funds currently hold approximately 51.4% of open-end funds, out of which, 46.32% is held by NIT alone. As at 31st March 2007, the fund size of NIT is PRs78.248bn. Excluding NIT, other private sector equity funds are approximately 5% of the open-end fund industry size. (PRs8.576bn)

The most popular category of funds is the income funds category and approximately PRs50.361bn (29.81% of the industry size) is invested in income funds. Income funds invest in fixed income securities like Term Finance Certificates (TFCs), Continuous Funding System (CFS) and high yielding Term Deposits (TDRs). NAFA cash fund, being the largest private sector income fund, as at 31st April 2007 stands at PRs12.6bn. These income funds are becoming popular because of their investment objective of capital preservation, the regular income stream they provide no-load structure and tax-free returns which are now comparable to a bank deposit. Income funds currently provide an investor with an attractive tax-free return averaging around 11% to 12% on an annualized basis.

All open-end funds except NIT, distribute their returns in terms of bonus dividends, which are tax-free. On the other hand the profit from bank deposits is taxable. An investor is liable to withholding tax deduction up to 10% for individuals, which in their case is the final tax liability but in case of corporations, the total tax liability is on average 30% to 40% depending upon the tax bracket the organization falls in. This makes the return on bank profits significantly lower than the stated rate of return. Another benefit of investing in an income fund is the liquidity it provides unlike NSS. An investor does not need to lock in the investment for 10 years to earn the stated 10% return. The investment in mutual funds can be redeemed at will without paying any penalties, whereas with Defence Saving Certificates (DSCs), an investor earns a return of only 6% if the certificate is redeemed in a year.

The market of Islamic funds is also in the development stage and three new Islamic funds have been launched in the current fiscal year. An Islamic Income Fund, first of its kind has been launched in January 2007, by Al Meezan Investment Management, which is a Riba free income fund, a unique product indeed. All other Islamic funds in the market are purely equity funds by nature. Currently, Islamic funds are 4.94% of the open-end funds industry size.

Going forward, although asset managers are working on innovative financial products, there is a real need to create general awareness about mutual funds in the retail segment of investors. Mutual funds are set to give tough competition to NSS and Bank Deposits in the near future, provided the asset managers and the financial planners work collectively in establishing enlightenment among the masses, the market, which is still largely untapped. This can be done by making an individual realize that the average return on bank deposits and the NSS is said to be even less than the rate of inflation in the country. As the Mutual Funds industry in Pakistan is in its budding stage and further growth in the near term cannot be ruled out as people start to accept mutual funds as an attractive investment option.

(The writer is a research & product development associate at INBEST, financial products distribution unit Atlas Capital Markets (Pvt.) Limited)

[Ibrahim]

Al Meezan Funds half-yearly results announced

KARACHI (February 21 2008): Al Meezan Investment Management Limited has announced the half-yearly results for Al Meezan Mutual Fund Limited (AMMFL) and Meezan Balanced Fund (MBF). AMMFL, a closed-end equity fund, has been in operation since 1996.

During the half year period ended December 31, 2007, AMMFL earned a net income of Rs 129.4 million (Rs 0.94 per share) as compared to Rs 45 million (Rs 0.33 per share) in the corresponding period a year back reflecting an impressive growth of 187 percent. As on December 31, 2007, AMMFL's net assets stood at Rs 2,041 million.

MBF, a closed-end balanced fund scheme, during the half year period ended December 31,2007, earned net income of Rs 62.7 million (Rs 0.52 per unit) as compare to Rs 55.4 million in the same period a year back. The income was mainly generated through realised capital gains of Rs 45.6 million, dividend income of Rs 20.6 million and profit on Shariah compliant income instruments of Rs 33.1 million. The net assets of MBF as on December 31, 2007 stood at Rs 1,467 million.

In line with the philosophy of developing Shariah compliant products to meet the investors' needs, Al Meezan Investments is going to launch next month Pakistan's Shariah Compliant Capital Protected Fund - Meezan Capital Protected Fund that will provide investment opportunity to the investors who desire high level of capital protection and also want to get healthy return from positive stock market development.-PR

[NEEDY NEEDO]

ASSALAM O ALAIKUM

thank you very much for the info you provided MR.IBRAHIM
do tell us when the said islamic fund ipo is announced.

it feels i have lost this world and hereafter(ALLAH forbidden)
by playing stocks in banking sector,on margin etc.
now i want to invest in islamic way at the earliest.

also please guide me if you have some resarch that is it lawfull in islam to invest in banking or to play their stocks or to play stocks on "badla"/margin

thanks a lot

[Zahir Shah]

ASSALAM O ALAIKUM

thank you very much for the info you provided MR.IBRAHIM
do tell us when the said islamic fund ipo is announced.

it feels i have lost this world and hereafter(ALLAH forbidden)
by playing stocks in banking sector,on margin etc.
now i want to invest in islamic way at the earliest.

also please guide me if you have some resarch that is it lawfull in islam to invest in banking or to play their stocks or to play stocks on "badla"/margin

thanks a lot

bhai !!! i m also v much conscious of legelness of share business!! BANKS, LEASING & INSURANCE , TOBACCO & Film producing company shares r haraam. aprt from this day trading is also not allowed.... working through BADLA is also not allowed bcz it will bcome SATTA bcz whn the rates get lowered ,,, ppl get panic & sell their shares bcz they have to pay INTEREST to Financing Institution & business through INTEREST giving is not allowed in ISLAM... ye bhi kaha jata hay k sari COs interest pay karti hain... bur ajkal koi aisi compay nahin jo interest na deti hooo.... is liye islamic scholars ne fatwa diya hay k agar DEBT to ASSET ration 33% / 40% (kahin pe 33 kaha hay & kahi pe 40 kaha hay ) ye is case mei k jab tak debt pay kartay kartay wo ISlamic hojaye tb tk is mei sarmaya kari kar saktay hain....
1. jab ap aik company k share khareed laitay ho tu 2-3 days lagtay hain os ko ap k qabzay mei anay mei... jab wo ap k qaqzay mei ajayen tb ap ab on ko sell kar saktay hain is se pehlay nhain.... ok?? (ye sab mei ne CNBC mei ISLAM & KAROBAR pe prog mei suna tha)

[Ibrahim]

Dear Friends,

if you ask me I like only Modaraba and Mutul Funds.

I think they are much safer.

[NEEDY NEEDO]

ASSALM O ALAIKUM

MR IBRAHIM THANK YOU VERY MUCH FOR THE DETAILED ANSWER
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