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Investment and Portfolio Management

Contents
INVESTMENT AND PORTFOLIO MANAGEMENT ............................................................................... 2
WHY DO WE INVEST ................................................................................................................................ 2
SPECULATION ........................................................................................................................................... 3
INVESTMENT ALTERNATIVES .............................................................................................................. 3
Direct Investing......................................................................................................................................... 3
Indirect Investing ...................................................................................................................................... 3
FACTORS AFFECTING INVESTMENT DECISIONS ............................................................................. 3
COMPANIES ............................................................................................................................................... 6
WHAT IS AN INVESTMENT COMPANY ................................................................................................ 6
STRUCTURE OF MUTUAL FUND ........................................................................................................... 6
FLOW CHART ............................................................................................................................................. 7
THREE MAJOR TYPES OF INVESTMENT COMPANIES ..................................................................... 7
DIFFERENCE BETWEEN ETF & MF ....................................................................................................... 8
DIFFERENCE BETWEEN OPEN ENDED AND CLOSED ENDED MF ................................................. 8
HOW DO MUTUAL FUNDS DETERMINE THEIR UNIT PRICE .......................................................... 8
BENEFIT OF MUTUAL FUND .................................................................................................................. 9
MUTUAL FUND ATTRACTIONS AND SERVICES ............................................................................... 9
WHY INVESTMENT IN MUTUAL FUNDS ........................................................................................... 10
TYPES OF MUTUAL FUNDS .................................................................................................................. 10
Money Market Mutual Funds ................................................................................................................. 10
Equity Funds, Bond Funds, and Hybrid Funds ....................................................................................... 11
CATEGORIES OF MUTUAL FUND ........................................................................................................ 11
ANNUAL REPORTING ............................................................................................................................ 13

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INVESTMENT AND PORTFOLIO MANAGEMENT

Suppose you are fortunate enough to receive an inheritance of Rs.1 million from a relative.
He/she specifies only that you must invest these money intelligently in financial assets within the
next six months, and not spend it on consumption, and that you must be answerable to a trustee
who has the final say if you fail to make reasonable decisions. You now face an enviable task—
building a portfolio of stocks, bonds, and so forth—and you quickly realize that not only do you
not know all the answers, you don’t even know some of the questions.

An investment can be defined as the commitment of funds to one or more assets that will be held
over some future time period. Investment is concerned with the management of an investor’s
wealth, which is the sum of current income and the present value of all future income.

Portfolio management is the art and science of making decisions about investment mix and
policy, matching investments to objectives, asset allocation for individuals and institutions, and
balancing risk against performance. Portfolio management is all about determining strengths,
weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international,
growth vs. safety, and many other trade-offs encountered in the attempt to maximize return at a
given appetite for risk.

WHY DO WE INVEST

We invest to make money! Although everyone would agree with this statement, we need to be
more precise. We invest to improve our welfare, which for our purposes can be defined as
monetary wealth, both current and future. We assume that investors are interested only in the
monetary benefits to be obtained from investing, as opposed to such factors as the psychic
income to be derived from impressing one’s friends with one’s financial prowess.

The idea of an “optimal combination” is important because our wealth, which we hold in the
form of various assets, should be evaluated and managed as a unified whole. Wealth should be
evaluated and managed within the context of a portfolio, which consists of the asset holdings of
an investor.

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SPECULATION

The act of buying something hoping that its value will increase and then selling at this higher
price in order to make a profit.

INVESTMENT ALTERNATIVES

Investing opportunities, both current and prospective make it possible for investors to make
choices that yield more return. Investment can be break down in two ways direct and indirect.

Direct Investing

This concentrates on investment alternatives available through direct investing, which involves
securities that investors not only buy and sell themselves but also have direct control over the
investment assets. Investors who invest directly in financial markets, either using a broker or by
other means, have a wide variety of assets from which to choose.

Indirect Investing

Indirect investing in this discussion refers to the buying and selling of the shares of investment
companies that, in turn, hold portfolios of securities. Rather than buy and sell securities
themselves, investors can purchase some type of investment company fund which then relieves
them from making decisions about that portfolio.

FACTORS AFFECTING INVESTMENT DECISIONS

(1) Element of Uncertainty:
Yield of capital assets depends upon the business expectations. These business expectations are
very uncertain. Further, because of uncertainty, investment projects usually have a short pay-off
period. Capital assets become obsolete earlier than their expected life due to rapid technological
developments.

(2) Existing Stock of Capital Goods:
“Goods that are used in producing other goods, rather than being bought by consumers.”

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If the existing stock of capital goods is large, it would discourage potential investors from
entering into the making of goods. Again, the induced investment will not take place if there is
excess or idle capacity in the existing stock of capital assets.

In case the existing stock of machines is working to its full capacity, an increase in the demand
for goods manufactured by them will raise the demand for capital goods of this type and raise the
inducement to invest.

(3) Level of Income:
Per capita income or average income measures the average income earned per person in a given
area (city, region, country, etc.) in a specified year. It is calculated by dividing the area's
total income by its total population.

If the level of income rises in the economy through rise in money wage rates and other factor
prices, the demand for goods will rise which will, in turn, raise the inducement to invest.
Contrariwise, the inducement to investment will fall with the lowering of income levels.

(4) Consumer Demand
The present and future demand for the products greatly influences the level of investment in the
economy. If the current demand for consumer goods is increasing rapidly more investment will
be made. Even if we take the future demand for the products, it will be considerably influenced
by their current demand and both will influence the level of investment. Investment will be low
if the demand is low, and vice versa.

(5) Liquid Assets:
The amount of liquid assets with the investors also influences the inducement to invest. If they
possess large liquid assets, the inducement to invest is high. This is especially the case with those
firms which keep large reserve funds and undistributed profits. On the contrary, the inducement
to invest is low for investors having little liquid assets.

(6) Inventions and Innovations:
Inventions and innovations tend to raise the inducement to invest. If inventions and technological
improvements lead to more efficient methods of production which reduce costs, the MEC
(marginal efficiency of capital) of new capital assets will rise. Higher MEC will induce firms to
make larger investments in the new capital assets and in related ones.

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The absence of new technologies will mean low inducement to invest. An innovation also
includes the opening of new areas. This requires the development of means of transport, the
construction of houses, etc. leading to new investment opportunities. Thus inducement to invest
rises.

(7) New Products:
The nature of new products in terms of sales and costs may also influence their MEC and hence
investment. If the sale prospects of a new product are high and the expected revenues more than
the costs, the MEC will be high which will encourage investment in this and related industries.

For example, the invention of television must have encouraged the electronics industry to invest
in these capital assets and used them to produce television sets, if they had expected profits to be
higher than costs. Thus lower maintenance and operating costs in the case of new products are
important in increasing the inducement to invest.

(8) Growth of Population:
Increase in population means increase in demand which tend to increase the investment
opportunities notwithstanding other factors affecting the investment decisions.

(9) State Policy:
If the state follows the policy of nationalization of industries, the private enterprise would be
discouraged to invest. On the other hand, if the state encourages private enterprise by providing
credit, power and other facilities, inducement to invest will be high.

The economic policies of the government have an important influence on the inducement to
invest in the country. If the state levies heavy progressive taxes on corporations, the inducement
to invest is low, and vice versa. Heavy indirect taxation tends to raise the prices of commodities
and adversely affects their demand thereby lowering the inducement to invest, and vice versa.

(10) Political Climate:
Political conditions also affect the inducement to invest. If there is political instability in the
country, the inducement to invest may be affected adversely. In the struggle for power, the rival
parties may create unrest through hostile trade union activities thus creating uncertainty in
business.

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On the other hand, a stable government creates confidence in the business community whereby
the inducement to invest is raised. Similarly, the danger of a revolution or war with some other
country has an adverse effect on the inducement to invest, whereas peace and prosperity tend to
raise it.

COMPANIES

Under Companies Act, 2017, companies primarily can be classified as single member company,
private limited and public limited (Listed or unlisted). Investment companies are regulated by
Securities and Exchange Commission of Pakistan (SECP) under Non-Banking Finance
Regulations.

WHAT IS AN INVESTMENT COMPANY

In general, an investment company is a company that is engaged primarily in the business of
investing in, and managing, a portfolio of securities. By pooling the funds of thousands of
investors, an investment company can offer its owners (shareholders) a portfolio with a specific
objective as well as offer them a variety of services in addition to diversification, including
professional management and liquidity.

Mutual fund is an example of Investment Company. A mutual fund is a collective investment
scheme, which specializes in investing a pool of money collected from investors for the purpose
of investing in securities such as stocks, bonds, money market instruments and similar assets.

STRUCTURE OF MUTUAL FUND
Investment in mutual funds typically can be made by either of these methods:

a. Directly, from a fund company, using mail or telephone, or at the company’s office
locations.
b. Indirectly, from a sales agent, including securities firms, banks, life insurance companies,
and financial planners.

Mutual Funds are operated by Asset Management Companies (AMCs) which exists in the form
of a public limited company registered under Companies Act 2017 (Formerly Companies
Ordinance, 1984). The AMC launches new funds through the establishment of a Trust Deed,
entered between the Asset Management Company and the Trustee, with due approval from the

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SECP under the Non-Banking Finance Companies (Establishment and Regulation) Rules. The
Trustee performs the functions of the custodian of the assets of the Fund. The trustee ensures that
the Fund Manager takes the investment decisions within the defined investment policy of the
mutual fund. Under Pakistan law, banks and central depository companies, approved by the
SECP, can act as trustee.

FLOW CHART
Pool their Money With

Fund
Investors
Manager

Passed
Back to Invest In

Returns Securities

Generate

THREE MAJOR TYPES OF INVESTMENT COMPANIES

A mutual fund is a collective investment scheme, which specializes in investing a pool of money
collected from investors for the purpose of investing in securities such as stocks, bonds, money
market instruments and similar assets.

1. Open-end mutual fund shares are bought and sold on demand at their net asset value, or
NAV, which is based on the value of the fund’s underlying securities and is generally
calculated at the close of every trading day. Investors buy shares directly from a fund.

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2. Closed-end funds have a fixed number of shares and are traded among investors on an
exchange. Like stocks, their share prices are determined according to supply and demand,
and they often trade at a wide discount or premium to their net asset value.

3. Exchange-traded funds also trade like stocks on an exchange, but their market prices
hew more closely to their net asset value than closed-end funds. Premiums and discounts
usually stay within 1 percent of NAV, with the exception of some smaller ETFs that trade
infrequently. (Global X MSCI Pakistan ETF)

DIFFERENCE BETWEEN ETF & MF

An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity,
bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a
common stock on a stock exchange. ETFs experience price changes throughout the day as they
are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund
shares, making them an attractive alternative for individual investors.

DIFFERENCE BETWEEN OPEN ENDED AND CLOSED ENDED MF

Open-end mutual fund shares are bought and sold on demand at their net asset value, or NAV,
which is based on the value of the fund's underlying securities and is generally calculated at the
close of every trading day. Closed-end funds have a fixed number of shares and are traded
among investors on an exchange and their price will be determined through demand and supply
mechanism.

HOW DO MUTUAL FUNDS DETERMINE THEIR UNIT PRICE

A fund's Net Asset Value (NAV) represents the price per unit. The NAV is equal to the market
worth of assets held in the portfolio of a Fund, minus liabilities, divided by the number of units
outstanding.

NAV = _ Current Market Value of all the Assets – Liabilities_____
Total Number of Units Outstanding

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Example:
Assume the ABC Fund has a portfolio of stocks valued on a given day at Rs. 50,000,000. Its
liabilities are Rs.500,000 and shareholders of this fund own five million shares/units. The NAV
is,

NAV= 50,000,000 - 500,000 = Rs. 9.90
5,000,000

In order to determine the sale price of the unit sales load is added to the NAV. In case there is no
sales load the NAV will be the sale price as well as the redemption price. The sale and
redemption price is declared on a daily basis by the Funds and can be viewed on their websites.

BENEFIT OF MUTUAL FUND

One of the main advantages of mutual funds is that they give small investors access to
professionally managed, diversified portfolios of equities, debt instruments i.e. TFCs and Govt.
Securities and other securities, which otherwise would be quite difficult (if not impossible) to
create with a small amount of capital. The income earned through these investments and the
capital appreciations realized are shared with its unit holders in proportion to the number of units
owned by them.

MUTUAL FUND ATTRACTIONS AND SERVICES

The investment industry is undergoing a silent but significant revolution. As consumers watch
inflation nibble away at their savings deposits, financial institutions are rolling out higher-
yielding alternatives to satisfy demand.

Mutual or "pooled" investments are one of the easiest and least costly ways to invest in the stock
market. In practice, unitised investors combine their money to gain the advantages usually
reserved for larger investors - reduced costs and the services of an investment manager.

Unit trusts are indirect investments in either a number of assets types or equities alone. Unit-
linked funds are similar to unit trusts but have a life assurance dimension. Investment in both
types of funds is measured in units rather than pounds. The value of each unit is determined by
the value of the underlying assets. In general, these unitised funds fall into three categories -

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secure, balanced and specialist funds. As their names suggest, each type is based on a particular
risk profile.

WHY INVESTMENT IN MUTUAL FUNDS

Mutual funds make saving and investing simple, accessible, and affordable. The advantages of
mutual fund include the following:-

1. Accessibility
Mutual funds units are easy to buy.

2. Liquidity
Mutual fund unit holders can convert their units into cash on any working day. They will
promptly receive the current value of their investment. Investors do not have to find a buyer; the
fund buys back (redeems) the units.

3. Diversification
By investing the pool of unit holders’ money across number of securities, a mutual fund
diversifies its holdings. A diversified portfolio reduces the investors’ risk. It would be difficult
for an average investor to buy varied securities to achieve the same level of diversification as is
available with investment in mutual fund.

4. Professional Management
Asset Management Company evaluates all the opportunities that arises in the market, carefully
examines them and then takes decision for investing the mutual fund’s money whereas it is not
an easy task for an individual and even for corporate company if investing is not their core
business.

5. Tax Credit on Investment to Individual
Under income tax ordinance 2001 tax credit is available to investors for investment in mutual
funds.

TYPES OF MUTUAL FUNDS

Money Market Mutual Funds
Money market funds (MMFs) are open-end investment companies whose portfolios consist of
money market instruments e.g. treasury bills, bills of exchange, derivatives, Investors in money

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market funds pay neither a sales charge nor a redemption charge, but they do pay a management
fee. Interest is earned and credited daily.

Equity Funds, Bond Funds, and Hybrid Funds
Simply stated, equity funds hold primarily stocks, bond funds hold bonds, and hybrid funds hold
some combination of the two. Within these three broad categories, however, a mutual fund’s
objectives can vary widely. It is important to consider a fund’s stated objectives whether to
invest for equity share, fixed return or both.

CATEGORIES OF MUTUAL FUND

Many equity funds can be divided into two categories based on their approach to selecting
stocks, value funds and growth funds.

1. A value fund generally seeks to find stocks that are cheap on the basis of standard
fundamental analysis yardsticks, such as earnings, book value, and dividend yield.

2. Growth funds, on the other hand, seek to find companies that are expected to show rapid
future growth in earnings, even if current earnings are poor or, possibly, non-existent.

Value funds and growth funds tend to perform well at different times because value stocks and
growth stocks perform well at different times, each having its own cycle. Therefore, value fund
investors will have a run when they do well, and growth fund investors will have similar runs.

SECP the Regulator has categorized the Schemes of mutual funds as under:-

Equity Scheme:
An equity scheme or equity fund is a fund that invests in Equities more commonly known as
stocks. The objective of an equity fund is long-term growth through capital appreciation,
although dividends and capital gain realized are also sources of revenue.

Balanced Scheme:
These funds provide investors with a single mutual fund that invests in both stocks and debt
instruments and with this diversification aimed at providing investors a balance of growth
through investment in stocks and of income from investments in debt instruments.

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Asset Allocation Fund:
These Funds may invest its assets in any type of securities at any time in order to diversify its
assets across multiple types of securities & investment styles available in the market.

Fund of Fund Scheme:
Fund of Funds are those funds, which invest in other mutual funds. These funds operate a diverse
portfolio of equity, balanced, fixed income and money market funds (both open and closed
ended).

Shariah Compliant (Islamic) Scheme:
Islamic funds are those funds which invest in Shariah Compliant securities i.e. shares, Sukuk,
Ijara sukuks etc. as may be approved by the Shariah Advisor of such funds. These funds can be
offered under the same categories as those of conventional funds.

Capital Protected Scheme:
In this type of scheme, the payment of original investment is guaranteed with any further capital
gain which may accrue at the end of the contractual term of the Fund. Such funds are for a
specific period.

Index Tracker Scheme:
Index funds invest in securities to mirror a market index, such as the KSE 100. An index fund
buys and sells securities in a manner that mirrors the composition of the selected index. The
fund's performance tracks the underlying index's performance.

Money Market Scheme:
Money Market Funds are among the safest and most stable of all the different types of mutual
funds. These funds invest in short term debt instruments such as Treasury bills and bank
deposits.

Income Scheme:
These funds focus on providing investors with a steady stream of fixed income. They invest in
short term and long term debt instruments like TFCs, government securities like T-bills/ PIBs, or
preference shares.

Aggressive Fixed Income Scheme:
The aim of aggressive income fund is to generate a high return by investing in fixed income
securities while taking exposure in medium to lower quality of assets also.

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Commodity Scheme:
These schemes enable small investors to take advantage of gains in commodities such as gold
through pooled investments. They invest at least 70% of their assets in commodity futures
contracts, which include both cash-settled and deliverable contracts.

An investor can invest in any of the above categories of funds in accordance with his
requirements and appetite for risk. For example those who want to earn high returns over a
longer period can invest in Equity Funds whereas those who want to invest for short term with
reasonable return can invest in Money Market Fund.

ANNUAL REPORTING

Similar as per requirements of SECP, financial statements to be prepared for each financial year
considering the requirements of Companies Act 2017. (Read AL-Meezan Mutual Funds
Financials)

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