What is Mutual Fund?

Amir Aizaz
Secretary Mutual Funds Association of Pakistan - MUFAP Once you've decided to invest in the stock market, mutual funds are an easy way to own stocks without worrying about choosing individual stocks. As an added bonus, you can find plenty of information on the Internet www.mufap.com to help you learn about, study, select, and purchase them. But what is mutual fund? It's not complicated.

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mutual fund is managed by a management company. The management company is a bank of human resources, considered to be professionally qualified personnel. The portfolio of mutual fund is managed by a "Portfolio Manager", whose responsibility is to be invested in, and satisfies the desire of the investors. While selecting the securities for investment, these managers analyze economic conditions, industry trends, government regulations and their impact on the stocks, and forecasts for the specific stocks to the project the future outcome generated by the companies. As we all know that the economic and business condition do not remain constant, so these managers also revise their portfolio with the passage of time, as the circumstances demand.

Concept of Mutual Funds:

The concept is very simple, small investors invest their money into a common
pool or fund and hand over the investment decision to fund manager/ portfolio manager. This is expected to have several advantages for the small investors: no more searching for good buys or relying on the neighborhood sub-broker for advice or even waiting anxiously for the allotment. All this is taken care of by the cumulative bargaining power of the fund, which has trained professionals managing it.

Every

day, the fund manager/ portfolio manager counts up the value of all fund's holding, figures out how many shares have been purchased by shareholders, and then calculates the Net Asset Value (NAV) of the mutual fund, the price of a single share of the fund on that day. If you want to buy shares, you just send the manager your money, and they will issue new shares for you at the most recent price.

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If the fund manager is doing good job, the NAV of the fund will usually get bigger your shares will be worth more.

Types of Mutual Funds:
There are two types of mutual funds, which are:
• •

Open-end mutual funds Closed-end mutual funds

OPEN-ENDED MUTUAL FUND: Open-end mutual funds are those where subscription and redemption of shares are allowed on a continues basis. The price at which the shares of open-end funds offered for subscription and redemption is determined by the NAV after adjusting for any sales load or redemption fee. In Pakistan there exists thirteen open ended mutual funds; National Investment (Unit) Trust (NIT) in the public sector and Atlas Income Fund, Crosby Dragon Fund, Faysal Balanced Growth Fund, Dawood Money Market Fund, Pakistan Income Fund, Pakistan Stock Market Fund, MetroBank-Pakistan Sovereign Fund, Meezan Islamic Fund, Unit Trust of Pakistan, UTP Income Fund, UTP Islamic Fund and United Money Market Fund in private sector. CLOSED-END MUTUAL FUND: Closed-end mutual funds are those where the shares are initially offered to the public and are then traded in the secondary market. The trading usually occurs at a slight discount to the NAV. Over a period of time, the mutual fund managers have developed a variety of investment products to cater for the requirement of investors, having different needs. These include:
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GROWTH FUNDS BALANCED FUNDS INCOME FUNDS

GROWTH FUNDS The "growth funds" offer potential for appreciation in share value, while the current income may be low. The fluctuation in share price may also be high. Such funds invest in stocks and have tendency to outperform other funds and other modes of savings over a period of time. BALANCED FUNDS 2

The "growth and income funds" or "balanced funds", offer prospects of both moderate appreciations in share value as well as current income. The fluctuation in share price may be low. Such funds invest in stocks, corporate debts and Government paper. INCOME FUNDS The "bond fund" or "income funds", offer good current income but very little potential for growth. Such funds invest in government paper, bonds issued by municipal or local bodies, corporate debts and in stocks of utility companies, offering regular return. SOURCES OF PROFIT GENERATION:

A mutual fund can generate profits from three different sources, which are:
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Dividend Capital Gains Appreciation of Share Price

Dividend: Mutual fund generates income from dividends received from other joint stock companies whose shares the fund holds. A mutual fund uses this dividend income to distribute dividend to its own stock holders. Capital Gains: As discussed earlier the portfolio manager changes the portfolio of the fund with the passage of the time and also with the changes in economic and business conditions. So due to the sale and purchase of shares, the mutual fund generates capital from the sales/ purchase of stocks. The capital gain generated by the mutual fund is also used to pay dividends to the investors of the fund. Appreciation of Share Price: Mutual funds also increase the wealth/investment of their shareholder through appreciations of share price of the mutual fund. For example if the subscription price of a mutual fund is Rs.11.00, and after a period of seven months the price goes upto Rs.18.00, thus the investor gets a profit of Rs.7.00 if he sell the mutual fund's shares in the market.

Advantages of Mutual Funds:
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Mutual Funds substantially lower the investment risk of small investors through diversification in which funds are spread out into various sectors, companies, securities as well as entirely different markets. It is always the objectives of a fund manager to maximize a funds return for a given level of risk, however the dangers of "over-diversification" are always prevalent which would inevitably lead to a reduced return on the portfolio. Mutual Funds mobilize the saving of small investors and channel them into lucrative investment opportunities. As a result, mutual funds add liquidity to the market. Moreover, given that the funds are long term investment vehicles, they reduce market volatility by offering support to scrip prices. Mutual Funds are providing the small investor access to the whole market which individually, would be difficult to achieve. The investors save a great deal in transaction cost given that he has access to a large number of securities by purchasing a single share of mutual fund. The investors can pick and choose a mutual fund to match his particular needs.

Disadvantages of Mutual Funds:
As such there is no major disadvantage attached to the mutual funds. However, the possible disadvantages could be:

Economic and Business Conditions: As the business and economic conditions do not remain constant, the mutual fund may face some difficulties in future. Especially if the manager does not shuffle the investment portfolio with the passage of time, or some other major unforeseen disaster/event changes the investment scenario. Portfolio Managed by Managers: Portfolio of a mutual fund is managed by the portfolio managers due to which the investor has no say in the affairs of a mutual fund.

History of Mutual Funds in Pakistan:
Mutual Funds were introduced in Pakistan in 1962, with the public offering of National Investment (Unit) Trust (NIT) which is an open-end mutual fund in the public sector. This was followed by the establishment of the Investment Corporation of Pakistan (ICP) in 1966, which subsequently offered a series of closed-end mutual funds. Currently there exists one open end (NIT) mutual fund in public sector. Twelve open-ended and Fourteen closed-ended mutual funds under private sector management, and there are many more Funds in the pipeline. 4

Rules Govern Mutual Funds in Pakistan
There are two rules govern mutual funds in Pakistan, which are: 1. Investment Companies and Investment Advisors' Rules, 1971. (govern closed-end mutual funds) 2. Asset Management Companies Rules, 1995. (govern open-ended mutual funds)

Mutual Funds in Pakistan:
Open-end
Public Sector
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. National Investment Trust Atlas Income Fund Crosby Dragon Fund Faysal Balanced Growth Fund Dawood Money Market Fund Pakistan Income Fund Pakistan Stock Market Fund MetroBank-Pak Sovereign Fund Meezan Islamic Fund Unit Trust of Pakistan UTP Income Fund UTP Islamic Fund 13. United Money Market Fund

Closed-end
-1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.
Al-Meezan Mutual Fund Asian Stocks Fund ABAMCO Composite Fund ABAMCO Capital Fund ABAMCO Stock Market Fund 4th ICP Mutual Fund BSJS Balanced Fund Dominion Stock Fund First Capital Mutual Fund Golden Arrow Stock Fund Investec Mutual Fund ICP SEMF managed by PICIC PICIC Investment Fund (ICP Lot ‘B’) Pakistan Premier Fund Pakistan Capital Market Fund Prudential Stock Fund Safeway Mutual Fund Tri-Star Mutual Fund

Private Sector

(This article is written by Mr. Amir Aizaz, Secretary Mutual Funds Association of Pakistan – MUFAP. Mr. Amir Aizaz holds Masters Degree (MBA). He joined MUFAP in 1996.)

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