IFMP Mutual Funds Basics Certification (Study and Reference Guide) PDF

ICM - Mutual Fund Distributors Certification
Mutual Funds
Basics Certification
Study and Reference Guide
July 2017
Institute of Financial Markets of Pakistan © 2017

IFMP - Mutual Funds Basics Certification
Mutual Funds
Basics Certification
July 2017

Copyright © 2017
Institute of Financial Markets of Pakistan (Formerly Institute of Capital Markets)

Karachi, Pakistan
All rights reserved
This is document is for educational purposes only and the Institute of Financial Markets of
Pakistan (IFMP) (Formerly Institute of Capital Markets) accepts no responsibility for persons
undertaking trading or investments in whatever form.
While every effort has been made to ensure its accuracy, no responsibility for loss
occasioned to any person acting or refraining from actions as a result of any material in this
publication can be accepted by the IFMP or its members.
IFMP has prepared its study guides with the best intent for educational reference purposes
only and the documents shall not be considered as an ultimate authority on the subject or
to pass the IFMP qualifications. Readers are encouraged to study additional relevant
material and as recommended by IFMP.
The IFMP's training materials are solely for the purpose of referencing and the matter
provided may not be taken as any empirical theory on the subject which is dynamic and
evolving with latest research and developments. While some of the content has been taken
from third-party sources, their efforts and work on the topic are highly acknowledged.
For any comments, suggestions and information, you may reach IFMP at info@ifmp.org.pk

TABLE OF CONTENTS
1. Objective of the Examination……………………………………………………………. 05
2. Exam Specification ……………………………………………………………………………. 06
3. Summary Syllabus ……………………………………………………………………………… 07
4. Recommended Readings ………………………………………………………………….. 14
5. Detailed Study Material…………………………………………………………………..… 15
6. Acronyms ………………………………………………………………………………………….. 16
7. Element 1 - Introduction to Financial Services and Products …………..… 17
8. Element 2 - Introduction to Mutual Funds ………………………………………... 25
9. Element 3 - Regulatory Framework …………………………………………………. 55
10. Element 4 - Fund Features and Mechanics ………………………………………. 57
11. Element 5 - Ethics, Disclosure and Best practices………………………………. 80
12. Glossary……………………………………………………………………………………………… 92

OBJECTIVE OF THE EXAMINATION
This Certification Exam is specifically designed to meet the minimum qualification needs of
the mutual fund distributors working either directly with a fund management company or
through a distribution agent. It intends to ensure that they are competent to provide
investment advice to the investors.
TARGET AUDIENCE
This exam has been mandated for Sales Staff of Mutual Fund Companies/ Collective
Investment Schemes and their distributors.
SYLLABUS STRUCTURE
The curriculum is divided into elements and these are broken down into a series of learning
objectives. Each learning objective begins with one of the following prefixes: know,
understand, be able to calculate and be able to apply. These words indicate the different
levels of skill to be tested. Learning objectives prefixed:
 know require the candidate to recall information such as facts, rules and principles
 understand require the candidate to demonstrate comprehension of an issue, fact,
rule or principle
 be able to calculate require the candidate to be able to use formulae to perform
calculations
 be able to apply require the candidate to be able to apply their knowledge to a
given set of circumstances in order to present a clear and detailed explanation of a
situation, rule or principle

EXAMINATION SPECIFICATION
Each examination paper is constructed from a specification that determines the weightings
that will be given to each element. The specification is given below.
It is important to note that the numbers quoted may vary slightly from examination to
examination as there is some flexibility to ensure that each examination has a consistent
level of difficulty. However, the number of questions tested in each element should not
change by more than plus or minus 2.
Examination Specification
100 multiple choice questions
Element number Element Questions

1 Introduction to Financial Services and Products 20
2 Introduction to Mutual Funds 30
3 Regulatory Framework 10
4 Fund Features and Mechanics 20
5 Ethics, Disclosures and Best Practices 20
Total 100
ASSESSMENT STRUCTURE
 This will be a 150 minutes examination of 100 multiple choice questions.
 All questions will carry equal marks.
 There will be no negative marking on any wrong answer.

SUMMARY OF THE SYLLABUS

ELEMENT 1
Introduction to Financial Services and Products
On completion, the candidate should:
1.1 know the role of the Securities Market and Financial System including
 stock exchanges
 retail/commercial banks
 pension/mutual funds
 insurance companies
 fund managers/asset management companies
 custodians
 industry trade bodies (MUFAP)
1.2 know the products and asset classes including:
 Cash deposits
 Government securities and Corporate Bonds
 Equities
 Commodities
1.3 know the difference between retail and institutional investors
1.4 understand the role and functions of Primary Market
1.5 understand the role and functions of Secondary Market

ELEMENT 2
Introduction to Mutual Funds
2.1 know the Concept and Role of Mutual Funds including:

 Importance of Mutual Funds in the Financial Markets
 Concept of Mutual Funds
 Advantages Mutual Funds
2.2 know the structure of Mutual Funds
2.3 know the benefits of Mutual Funds
2.4 know the types of Mutual funds in Pakistan including:

 Types of Funds
 Significance of various types of Funds
2.5 know the differences between Mutual Funds and Bank Deposits.
2.6 know the Categories of Mutual Funds including:

 Equity Funds
 Debt Funds
 Money Market Funds
 Sector Funds
 Balanced Funds
 Index Funds
 Pension Funds
2.7 Pension Funds
2.7.1 know the purpose, benefits and financial protection provided by Pension Funds
2.7.2 know the type and categories of Life assurance products available through
Mutual Funds
2.7.3 Understand and be able to calculate the Tax treatment of pensions
2.7.4 Know Legislation and taxation benefits on Pension Funds
2.8 know the Risks associated with Mutual Funds including:

 Market Risk
 Credit Risk
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 Liquidity Risk
 Inflation Risk
 Interest Rate Risk
 Settlement Risk
2.9 know the types of Shariah compliant Islamic Mutual Funds including:
 Shariah Compliant Equity Fund

 Shariah Compliant Money Market and Income Funds
 Commodity Fund
 Hybrid Funds
10

ELEMENT 3
Regulatory Framework
3.1 Briefly understand the scope, core functions and powers of the Securities and
Exchange Commission of Pakistan (SECP)
3.2 understand the NBFC and Notified Entities Regulations 2008 including:
 Section 38: Obligations of the Asset Management Company

 Section 49: Custody of assets
 Section 52: Periodical reports to shareholders, etcetera
 Section 55: Investment policy and diversification
 Section 57: Pricing, issue and redemption of units
 Section 61: Remuneration to Asset Management Companies
 Section 66A: Sale and Distribution of units of Collective Investment Schemes
3.3 understand the SECP Directives to Fund Management Companies on Conduct of

Business, Investor Warnings, etc.
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ELEMENT 4
Fund Features and Mechanics
4.1 understand the structure and importance of Regulatory Documents including
 Prospectus/Offering Documents
 Trust Deed
4.2 know Investor Services and requirements including:
 Account Statements
 Electronic Issuance and Certificates
 Minimum Balance Requirements
 Fund Expenses
 Transaction Costs
 Sales and Purchase of Units/ Offer and Redemption
 Registration of Unit Holders/ Investors
4.3 understand the investment planning and various funds asset allocation strategy
4.4 understand the Net Asset Value (NAV) of the Fund and be able to calculate the
return of the Fund as per MUFAP Total Return Methodology
4.5 know the Zakat applicability, exemption and should be able to calculate Zakat on
Units/ investment
4.6 understand the Fund Redemption and Transfer procedure including:
 Payment of redemption proceeds

 Partial redemption
 Partial transfer
4.7 understand the Fund Valuation and Taxation including:
 Taxation on Fund Units

 Taxation on Dividends and Bonus
 Tax Exemptions, Rebates and Allowances
4.8 know the Mutual Fund ratings, Fund Manager Ratings and benchmarks
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4.9 Understand and be able to calculate the Tax treatment of pensions,
4.10 Know Legislation and taxation benefits on Pension Funds.
13

ELEMENT 5
Ethics, Disclosures and Best Practices
5.1 know the methods of information dissemination and disclosure requirements
5.2 know the requirements and importance of NAV announcement related to:
 Matching investments and redemption

 Cut-off and market timings
 Performance
5.3 understand the disclaimers, policies and their disclosure requirements related to
Investments and Risks
5.4 understand the duty to investors relating to mis-selling under and overselling
5.5 understand the importance and methods of investor profiling for affordability and
suitability
5.6 know the importance of maintenance of investor records
5.7 understand the confidentiality related to:
 Clients’ Information
5.8 know the relevant sections of Anti Money Laundering Ordinance and KYC/CDD
requirements
5.9 know the requirements of Fair Dealing including:
 Risks & Rewards of Investing

 Maintenance of Records
 Time Stamps
 Misstatements & Mis-selling/ False Selling
5.10 know the process and handling of Investor Complaints
14

Recommended Readings
The next section of this study guide covers a brief extract from some of the below
mentioned documents. Candidates are advised to study the respective documents (in detail
and original) which are available free-to-download from IFMP's website and / or the
respective organization's websites.
1. Code of Corporate Governance, 2012

2. SECP Act, 1997
3. Securities Act, 2015
4. Securities Brokers (Licensing and Operations) Regulations, 2016
5. Securities (Leveraged Markets and Pledging) Rules, 2011
6. Stock Exchange Members (Inspection of Books and Record) Rules , 2001
7. Securities & Exchange Rules, 1971
8. Voluntary Pension System Rules, 2005
9. NBFC Regulations 2008
15

STUDY MATERIAL
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ACRONYMS
AFS Available For Sale
AMC Asset Management Company
CDC Central Depository Company (of Pakistan Limited)
CDS Central Depository System
CEF Closed-End Fund
CGT Capital Gain Tax
CRA Credit Rating Agency
CVT Capital Value Tax
GDP Gross Domestic Product
GNP Gross National Product
IFRS International Financial Reporting System
IFMP Institute of Financial Markets of Pakistan
KMI Karachi Meezan Index
MUFAP Mutual Funds Association of Pakistan
NAV Net Asset Value
NBFC Non-Banking and Finance Companies
NCCPL National Clearing Company of Pakistan Limited
PMEX Pakistan Mercantile Exchange Limited
PSX Pakistan Stock Exchange
NCSS National Clearing and Settlement System
REIT Real Estate Investment Trust
RMS Risk Management Ratio
SECP Securities & Exchange Commission of Pakistan
SBP State Bank of Pakistan
TFC Term Finance Certificates
VPS Voluntary Pension System
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ELEMENT 1
Introduction to Financial Services and Products
1.1 know the role of the Securities Market and Financial System including:
 retail/commercial banks
 pension/mutual funds
 insurance companies
 fund managers/asset management companies
 custodians
 industry trade bodies (MUFAP)
 stock exchanges
RETAIL/COMMERCIAL BANKS
A commercial bank is a type of financial intermediary and a type of bank. It is a bank that
provides checking accounts, savings accounts, and money market accounts and it accepts
time deposits. Commercial banks also function as retail bank. Retail banking refers to
banking in which banking institutions execute transactions directly with consumers, rather
than corporations or other banks. Services offered by commercial banks include: savings
and cheque accounting, mortgages, personal loans, debit cards, credit cards, and so forth.
Most banks offer both commercial and retail banking services.
MUTUAL AND PENSION FUNDS

Mutual Fund is a pool of money (Collective Investment) belonging to a group of investors,
who entrust it to a Fund Manager (Asset Management Company) for making prudent
investments on their behalf. These investments are made strictly in accordance with the
Investment Policy laid down in the Constitutive Documents of the Fund. The ownership of
the Fund Property vests in the investors and the Fund manager is entitled only to certain
fees, paid by the Fund (by the investors) for managing the Fund.
Asset Management Companies have professional management, with a portfolio manager to
monitor its holdings and decide which security to buy, hold or sell. Shares/units are sold to
the public at Net Asset Value (NAV) price that are subject to certain adjustments. How well
the Fund is performing at any time is partly reflected in a rising or declining NAV at that
time.
Mutual Funds are primarily structured in two ways; the more common structure is an Open
End Fund, from which shares can be redeemed at any time at a price that is tied to asset
value of the fund. Mutual Funds can also be structured as Close End Fund in which a fixed
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number of redeemable shares are sold at an initial offering and are then traded like
common stock on the Stock Exchange or Over-The-Counter (OTC) market.
There are, however, different types of mutual funds. There are funds that specialize in debt
instruments that may, in turn focus/specialize in corporate or sovereign debt. Similarly
funds that invest in common stocks may specialize and invest solely in specialized markets
or sectors. Another type of fund, known as an index fund, doesn't try to beat the
performance of the overall market, but tries to equal it. Manager of Index Funds buy a
portfolio that is a mirror image of an index and therefore less research and expertise is
required to manage such funds.
A mutual fund's performance can be judged from the consistency of returns on year after
year basis. Buying the top funds of the prior year can sometimes be disappointing, since
high flyers of one year may not guarantee similar results in later years. Investing in mutual
funds requires first doing some basic homework, setting goals, selecting appropriate funds
closely matching investment objectives. Mutual Funds should normally be seen by the
investors as a relatively longer term investments (minimum five year horizon)
A pension fund is a pool of assets similar to Mutual Funds but forming an independent legal
entity that are bought with the contributions to a pension plan for the exclusive purpose of
financing pension plan by the investor.
INSURANCE COMPANIES
Insurance is defined as the equitable transfer of the risk of a loss, from one entity to
another, in exchange for payment of a premium, and can be thought of as a guaranteed
small cost (premium) to prevent a large, possibly devastating loss. Insurance companies
perform risk management that is primarily used to hedge against the risk of a contingent
loss. An ‘insurer’ is the company selling the insurance while; an ‘insured’ is the person or
entity buying the insurance. Insurance companies are one of the major institutional
investors in equity and debt markets.
ASSET MANAGEMENT COMPANIES (AMC)

Asset Management Company provides the professional management of various securities
(shares, bonds etc.) and assets (e.g., mutual funds), to meet specified investment goals for
the benefit of the investors. Investors may be institutions (insurance companies, pension
funds, corporations etc.) or private investors.
Non-Banking Finance Companies and Notified Entities Regulations, 2008 define AMC to
mean “Non-Banking Finance Companies licensed by the Commission to provide asset
management services”.
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While the Voluntary Pension System Rules, 2005 define AMC to mean “A company which has
been licensed by the Commission under rule 5 of the Non-Banking Finance Companies Rules,
2003, to offer investment schemes under trust deeds and to issue redeemable securities”.
CUSTODIAN
Custodian is a trust company, bank or similar financial institution responsible for holding
and safeguarding the securities owned within a mutual fund on behalf of investors. A
mutual fund's custodian may also act as the mutual funds transfer agent, maintaining
records of unit-holder transactions and balances. Since a mutual fund is essentially a large
pool of funds from many different investors, it requires a third-party custodian to hold and
safeguard the securities that are mutually owned by all fund's investors. This structure
mitigates the risk of dishonest activity by separating the fund managers from the
physical/holding of securities and investor records.
STOCK EXCHANGES
Under Section 2 of Securities Act, 2015,
"Securities Exchange" means a public company that is licensed by the Commission as a

securities exchange under section 5 and,
"Futures Exchange" means a public company that is licensed by the Commission as a futures
exchange.
"Securities Broker" means a trading right entitlement certificate holder or "TRE" certificate
holder who, by way of business,
(a) makes or offers to make with any person or induces or attempts to induce any
person to enter into or to offer to enter into, any agreement for or with a view to buying,
selling, exchanging or subscribing for, securities; or
(b) solicits or accepts any order for or otherwise trading in, or effects transactions in,
securities for clients or on its own account
A stock exchange is a corporation or mutual organization which provides "trading" facilities

for stock brokers and traders, to trade stocks and other securities. Stock exchanges also
provide facilities for the issue and redemption of securities as well as other financial
instruments including the payment of income and dividends. The securities traded on a
stock exchange include: shares issued by companies, unit trusts, pooled investment
products and TFCs/bonds. For a security to be able to trade on a certain stock exchange, it
has to be listed at that exchange. Historically there used to be a central location at least for
recordkeeping, but now trade is less and less linked to such a physical place, as modern
markets are electronic networks, which gives the Stock Exchanges efficiencies and also the
advantages of speed and reduced cost of transactions.
Trade on a not demutualized exchange is done by members only. The initial offering of
stocks and bonds to investors is by definition done in the primary market and subsequent
trading is done in the secondary market. Stock not traded through the stock exchange is
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said to be traded off-exchange or over-the-counter (OTC) market. This is normally the

manner that bonds are traded.
INDUSTRY TRADE BODIES (MUFAP)

Each segment of financial industry has its own sector specific Associations; like leasing
sector has Leasing Association of Pakistan (LAP) and Commercial Banking has Pakistan Banks
Association (PBA).
The Mutual Funds Association of Pakistan (MUFAP) is the representative trade body of the
Asset Management Companies managing Mutual Funds in Pakistan. The money managed by
its members in a wide variety of investment vehicles including stocks, bonds, money market
instruments, government securities and bank deposits.
These trade bodies try to promote transparency, ethical conduct and growth of industry.
These trade bodies are also policy advocacy mechanisms for each financial sector they
represent. Trade Bodies have invariably been established as Associations not-for-profit
licensed under the Section 42 of the Companies Ordinance 1984.
1.2 know the products and asset classes including:
 Cash deposits
 Government securities and corporate TFCs/bonds
 Equities
 Commodities
CASH DEPOSITS
A cash deposit is held at a financial institution and is either in form of a demand deposit or
term deposit. The demand deposit can be withdrawn at any time, in other words the
deposited amount is available to the account holders on demand. The term deposits are
generally for short to medium term with maturities ranging anywhere from few days to few
years. When a term deposit is purchased, the lender (the customer) understands that the
money can only be withdrawn after the term has ended or by giving a predetermined
number of days’ notice.
Cash deposits are comparatively safer investments as compared to some securities and are
therefore very appealing to conservative, low-risk profiled investors, with the return on
investment being the prevailing interest rate that is normally much lower than the rate of
inflation. By having the money tied up for fixed period of time (term), investors generally
get a higher rate of returns compared with a demand deposit.
GOVERNMENT BONDS/ SECUIRTIES

A bond is a debt security or a formal contract where the issuer (borrower) agrees to repay
the holder (lender) the money with an interest rate (coupon) at fixed intervals. The Bond
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Market is important to economic activity because it enables the private businesses/

corporations or the Government to borrow money from the private individuals or financial
intermediaries to finance their activities.
A government bond is simply a contract between the State and investor to repay borrowed
money to the lender who can either be individuals or institutions. Raising money by
government through issuance of bonds and/or borrowing from intermediaries (banks) is
normal for governments especially when the revenue resources are limited.
CORPORATE TFCs
Usually, the corporate TFCs/ bonds are issued by corporations to raise money in order to
finance its business. The term the ‘TFC/Bond’ is usually applied to longer-term debt
instruments, generally with a maturity date falling at least one year after their issue date.
The term "commercial paper" is used for similar instruments but which has a shorter
maturity.
Corporate TFCs/ bonds are often listed on stock exchanges (are called "listed" TFCs/ bonds),
and the coupon (i.e. interest payment) is usually taxable. Sometimes this coupon can be
zero, the zero coupon bond also called ‘discount bond’ is bought at a price below its face
value (discount) and the face value is repaid at the maturity date. Unlike coupon bond a
discount bond does not make any interest payments; it just pays off the face value. Some
corporate TFCs/ bonds have an embedded call option that allows the issuer to redeem the
debt before its maturity date. Other bonds, known as convertible bonds, allow investors to
convert the bond into equity.
EQUITIES
Equity investment generally refers to the buying and holding of shares/securities of
company on a stock market by individuals and funds in anticipation of income from
dividends and capital gain. By buying shares/equities of the company, the investor becomes
part owner of the company. When the investment is made in shares of infant companies, it
is referred to as venture capital investing and is generally understood to be of higher risk
than investment in listed going-concern companies that have a long proven track record of
performance.
COMMODITIES
Commodity is a basic good used in commerce for which there is demand, but which is
supplied without qualitative differentiation across a markets i.e. it is essentially the same no
matter who produces it and that it is interchangeable with other commodities of the same
type. One of the important characteristics of a commodity is that its price is determined as
a function of market and is normally universal and fluctuates on a daily basis on global
supply and demand considerations; examples are petroleum, gold, sugar, wheat or copper.
The commodities can be differentiated from the manufactures by the simple fact that
manufactured products have many aspects of product differentiation, such as the brand,
the user interface, the perceived quality etc.
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Generally, Commodities are basic resources and agricultural products such as iron
ore, crude oil, coal, ethanol, salt, coffee beans, sugar, soya beans, aluminium, copper, rice,
wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown,
like wheat, maize while hard commodities are the ones that are extracted through mining.
Because these are used in consumption or as raw material therefore these are sensitive to
consumer sentiments. Commodity markets can be highly volatile and respond very quickly
to changes in supply and demand equilibriums. Investors normally can gain exposure to
future changes in commodity markets through the commodity future market or a
commodity Fund.
1.3 know the difference between retail and institutional investors
Retail Investors
1. Unlike central banks and institutional investors, retail investors invest in bonds through
mutual funds or ETFs.
2. Many retail investors prefer to invest in bonds because of the certainty of income in the
form of interest payments and principal payment at maturity.
3. Also fixed-income securities are not as volatile as their equity counterparts.
Institutional Investors
1. Largest group of investors in fixed-income securities.
2. Includes pension funds, hedge funds, endowments, charitable foundation, insurance
companies, and banks.
3. Sovereign wealth funds with a long investment horizon.
4. Unlike equities that trade in primary and secondary markets, bonds primarily trade over-
the-counter. Many issues are not liquid and tradable, making them out of reach for retail
investors, but are preferred by institutional investors.
1.4 understand the role and functions of Primary Market
The Equity Market, also known as the Stock Market or the Stock Exchange, is the market
where investors can buy shares of listed companies that have already floated their shares
through an IPO.
Primary Market:
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When new issues of a security, such as bonds or stock/shares are sold to the initial buyers
by a Company [as in the case of an Initial Public Offering (IPO)] or a government agency, it is
known as a transaction in the Primary Market.
Advantages of Primary Market (as opposed to Secondary Market):
 Shares/Units are, normally, offered at their Face Value

 Tax Credit can be claimed in Pakistan on the invested amount under Section 62 of
the Income Tax Ordinance, 2001
Disadvantages of Primary Market (as opposed to Secondary Market):
 If the Issue is oversubscribed, the investors will receive shares only if they succeed in
the balloting. Hence, one can, normally, expect to buy only a small quantity of
shares through the Primary Market.
 An IPO can be a risky investment. For the individual investor, it is tough to predict
what the stock or shares will do on its initial day of trading and in the near future
since there is often little historical data with which to analyse the company. Also,
most IPOs are of companies going through a transitory growth period, and they are
therefore subject to additional uncertainty regarding their future value. However, in
order to make money, calculated risks need to be taken.
1.5 understand the role and functions of Secondary Market
Secondary Market
When there is a sale/purchase transaction of securities that have previously been issued
(and thus second hand), between two investors through their Brokers on the Stock Market,
it is known as a transaction in the Secondary Market.
Advantages of Secondary Market (as opposed to Primary Market):
 Subject to availability of a willing seller at the right price, any number of shares can
be bought/sold
Disadvantages of Secondary Market (as opposed to Primary Market):

 Buyer has to pay the Market Price of the share, which is determined on the basis of
demand and supply
 Tax Credit is not available on such transactions
24

ELEMENT 2
Introduction to Mutual Funds
2.1 know the Concept and Role of Mutual Funds including:
 Importance of Mutual Funds in the Financial Markets

 Concept of Mutual Funds
 Disadvantages of investing through Mutual Funds
CONCEPT OF MUTUAL FUNDS

A mutual fund is a Collective Investment Scheme (CIS), which specializes in investing a pool
of money collected from many investors for the purpose of investing in securities such as
stocks, bonds, money market instruments and similar assets. A fund's portfolio is structured
and maintained to match the investment objectives stated in its prospectus.
One of the main advantages of Mutual funds is that they give small investors access
to professionally managed, diversified portfolios of equities, bonds and other securities,
which 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 are shared by
unit holders of the fund in proportion to the number of units owned by each of them.
Mutual Funds usually have low minimum initial investment requirements. This gives the
investors an access to the market and a chance to add to holdings in small increments.
Mutual fund is a pool of money belonging to a group of investors, who

entrust it to a Fund Manager for making prudent investments on their
behalf, strictly in accordance with the Investment Policy laid down in the
Constitutive Documents of the Fund. The ownership of the Fund Property
vests in the investors and the Fund Manager is entitled only to certain
fees, paid by the Fund, i.e., by the investors, for managing the Fund.
Every mutual fund publishes an offering document that states its investment goal,
investments (such as stocks or bonds) that it purchases, past performance, name of the
fund manager, fees and how it derives its returns. A potential investor can also examine the
annual and semi-annual reports.
When examining a mutual fund's performance, consistency of returns year after year is
normally studied. Investing in Mutual Funds requires doing homework, setting goals,
selecting appropriate funds and then keeps funds invested for long period (usually five
years) so that seasonal variations or cycles are smoothed out.
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Mutual Funds are operated by Asset Management Companies (AMC) which exists in the
form of a Corporation, owned by its shareholders. The AMC launches new funds
through the establishment of a Trust Deed, entered between the Asset Management
Company and the Trustee, which in most cases is the Depository Company , with due
approval from the SECP under the framework provided by the Non-Banking Finance
Companies and Notified Entities Regulations, 2008 (the “Rules”).
The Depository Company performs the functions of the custodian and trustee, whereas the
AMC can act as the registrar or can appoint an external registrar. Banking/financial
companies may be authorized to act as distributors/ sales agents. The Board of Directors of
AMC must also approve and appoint a legal advisor and auditor for legal and compliance
affairs.
Mutual Funds in Financial Markets
By pooling the funds of large number of investors, mutual funds provide full-time and high-
level professional management that few individual investors can afford to obtain
independently. Such management is vital to achieving results in today's complex markets.
The fund managers' interests are tied to the investments made, because their
compensation is based not on sales commissions, but on how well the investments made
under the fund perform. These Fund Managers have access to crucial market information
and are able to execute trades on the large and cost-effective scale. In short, managing
investments is a full-time job for these Funds manager who are qualified professionals.
Mutual funds invest in a broad range of securities. This limits investment risk by reducing
the effect of a possible decline in the value of any one security. Mutual fund shareowners
can benefit from diversification techniques that can only be available to real wealthy
investors who can buy significant positions in a wide variety of securities. If somebody tried
to create his own diversified portfolio of 50 stocks, he would need a very large amount of
money and pay thousands more in commissions to assemble the portfolio. A mutual fund
investor can participate in a diversified portfolio for as little as Rs.5000/- and sometimes
even less. The Investor in Mutual Fund units/shares owns just one security rather than
many, yet enjoy the benefits of a diversified portfolio and a wide range of services. Fund
managers decide what securities to trade, and see that dividends on portfolio securities are
received and rights exercised. It's fairly easy to purchase and redeem mutual fund units.
An Investor can easily redeem his mutual fund units anytime when he needs cash and the
sale proceeds are usually available to the investor within two – three days in case of most
AMCs. The law, however, provides for a maximum of 6 days. Investors can tailor their
investment products according to their plans of future individual and family needs, and
make adjustments as their life cycle needs change. They can invest in growth funds for
future college tuition needs of their children and then in income funds for retirement, and
adjust the investments as their needs change with age and responsibilities in life.
26

For investors who want to actively manage their investments. They can move their funds
within the family of funds as and when they perceive any change in market conditions.
Investor can place their investments in equities fund when the market is bullish and move
into money market funds in the anticipation of bearish stock market and rising interest rate
atmosphere. A word of caution: since it is almost impossible to predict how the market will
behave at any point in time, staying on a long-term in a diversified investment portfolio is
recommended for most investors. Mutual fund unit holders receive regular reports from
the funds, including details of holdings on a year-to-date basis.
The current Net Asset Value of mutual fund units (the price at which investor may purchase
or redeem the units subject to normal adjustments) also appears in the mutual fund price
listings on business pages of major daily newspapers. Because new units are issued every
time an investment is made in Open-end Funds, such investments enjoy a Tax-break (just
like the Tax-break enjoyed on investments in new shares of Companies), provided that the
Fund is listed on at least one of the Stock Exchanges and such investment is not en-cashed
for at least one year. Under Finance Act, 2015, A new sub-section has been inserted in
section 65 which deals with general provisions relating to tax credit, to clarify that all these
tax credits are deductible from ‘minimum taxes’ and ‘final taxes’. Tax credit of 10% is
available to a company under section 65B of the Income Tax Ordinance, 2001 on investment
in the purchase of plant and machinery for the purposes of extension, expansion, balancing,
modernization and replacement of the plant and machinery.
Through the Finance Act, 2015, the eligibility for tax credit has been extended to plant and
machinery purchased and installed by June 30, 2016. All Mutual Funds are regulated under
the Non-Banking Finance Companies and Notified Entities Regulations, 2008 and are
controlled and regulated by the Securities and Exchange Commission of Pakistan (SECP).
The Commission’s controls are fairly stringent and even an advertisement of a Mutual Fund
has to be first approved by SECP before it can be released to the media. All Mutual Funds
are obliged to appoint a Trustee which can be a Scheduled Bank having a minimum of ‘A+’
rating or a Depository Company. All the moveable and immoveable assets of the funds are
vested in the Trustee for the benefit of the Unit-holders, i.e., the beneficial ownership of the
assets of the Fund vests in the Unit-holders. The Trustee is obligated to ensure that the
Fund Manager:
 Takes all investment decisions within the framework of defined Investment Policy,
and
 Does not take any action that is not in accordance with the provisions of the Trust
Deed, the Offering Document or, which do not protect the interests of the Unit-
holders.
Mutual Funds: Disadvantages
Mutual funds have features that some investors might view as disadvantages, such as:
27

Costs:
Investors have to pay charges like annual fees, and other expenses regardless of how the
fund performs.
 Price-day trading — with an individual stock, investor can obtain even real-time
pricing information by calling their broker. In case of a mutual fund, the purchase or
redemption prices depend on the fund's NAV that is calculated only once every
business day. Mutual Funds’ investments have, therefore, to be on a long term
perspective and are not meant for speculators seeking immediate gains.
Fund’s Tax Liability:
The Fund does not incur any tax liability if it distributes at least 90% of its income amongst
the investors, by way of Dividends or Bonus Units.
Public Company and Insurance Company: 5%

If received by any other person, including a non-resident: 10%
Fund Management Fee:
The Fund Management Company is entitled to a Management Fee. The management fee
covers all the work done and expenses incurred in the management of the Fund.
Management fee ranges from 1% p.a. to 3% p.a. of assets under management.
Sales Load:
All Asset Management Companies (AMCs) to ensure that where the offering document of
the Collective Investment Scheme (CIS) permits charging of sales load, the cumulative sales
load does not exceed 3% of the NAV per unit.
Last, but not least, the greatest convenience of investing through a Mutual Fund is that all
investment/business are transacted under the ‘one window’ concept and that too with the
greatest of ease.
2.2 know the structure of mutual funds.
Mutual Funds are operated by Asset Management Companies (AMCs). AMCs manage all the
investments and management functions related to client services, accounting, IT, etc. These
companies exist in the form of a public limited company registered under Companies
Ordinance, 1984. Mutual funds are set up as unit trust schemes. AMCs launch new funds
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through the establishment of a Trust Deed, entered between the Asset Management
Company and the Trustee. All assets are controlled by trustee or custodian. It is the function
of a trustee to ensure that the fund manager takes the investment decisions within the
defined investment policy of the mutual fund. In Pakistan, banks and central depository
company, approved by Securities and Exchange Commission of Pakistan, can act as trustee.
At present, Central Depository Company of Pakistan (CDC) is acting as Trustee for the most
of the funds.
The Securities & Exchange Commission of Pakistan (SECP) is the regulator of mutual funds
industry. SECP issues licences to fund management companies, especially in the case of
Collective Investment Scheme (CIS). It carries out continuous monitoring of mutual funds
through reports that are filed by the mutual funds on a regular basis. It also conducts on-
site inspections of the Asset management companies. Extensive audit is carried out by
external auditors. Mutual funds are regulated by NBFC and Notified Entities Regulations,
2008.
2.3 know the benefits of investing in mutual funds.
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BENEFITS OF INVESTING IN MUTUAL FUNDS
Liquidity:
Unit holders of mutual funds can convert their units into cash on any working day. They will
receive the current value of their investments. The fund redeems the units.
Convenience and Fair Pricing

Mutual funds are very common and easy to buy. They have low minimum investments and
they are traded only once per day at the closing net asset value (NAV) which eliminates
fluctuation in prices throughout the day and various arbitrage opportunities as well.
Diversification:
A reduced portfolio risk is achieved through the use of diversification technique. Most of
the mutual funds will invest in anywhere from 50 to 200 different securities according to
their focus. By investing the pool of unit holders’ money across number of securities, a
mutual fund diversifies its holdings. This is how a diversified portfolio reduces the investors’
risk.
Tax benefits:
Investments held by investors for a period of one year or more qualify for capital gains and
will be taxed accordingly. These investments will also get the benefit of indexation.
Transparency:
A unit holder is provided with regular updates and information on the fund's holdings and
the fund manager's strategy as the performance of a mutual fund is reviewed by various
publications and rating agencies which makes it easy for investors to compare fund to
another.
Lower costs:
Economies of scale make them a cost-effective option for investment. In this option, you
can share costs with other investors such as individual transaction and management fees.
Professional Management:
AMCs evaluate all the opportunities that arise in the market. They examine them carefully
and then take decision for investing the mutual fund’s money whereas it is not an easy task
for an individual and even for corporate entity if their core business is different.
Regulations:
All mutual funds are required to register themselves with SECP (Securities and Exchange
Commission of Pakistan). They all are obliged to follow all the rules and regulations
designed by SECP to protect investors. SECP regularly monitors all their operations.
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2.4 know the types of Mutual funds in Pakistan including:
 Significance of various types of Funds
Mainly, there are two types of Mutual Funds; i) Open-end Funds and; ii) Closed-end Funds.
OPEN-END FUNDS
The Open End Mutual Funds continuously issue new units on demand and simultaneously
redeem these units on demand. Therefore, the numbers of units outstanding at any
particular point in time vary. An Open-end Fund does not have a fixed pool of money. The
Fund Manager is committed to continuously issue Units to new investors at the Offer Price
and buy-back Units from ‘old’ investors at the Repurchase Price, also known as Redemption
Price. The units do not trade on a stock market.
Open-ended fund units are issued and can be purchased or redeemed as needed at the
fund's current net asset value (NAV) per share adjusted for offer/redemption price whereas
mostly closed-end funds are listed on the stock exchanges and are freely traded as shares of
any other company. Net Asset Value (NAV) of the units of an Open End Mutual Fund is
published on the respective website of the fund manager and also in the newspapers.
The Fund is set up as a Trust, with an independent Trustee, who has custody of the assets of
the Trust. Each share of the Fund is called a Unit and its Fund Manager is known as the
Asset Management Company (AMC). The Fund, itself, is called a Unit Trust.
Net Asset Value (NAV):

At the close of every day the AMC calculates the Net Assets of the Fund which are divided
by the then the total issued and outstanding Units of the fund which gives the Net Asset
Value (NAV) of each Unit.
The Net Asset Value (NAV) is calculated everyday by dividing the Net Assets by the number
of units issued and outstanding. (Explained under Element 5)
Net Asset Value = Mutual Fund’s Net Assets

Units Outstanding
Offer Price:
This is the price at which the Fund sells its Units to the investors. It is usually published in
the newspapers as well as posted on the AMC’s website every day.
Repurchase Price:
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This is the price at which the Fund buys-back its Units from the Unit-holders.
Mutual fund companies have professional management, with a portfolio manager to

monitor investment holdings in a fund and who decides what equities to buy, hold or sell.
Units of an Open End Mutual Fund are sold to the public at Net Asset Value (NAV) price
adjusted for load. How well the fund usually makes the difference between a rising and a
declining NAV.
CLOSE-END FUNDS
A closed-end fund (CEF) is a publicly traded investment company. It collects money from
investors through an initial public offering (IPO) and uses this money to invest in securities.
The shares of a CEF are trade on a stock exchange like that of any other company.
Closed-end funds issue a specific number of shares and their capitalization is fixed. The
shares are not redeemable, but are readily transferable and traded on either a stock
exchange or the over-the-counter market. The price of a closed-end fund share fluctuates
based on investor supply and demand i.e. the price is not linked to its book value but
determined exclusively by the supply and demand factor. Closed-end funds are not required
to redeem their shares unlike in the case of open ended funds.
A closed-end fund, as with any other incorporated public listed company, has a board of
directors elected by the shareholders. The board appoints an investment advisor (and,
possibly, sub-advisors) for investment research and portfolio management. The investment
advisor employs a portfolio manager who is often assisted by a team of analysts, who make
the actual investment decisions, in accordance with the guidelines listed in the offering
document issued during the initial public offering of the fund and any subsequent
amendments made to it.
The day-to-day administrative duties such as mailing shareholder reports or responding to

shareholder concerns may be performed by the investment advisor, or a separate
administrator may be employed for the purpose.
The CEFs offer a wide array of investment choices for the investor. These are Diversified
Domestic Funds, Sector Funds, Single Country Funds, Regional Funds, Emerging Markets,
Global Funds and etc.
The net asset value (NAV) of a CEF is the current worth of a share of the CEF. It is computed
by deducting the total liabilities of the CEF from the total assets (the current market value
of the securities held by the CEF plus cash), and dividing the result by the total number of
outstanding units.
NAV = Total Assets - Total Liabilities

Units Outstanding
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The NAV of a CEF fluctuates with the changes to the market price of the securities in which
the CEF has invested. CEFs are publicly traded, that is, the shares of the CEF change hands in
stock exchanges. The price at which the share of the CEF trades is called the market price.
The market price of a CEF shares are determined by the normal demand and supply
principles of the market. Sometimes, when demand exceeds supply, the market price at
which the shares of a CEF trade may be at a premium to the NAV, that is, the shares of the
CEF cost more than its NAV. Likewise, when supply exceeds demand, the shares of the CEF
may trade at a discount to its NAV, that is, the shares of the CEF cost less than its NAV.
For example, if the NAV of a CEF is 10 and its market price is 12, the CEF is
trading at a premium of 20%. If the NAV is 10 and its market price is 8, the
CEF is trading at a discount of 20%.
The premium/discount may be computed using the following formula:
Premium or Discount = Market Price – NAV

NAV
Though some funds do at times trade at a premium, the majority of CEFs trade at a
discount, often as much as 15% to 20%. The premium or discount is not constant, but
usually fluctuates with market conditions. Often a fund that is trading at a discount may
shoot up to a steep premium or vice versa, as investors’ perceptions of the market changes.
The Closed End Fund is a Mutual Fund that has a fixed pool of money which is collected
from the investors when the Fund is set up and subscription are received through Initial
Public Offering (IPO). The Fund Manager invests the money in accordance with the declared
Investment Policy of the Fund and distributes the returns achieved to the investors, from
time to time, in the shape of Cash Dividends or Bonus shares. Each share of the Fund is
called a Unit and its Fund Manager is also known as the Investment Advisor.
In the case of a Closed End Fund, if an investor wants to sell his mutual fund shares, he can
do so on the Stock Exchange, through a Stock Broker, at the prevailing market price, just like
selling Shares of any other listed Company. The price is determined by the demand and
supply of those Certificates at that given time and not in any way linked to its intrinsic value.
2.5 know the differences between mutual funds and bank deposits.
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MUTUAL FUNDS BANK DEPOSITS

1. Return is not fixed. AMCs invest in Banks offer fixed rate of interest for a pre-
securities and capital market to earn specified tenure.
return.
2. In mutual funds, moderate risk is taken Both risk and return are lower.
to earn better returns.
3. There is a restriction on withdrawal of Banks charge a penalty for premature

the money before maturity. withdrawal.
4. They provide their holders with market Banks pay around 6% to 8% return to the
based returns i.e. 7% to 11% for money depositors.
market and income funds.
5. Mutual funds charge around 1% to 3% Banks make a spread of 7%.

fee per annum.
6. If it is held for more than 12 months then Withholding Tax of 10% has to be paid on
no capital gain tax has to be paid. Tax profits in any case.
rebate will also be received.
7. Fixed deposits come with a fixed tenure Mutual funds do offer liquidity to its
and offer medium to low liquidity option investors but with certain conditions.
until you complete the entire tenure of
the deposit.
2.6 know the Categories of Mutual Funds including:
 Equity Funds
 Debt Funds
 Money Market Funds
 Sector Funds
 Balanced Funds
 Index Funds
 Pension Funds
SECP through its Circular No. 07 of 2009 issued on 6 March 2009 has devised detailed
criteria for categorization of Open End Funds (Collective Instruments Schemes). Please
34

consult the SECP’s circular for details. The circular is available on the website of the IFMP:
www.ifmp.org.pk
The different categories of funds in general are explained below for understanding purposes:
CAPITAL PROTECTED FUND

A Capital Protected Fund is a type of mutual fund that guarantees an investor at least the
initial investment made, plus any capital gains, if the units in the Fund are held for the
contractual term. The idea behind this type of fund is that investor will be partly exposed to
capital market returns because the fund is able to invest in the stock market, but
simultaneously have the safety and the protected return principal.
A Capital Protected Fund essentially tries to guarantee that investor never loses his initial
money but the fund can only increase its value. Most people use these types of funds to
“protect” a certain percentage of their total investments. Most capital protected products
have average to poor performance. But, they don’t lose value because the fund invests in a
mix of fixed income government securities and blue chip securities. So capital protected
fund is type of low risk low return fund.
MONEY MARKET FUND

A money market fund is a mutual fund that invests its assets only in the most liquid of
money instruments. The portfolio seeks stability by investing in very short-term, interest-
bearing instruments and other debt certificates that can be converted into cash readily, and
can be considered as the equivalent of cash.
Usually money market funds are considered as the safest for novice investors while being
the easiest, least complicated to follow and understand. Almost every mutual fund
35

investment company offers money market funds which are favourite investment tool for
the new investors. They are regarded as the basic and conservative of all the mutual funds
available.
Money market funds are considered appropriate for investors seeking stability of principal,
total liquidity, and earnings that are as high, or higher, than those available through bank
certificates of deposit. And unlike bank Term Deposits, money market funds have no early
withdrawal penalties.
The Money market Mutual Fund is recommended as an ideal investment for risk averse
investor due to the advantages they offer including:
1. Safety of principal, through diversification and stability of the short-term portfolio

investments
2. Total and immediate liquidity
3. Better yields than offered by banks
4. Low minimum investment
INCOME GROWTH FUNDS

The primary purposes of ‘Income and Growth Funds’ are to provide a steady source of
income to the investor and moderate growth of principal invested. Such funds are ideal for
retirees needing a supplementary source of income without forsaking growth entirely.
The primary objectives of ‘Income and Growth funds’ are to seek long-term growth of
principal and reasonable current income. By investing in a portfolio of stocks believed to
offer growth potential plus market or above-market dividend income, the Fund appeals to
investors seeking growth of capital and moderate income over the long term (at least five
years). Such funds require that the investor should be willing to accept some share-price
volatility, but this is less than that found in pure growth funds.
Income Growth funds specialize in blue chip stocks and high rate fixed income securities.
These funds are suitable as a substitute for conservative investment in the stock market.
AGGRESSIVE FIXED INCOME FUND

Aggressive fixed income fund focuses on generating current income on investments while
maintaining the prospects for capital appreciation and potential for capital growth. These
funds may invest up to specified percentages in accordance with its Offering Document in
any one type of Authorized Investment and may aggressively change weightings to take
advantage of economic trends. These Funds may hold some or even all of their assets in
cash to either provide liquidity or for defensive purposes.
These Funds usually invest in a portfolio of diverse securities including:
a. Government Securities
36

b. Fixed Income debt securities

c. Deposits with Bank(s)
d. Clean placements with other financial investments
e. REPO transactions
f. Spread Transactions
g. Certificates of Investments and Deposits
h. Commercial Papers
i. Any other Authorized Investment Instrument
BALANCED FUNDS
The basic objectives of balanced funds are to generate income as well as long-term growth
of the principal amount that has been invested. These funds generally have portfolios
consisting of bonds, preferred stocks with some percentage of common stocks. The funds
are not expected to rise steeply, but simultaneously have a high degree of safety and
moderate to high income potential. Investors who desire to invest in secure fund with a
minimum downside i.e. who seek some current income and moderate growth with low-
level risk, would do well to invest in balanced mutual funds.
SECP has laid down a criteria that provides that under balanced schemes/funds investment
should be made in listed equity securities, government securities, cash in bank accounts,
money market placements, deposits, certificate of deposits (COD), Certificate of
Musharakas (COM), TDRs, Commercial papers, REPO, TFCs/Sukkuks, and preference shares.
However, the rating of any debt security in the portfolio has necessarily to be not lower
than A- (A Minus).
EQUITY FUNDS
An equity fund is a mutual fund that invests primarily in stocks. For this reason it is also
known as a 'stock' fund. Equity funds vary in size and composition. They are determined by
company size and the investment style of the portfolio holdings. The size of the fund is
determined by its market capitalization. Equity funds may be domestic or foreign/
international and can be broad market or sector specific. These can geographically be
international, regional or single-country funds.
In any Equity Scheme at least 70% of its net assets should remain invested in listed
securities during the year based on quarterly average investment, calculated on daily basis.
The remaining assets of the fund can be invested in cash and/or near cash instruments
which include cash in bank accounts (excluding TDRs), and treasury bills not exceeding 90
days maturity.
ASSET ALLOCATION FUNDS

Asset allocation funds don't invest in just stocks, instead, they focus on equity, bonds, gold,
real estate, and money market funds. This portfolio approach provides a very broad asset
allocation and diversification and decreases the reliance on any one segment of the
marketplace.
37

Why Equities?
Equity funds are used as a way to buy into a portfolio of stocks. The shareholder takes
indirect ownership in a large basket of securities by purchasing units of the mutual fund.
Equity funds are especially for those who want to own businesses to do it without starting
their own company, investing in local companies, or picking stocks themselves.
Equities have out-performed other investment asset classes over the long-term. The
average annual returns from 2001 to 2015 show that equities have performed much better
than other classes. With growing maturity, investors have begun to realise this and have
taken into stride the short-term volatility of this asset class.
FUND OF FUNDS
A "fund of funds" (FoF) is an investment strategy of holding a portfolio of other investment
funds rather than investing directly in shares, bonds or other securities. This type of
investing is also referred to as ‘multi-manager investment’. There are different types of
'fund of funds', each investing in a different type of collective investment schemes e.g.,
mutual fund, hedge fund, private equity or investment trust.
Investing in Collective Investment Scheme (CIS) increases the diversity for a small investor
who can at best hold small range of securities directly. Investing in a Fund of Funds achieves
even greater diversification.
ISLAMIC FUNDS
In case of Islamic Funds, the investments are made in different instruments but these have
to be in line with the Islamic Shariah Rules. The Fund investments are guided by Islamic
Shariah Board. Islamic Funds have been discussed in more detail under ‘Element 7’ in this
study guide.
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INDEX FUNDS
The intent of an Index Fund is basically to track the performance of a specific index of the
stock market. If the overall market advances, a good Index Fund follows the rise. If the
market declines, so will the index funds. Index Funds' portfolios consist of securities listed
on the popular stock market indices. It is also the intent of an Index Fund to materially
reduce expenses by eliminating the fund portfolio manager. Instead, the fund merely
purchases stocks that make up the particular index it follows.
The securities/stocks in an Index Fund portfolio rarely change and are weighted the same
way as in particular market index which it tracks. Thus, there is little or no need for any
great turnovers of the portfolio of securities. The funds are "passively managed" in a fairly
static portfolio. An Index Fund is almost fully invested in the securities of the index it tracks.
An index mutual fund never outperforms the market if judged against the tracked index but
may out or under perform other indexes. The reduction of administrative cost in the
management of an Index Fund also adds to its profitability.
In short Index Funds/schemes strive to mimic the stated index and discloses the likely
tracking error in the Offering Document. Index schemes and Index Tracker Schemes
however can only select an index (or a subset thereof) established by a recognized
independent third party like a Stock Exchange.
INCOME FUNDS
The objective of Income funds is to seek a high level of current income commensurate with
each portfolio's risk potential. In other words, the greater the risk, the greater the potential
for higher income yields, but simultaneously there is greater risk of loss of principal as well.
The risk/ reward potential are low to high, depending upon the type of securities that make
up the fund's portfolio. The risk is very low when the fund is invested in government
obligations, blue chip corporations and short-term securities. The risk is high when a fund
seeks higher yields by investing in long-term corporate bonds, offered by new
undercapitalized, risky companies.
Investors seeking current income higher than money market rates are willing to accept
moderate price fluctuations and "balance" their equity (stock) portfolios with a fixed
income investment usually invest in Income funds.
Income funds focus on dividend income, while also enjoying the capital gains that usually
accompany investment in common and preferred stocks. These funds are particularly
favoured by conservative investors.
GROWTH FUNDS
The primary objective of Growth Funds is to seek long-term appreciation (growth of capital).
The secondary objective is to make one's capital investment grow faster than the rate of
inflation. Dividend income is considered an incidental objective of Growth Funds. Growth
39

funds are best suited for investors interested primarily in seeing their principal grow and are
therefore to be considered as long-term investments - held for at least three to five years.
Jumping in and out of growth funds tends to defeat the purpose.
Investors likely to participate in Growth Funds are those willing to accept moderate to high
risk in order to attain growth of their capital and those investors who characterize their
investment temperament as "fairly aggressive."
Growth funds are similar to aggressive growth funds, but do not trade stock options or
borrow money with which to trade. Most growth funds usually do a little better during bull
markets, but do a lot worse than average during bear markets.
SPECIALIZED FUNDS
Specialized funds resemble sector funds in most respects. The major difference is the type
of securities that make up the fund's portfolio. For example, the portfolio may consist either
of common stocks only or foreign securities only or bonds only, new stock issues only, over-
the-counter securities only, and so on. Those who are not very experienced in the
investment business should normally avoid both ‘Specialized’ and ‘Sector Funds’ in their
early stages of investments and concentrate on more traditional, diversified mutual funds
instead because of low level of diversification provided by the funds.
REGIONAL / INTERNATIONAL FUNDS

Regional funds confine themselves to a single economic region, like South Asia, North
America, Europe or Asia. When an investor buys one of these funds, he is betting on an
economic region as a whole. International funds invest exclusively abroad, while global
funds combine domestic and foreign shares in the same portfolio.
International funds hold primarily foreign securities. There are two elements of risk in this
investment: The normal economic risk of holding stocks; as well as the currency risk
associated with repatriating money after liquidating the investment profits. These funds are
essential component of many portfolios, but any single International fund may prove too
volatile for the average private investor who holds it as his sole investment.
SECTOR FUNDS
As was stated earlier, most mutual funds have fairly broad-based, diversified portfolios. In
the case of Sector Funds, however, the portfolio consists of investments in only one sector
of the economy. Thus sector funds concentrate in one specific market segment; for example
these can be fund investing in energy, transportation, precious metals, health sciences,
utilities, leisure industries, etc. In other words, they are narrowly based.
Investors in Sector Funds must be prepared to accept the rather high level of risk inherent
in funds that are not particularly diversified. Diversification in sector funds is attained
through variety of securities, but all of these are in the same market sector. Substantial
40

profits are attainable by investors astute enough to identify which market sector is ripe for
growth.
PENSION FUNDS
Employee Pension Funds

A fund established by an employer to facilitate and organize the investment of employees'
retirement funds contributed by the employer and employees. The pension fund is a
common asset pool meant to generate stable growth over the long term, and provide
pensions for employees when they reach the end of their working years and commence
retirement. Pension funds are commonly run by some sort of financial intermediary for the
company and its employees, although some larger corporations operate their pension funds
in-house. Pension funds control relatively large amounts of capital and represent the largest
institutional investors in many nations.
2.7 Be able to:

(a) understand the purpose, benefits and Financial protection provided
by Pension Funds
(b) know the type and categories of Life assurance products available
through Mutual Funds
(c) understand and be able to calculate the Tax of pensions
(a) INTRODUCTION
Voluntary Pension System (VPS)
The need to introduce Voluntary Pension System

The current social security laws in Pakistan do not require employers to offer mandatory
pensions to their employees; therefore, VPS is an obvious reasonable recourse. It is meant
for those who are:
 Self-employed;
 Employed on contract basis with Government or private sector;
 Employed with private employers who do not offer any pensions; and
 Any other individuals who want to arrange voluntarily for old age pensions.
 Any person who works in a pensionable job but feels the need for an additional
pension
The Voluntary Pension System (VPS) in Pakistan is a self-contributory pension savings

scheme open to all adult Pakistanis registered with the tax authorities or having a CNIC,
41

who are usually not covered by other occupational pension schemes. VPS can also be used
for a second or supplementary pension. Employers can also contribute in VPS. There are no
limits on the maximum annual contributions. Contributions are to be invested in specially
set up funds, with flexibility of individualised asset allocation through individual accounts.
There are stringent requirements under the SECP regulations for licensing of pension fund
managers. The fee structure of the pension fund is kept much lower than those of normal
mutual funds. One of the unique features of a VPS is that the individual can diversify savings
(contributions) amongst more than one fund manager and can transfer the account from
one fund manager to other fund managers without any charge once annually.
The system of tax reliefs on pension schemes is known as the Exempt-Exempt-Taxed (EET)
structure. In the EET structure, the tax rebate is on contributions, investment income and
gains are accumulated tax-free, while tax is paid at the stage when pension is drawn.
Voluntary Pension System (VPS) is a comprehensive framework for the employed and self-
employed individuals under which:
 they voluntarily contribute to a Pension Fund during their working life to provide
regular income after retirement;
 thus, they seek to enable themselves to maintain a reasonable standard of living
after retirement
Pension Funds
Pension Fund is normally understood to mean a fund established by an employer to
facilitate and organize the investment of employees' retirement funds contributed by the
employer and employees. The pension fund is a common asset pool meant to generate
stable growth over the long term, and provide pensions for employees when they reach the
end of their designated working life (also known as superannuation) and commence
retirement. Pension funds are commonly run by some sort of financial intermediary for the
company and its employees, although some larger corporations operate their pension funds
in-house. Pension funds control relatively large amounts of capital and represent the largest
institutional investors in many countries.
Relationship between Pension Funds and Voluntary Pension System

The Voluntary Pension System is the overall framework under which the Pension Funds are
launched and managed. The Participants to VPS subscribe to a Pension Fund and not to the
Voluntary Pension System.
(b) TYPES
Structure of Voluntary Pension System

The SECP has mandated an Investment and Asset Allocation Policy for the Pension Funds
authorized under the Voluntary Pension System Rules, 2005.
42

The Policy covers both, the Conventional and Shariah Compliant funds and provides
detailed guidelines (SECP Circular No. 36 of 2009) for investment and categorization of sub-
funds, which are;
i) Equity Funds
ii) Debt Market Funds
iii) Money Market Funds
The Allocation policy mandated by the SECP obliges fund managers to offer at least four (4)
allocation schemes, which are:
Allocation Scheme Debt Equity Money Market

Sub-Fund Sub-Fund Sub-Fund
High Volatility Min 20% Min 65% Nil
Medium Volatility Min 40% Min 35% Min 10%
Low Volatility Min 60% Min 10% Min 15%
Lower Volatility Min 40% Nil Min 40%
(Volatility here means the downwards or upwards change in Principal amount invested
owing to change in price of the securities in the portfolio of a sub-fund)
Two additional plans (like life-cycle) may be offered by a Fund Manager during first five
years. Each sub-fund is also required to announce NAV based prices daily and the
management fee should not exceed 1.5% p.a. Front-end load is usually 3% but no load
applies on transfers. Funds do not distribute dividends and are exempted from tax.
The following are the key features which structure the Voluntary Pension Scheme as
discussed above.
Pension
Fund
Money
Equity Debt
Market
Sub-Fund Sub-Fund
Sub-Fund
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Investment Limits & Restrictions

Some of the current investment limits that apply to Pension Funds are:
- Investment in equity securities of any single company shall not exceed ten per cent (10%)
of net assets of an Equity Sub-fund or paid-up capital of that single company, whichever is
lower.
- Investment in securities issued by companies of any one sector (sector shall be same as
classified by Karachi Stock Exchange) shall not exceed thirty per cent (30%) or the index
weight, whichever is higher, subject to maximum of thirty five per cent (35%) of the net
assets of an Equity Sub-fund.
- The weighted average time to maturity of assets of a Money Market Sub-fund shall not
exceed ninety (90) days, except for assets of Shariah compliant Money Market Sub-fund,
where time to maturity may be up to one year.
- Time to maturity of any security in the portfolio of Money Market Sub-fund shall not
exceed six (6) months, except in the case of a Shariah compliant Money Market Sub-fund,
where the time to maturity of Shariah compliant Government securities such as
Government ljarah Sukuks may be up to three (3) years.
(For further details candidates are advised to refer the SECP Circular no. 36 of 2009 for
Investment and Allocation Policies for Pension Funds Authorized under the Voluntary
Pension System Rules, 2005)
Eligibility and Benefits
Eligibility to become a participant to a Pension Fund under VPS

To become a participant in a Pension Fund under VPS, easy eligibility criteria has been set
up which is:
 The participant needs to hold a valid National Tax Number (NTN) issued by Federal
Board of Revenue (FBR) and Computerized National Identity Card (CNIC) issued by
National Database and Registration Authority (NADRA)
 If the Participant is an overseas Pakistani, he/ she needs to hold a valid National
Identity Card for Overseas Pakistanis (NICOP) issued by NADRA
VPS framework: Pension Funds, Fund Managers and Trustees

The VPS Rules allow asset management companies and life insurance companies to apply to
SECP for registration as Pension Fund Managers. Pension Funds are authorised by the SECP
as a unit trust scheme structured under the Trust Act.
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Transfer of balance from one Pension Fund Manager to another Pension Fund Manger
Portability of Individual Pension Account if the Participant switches the job and employer
was also contributing
Benefits of subscribing to a Pension Fund under Voluntary Pension System

The following are some of the benefits a participant enjoys if he/she becomes a Participant
to a Pension Fund under the VPS:
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 VPS rules and guidelines provide detailed guidance on various areas under VPS
 VPS is a Savings plus investment Vehicle
 For those in employment, VPS helps in maintaining life style after retirement
 Pension Funds are a good option for those not receiving any employment pensions
 VPS has easy eligibility criteria
 Option to choose/ switch allocation policy and Pension Fund Manager
 The account stays with pension fund subscriber even if he/she changes job
 Expertise of Professional Fund Manager and Trustees
 Twenty per cent of the eligible person‘s taxable income for the relevant tax year;
Provided that an eligible person joining the pension fund at the age of forty-one
years or above, during the first ten years starting from July 1, 2006 shall be allowed
additional contribution of 2% per annum for each year of age exceeding forty years.
Provided further that the total contribution allowed to such person shall not exceed
50% of the total taxable income of the preceding year.
Provided also that the additional contribution of two per cent per annum for each
year of age exceeding forty years shall be allowed up-to the 30th June, 2019 subject
to the condition that the total contribution allowed to such person shall not exceed
thirty per cent of the total taxable income of the preceding year.
 Eligible persons investing under VPS (Participants) have right to save with one or
more Pension Fund Manager (PFM).
 Right to transfer the account to some other manager/s once a year. (No restriction if
PFM is de-authorized).
 Choice to select a plan within the offerings of each PFM.
 Choice to select retirement age between 60 and 70 years.
 Cash out any time is possible before retirement by paying tax.
 Withdrawal is allowed up to 50% of fund at retirement tax-free.
 Option for an annuity plan or income draw down plan at retirement. At age 75 funds
left over must be invested tax free in annuity plan or can be drawn down on
payment of applicable tax.
 Regular provision of account statements and financial statements.
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The Pension Funds provide an opportunity for self-employed to build their own pension
funds. It also serves as an opportunity for employees not covered by occupational pensions
to build their portable pension funds, while providing an occasion for corporate sector to
supplement or replace provident funds with matching contributions to VPS for their
employees. It also accommodates the Non-Resident Pakistani's (NRP) to build pension funds
in Pakistan. In most of the pension funds, the individuals can build professionally managed
portfolios, with optimal asset allocation.
(c) CALCULATION: TAX OF PENSION
The following fees and charges are levied on the balance in the participant’s individual
pension account:
 A front-end of up to 3% on contribution in Individual Pension Account
 A management fee of up to 1.5% of average balance in the individual pension
account
 Remuneration to trustee
There are also other expenses associated with formation and operations of the pension
funds which have to be met, like;
 Formation costs up to Rs. 750,000 or 0.5% of seed capital whichever is lower
 Brokerage and transaction costs
 Expenses incurred by trustee for registering property in his name
 Legal costs
 Bank charges on borrowings for meeting withdrawal requests
 Audit fee
 Annual fee of SECP
 Taxes (if any)
2.8 know the Risks associated with Mutual Funds including:
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 Market Risk
 Credit Risk
 Liquidity Risk
 Inflation Risk
 Interest Rate Risk
 Settlement Risk
All investment carry some risk, primarily because of changes occurring in the fundamentals
of an economy, a specific company or industry, as well as changes in interest rates,
economic conditions and other factors like wars natural disasters etc..
Mutual Funds like other capital market instruments are subject to the same risks as the
underlying investments. Some specific risks that can be associated with the Mutual Funds
include:
RISK MANAGEMENT
It is important for the fund manager to take proper risk management measures so as to
avoid undue risks while investing the Mutual Fund's money. Investment process has to be
transparent and adequately documented, with investment decisions taken by an
investment committee. Such decisions are to be implemented ethically, without any conflict
of interest and with no ambiguity as to the responsibilities of the personnel concerned and
must not violate different applicable laws including SECP Laws, Rules and Regulations.
MARKET RISK
Market risk is the risk that the fair value or the future cash flows of a financial instrument
may fluctuate as a result of changes in market prices. The Asset Management Company
manages market risk by monitoring exposure on marketable securities by following the
internal risk management policies and investment guidelines approved by its Board of
Directors and also the regulations laid down by the Securities and Exchange Commission of
Pakistan.
CREDIT RISK
There is a possibility that companies whose TFCs are held by the Fund fail to meet their debt
obligations. Similarly there is a probability that an investment in value will go down when
the issuer of the security is assigned a negative rating (downgraded) by a reputable credit
rating service.
PRICE RISK
The Fund is exposed to security price risk because of investments held by the Fund and
classified on the Statement of Assets and Liabilities as available for sale at fair value through
profit or loss. To manage its price risk arising from investments in securities, the Fund
diversifies its portfolio within the eligible stocks prescribed in the trust deed. The Fund's
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constitutive document / NBFC Regulations also place limits on individual different classes of
assets/securities which a fund must hold.
INFLATION RISK
Inflation is the increase in the level of prices and as such, decreases the real value of money.
Therefore, there is a threat that one's assets may decrease significantly in value over longer
periods of high inflation. Inflation Risk refers to the risk posed to the value of assets or
income by the inflation.
To avoid the pitfalls posed by inflation, portfolio allocation is important. Commodities such
as oil, grains, metals etc. are often seen as a hedge against inflation. This is because
commodity prices often rise with increased inflation but simultaneously there are certain
other risks associated with commodities and inflation;
i. Commodities have no income or earnings stream unlike stocks/equities. As a result,

they have no inherent value beyond their market prices, which are dependent on
the perceptions of agents in the market.
ii. Stocks play a crucial role, and have inflation cushion in growth in earnings with
inflation, when they are highly over-valued, their future returns, however, (and
therefore their inflation-fighting power) are likely to be diminished. Bonds on the
other hand, tend to fall in price in response to inflation and the risk that inflation will
outpace and erode investment returns overtime is a serious concern for money
market funds.
iii. In general, it is important to have a well-constructed, diverse portfolio to counter

the adverse effects of inflation. When considering inflation risk, it is important to
keep long-term effects in mind since inflation tends to have a more significant
impact on markets in the long-run.
DEFAULT RISK
It is the risk associated with an issuer of a debt instrument that may not have the financial
ability to meet regular scheduled payments or is incapable of repaying the debt at maturity.
INTEREST RATE RISK

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument
will fluctuate because of changes in market interest rates. It is thus the risk resulting from
increased interest rates in the market place.
LIQUIDITY RISK
Liquidity risk is the risk that the Fund may not be able to generate sufficient cash resources
to settle its obligation in full as they fall due or can only do so on terms that are materially
disadvantageous.
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The Fund is exposed to cash redemptions, at the option of unit holders. The Fund's
approach to managing liquidity is to ensure, as far as possible, that the Fund will always
have sufficient liquidity to meet its liabilities when due under both normal and stressed
conditions, without incurring unacceptable losses or risking damage to the Fund's
reputation. The funds therefore try to invest the majority of their assets in investments that
are traded in active market and can be readily disposed and are also considered readily
realisable.
In short liquidity risk in the context of securities markets is the risk that the market for
assets becomes too thin to enable fair and efficient trading to take place. This is the risk
that assets cannot be sold or bought as and when required.
SETTLEMENT RISK
Settlement risk is the risk that one party will fail to deliver the terms of a contract with
another party at the time of settlement. Settlement risk can be the risk associated with
default at settlement and any timing differences in settlement between the two parties.
This type of risk can lead to principal risk. As such, settlement risk comprises both credit and
liquidity risks. The former arises when a counterparty cannot meet an obligation for full
value of the obligation on due date and thereafter because it is insolvent.
2.9 know the types of Shariah compliant Islamic Mutual Funds including:
 Shariah Compliant Equity Fund

 Shariah Compliant Money Market and Income Fund
 Commodity Fund
 Hybrid Funds
SHARIAH COMPLIANT EQUITY FUND

In an Islamic equity fund the amounts are invested in the shares of joint stock companies.
The profits are mainly achieved through capital gains earned by purchasing and selling the
shares when the prices rise. Profits are also achieved through the receipt of dividends. If the
main business of any company is not lawful in terms of Shariah, an Islamic Fund is not
allowed to purchase, hold or sell its shares, because it will entail the direct involvement of
the shareholder in that prohibited business.
Similarly the contemporary Shariah experts have a consensus on the point that if all the
transactions of a company are in full conformity with Shariah, that includes the fact that
company neither borrows money on interest nor keeps its surplus in an interest bearing
account, its shares can be purchased, held and sold without any hindrance under the
Shariah law. If a company is engaged in a Halal business, but, it keeps its surplus money in
50

an interest-bearing account, wherefrom a small incidental income of interest is received, it

does not render all the business of the company unlawful under Shariah.
The SECP requires that under Shariah Compliant (Islamic) Scheme/funds can only invest in
Shariah compliant assets except money market Shariah Compliant Schemes. Credit Rating of
any bank or DFI with which funds are placed should not be lower than A- (A minus) and the
rating of Debt Instruments in the portfolio should not be lower than A- (A minus). Every
Islamic Scheme should be categorized with respect to equity, fund of funds, income etc. in
its constitutive documents and follow the conditions applicable to that specific category of
fund.
Conditions for Investment in Shares
Investments and dealing in equity shares are acceptable under Shariah subject to the
following conditions:
1. The main business of the company is not in violation of Shariah. Therefore, it is not
permissible to acquire the shares of the companies providing financial services on
interest, like conventional banks, insurance companies, or the companies involved in
some other business not approved by the Shariah, such as companies
manufacturing, selling or offering liquor, pork, haram meat, or involved in activities
like gambling and night club.
2. If the main business of the companies is Halal, like automobiles, textile, etc. but they
deposit there surplus amounts in an interest-bearing account or borrow money on
interest, the shareholder may express his disapproval against such dealings,
preferably by raising his voice against such activities in the annual general meeting
of the company.
3. If some income from interest-bearing accounts is included in the income of the

company, the proportion of such income in the dividend paid to the shareholder
must be given in charity, and must not be retained by him.
For example, if 5% of the whole income of a company has come out of

interest-bearing deposits, 5% of the dividend may be given in charity.
4. Under Shariah the shares of any company are negotiable only if the company owns
some non-liquid tangible assets. If all the assets of a company are in liquid form (i.e.
in the form of money that cannot be purchased or sold, except on par value) the
shares of such company if trading above par are not Shariah Compliant because in
this case the share represents money only and the money under Shariah cannot be
traded in except at par.
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Subject to these conditions, the purchase and sale of shares is permissible in Shariah. An
Islamic Equity Fund can be established on this basis. The subscribers to the Fund will be
treated in Shariah as partners. All the subscription amounts will form a joint pool and will be
invested in purchasing the shares of different companies. The profits can accrue either
through dividend distributed by the relevant companies or through the appreciation in the
prices of the shares. In the first case i.e. where the profits are earned through dividends, a
certain proportion of the dividend, which corresponds to the proportion of interest earned
by the company, may be given to charity. The contemporary Islamic Funds have termed this
process as "purification."
SHARIAH COMPLIANT MONEY MARKET AND INCOME FUNDS

Income funds provide regular and steady income to investors. Money market schemes
generally invest in fixed income securities such as bonds, government securities, bank
placements, Islamic income instruments etc. These funds are less volatile compared to
equity schemes and are best suited for investors who want to avoid fluctuations in stock
market. Investments in these funds are done to seek high liquidity, competitive return and
maximum possible preservation of capital.
COMMODITY FUND
Another possible type of Islamic Fund may be a Commodity Fund. In a fund of this type the
subscription amounts are used in purchasing different commodities for the purpose of
resale. The profits generated by the sale are the income of the fund which is distributed
pro-rata among the subscribers. In order to make this fund acceptable under Shariah, it is
necessary that all the rules governing the transactions are fully complied with. For example:
1. The commodity must be owned by the seller at the time of sale, therefore,
short sales (where a person sells a commodity before he owns it) are not
allowed in Shariah.
2. The commodities must be Halal; therefore, it is not allowed to deal in

commodities like wine, pork meat, or similar other prohibited materials.
3. The seller must have physical or constructive possession of the commodity he

wants to sell. (Constructive possession includes any act by which the risk of
the commodity is passed on to the purchaser).
4. The price of the commodity must be fixed and known to the parties. Any price
which is uncertain or is tied up with an uncertain event renders the sale
invalid.
In view of the above and similar other conditions, it may be obvious that the current
transactions that are prevalent in contemporary Commodity Markets, especially in the
futures commodity markets do not comply with the above conditions for compliance with
Shariah. Therefore, an Islamic Commodity Fund cannot enter into such transactions.
52

However, if there are genuine commodity transactions observing all the requirements of
Shariah, including the above conditions, a commodity fund may well be established. The
units of such fund can also be traded in with the condition that the investment portfolio of
the fund physically owns some commodities at all times.
HYBRID FUND
It is another type of Islamic Fund maybe of a nature where the subscription amount is
employed in a mix of different types of investments like equities, leasing, commodities. This
may be called a Mixed Islamic Fund. In this case if the tangible assets of the Fund are more
than 51% while the cash deposits/heed combined with debt are less than 50% the units of
the fund may be negotiable. However, if the proportion of cash and debts exceeds 50%, its
units cannot be traded as a Shariah compliant fund. According to the majority of the
contemporary Islamic scholars in such a case the Fund must be categorised as a normal
closed-end Fund.
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ELEMENT 3
Regulatory Framework
3.1 Briefly understand the scope, core functions and powers of the Securities and
Exchange Commission of Pakistan (SECP)
Introduction to SECP
The Securities and Exchange Commission of Pakistan (SECP) was set up in pursuance of
the Securities and Exchange Commission of Pakistan Act, 1997 (SECP Act). The Act
provides for the constitution, structure, powers and functions of the SECP and
simultaneously lays down the basis for its administrative authority and independence in
carrying out its regulatory and statutory responsibilities.
The SECP is the successor organisation of Corporate Law Authority; became operational
in its present shape in January 1999 and was initially concerned with the regulation of
the Corporate Sector and Capital Markets only. However, over time; its mandate has
expanded to include supervision and regulation of Insurance Companies, Non-Banking
Finance Companies, REITs and the Private Pension Schemes. The SECP is also entrusted
with the oversight of various external service providers to the corporate and financial
sectors, like Chartered Accountants, Cost and Management Accountants, Credit Rating
Agencies, Corporate Secretaries, Stock and Commodity Brokers and Insurance Surveyors
etc. SECP as the regulator and promoter of the Capital Markets is also one of the
sponsors of the Institute of Financial Markets of Pakistan and Pakistan Institute of
Corporate Governance.
Powers and functions of SECP (Commission) can be broadly categorized under:
1. Functional responsibility (powers)

2. Approval according body
3. Power to call for information
4. Enforcement and investigative powers
For further details regarding the Powers and Functions of SECP, candidates are advised
to refer to the Section 20 – 22 (Chapter VI – Powers and Functions) of SECP Act 1997.
54

ICM - Mutual Fund Distributors Certification
3.2 understand The NBFC and Notified Entities Regulations, 2008 (Fifth
Amendment) particularly:
 Section 38: Obligations of the Asset Management Company

 Section 49: Custody of assets
 Section 52: Periodical reports to shareholders, etcetera
 Section 55: Investment policy and diversification
 Section 57: Pricing, issue and redemption of units
 Section 61: Remuneration to Asset Management Companies
 Section 66A: Sale and Distribution of units of Collective Investment
Schemes

In order to understand the above mentioned sections, candidates are advised to refer to
NBFC and Notified Entities Regulations, 2008 (Fifth Amendment).
3.3 understand the SECP Directives to Fund Management Companies on Conduct of

Business, Investor Warnings, etc.
The SECP under Section 282.B. (3) of the Companies Ordinance 1984 has broad powers
and the Commission is empowered to issue ‘directives, circulars, codes, notifications
and Guidelines for the regulation of NBFCs, notified entities and their businesses and
activities’.
SECP as matter of routine, in exercise of its responsibilities and discharging of its

functions issues, instructions to its regulated entities like Asset Management Companies
that are called ‘Circulars’ or ‘Directives” etc. These ‘Circulars/Directives...etc.’ issued by
the SECP have the force of law as these are issued under enabling provisions of the
primary law.
The circulars and directives etc. are issued by SECP can be found on the website of the
SECP (www.secp.gov.pk)
ELEMENT 4
Fund Features and Mechanics
4.1 understand the structure and importance of Regulatory Documents including
 Prospectus/Offering Documents
 Trust Deed
PROSPECTUS/ OFFERING DOCUMENTS
A standard offering document of a Fund is a fairly comprehensive document and

contains almost all the relevant information that may be of relevance to the investor.
Some of the details covered by the documents are; i) Regulatory Approvals and; ii)
Constitution of the Scheme. The Constitution of the Scheme includes; i) objectives and
investment Policy; ii) Trust Deed; iii) nature of the Fund (whether Open End Fund or
not); iv) Size of initial offer and information about transactions of the units after initial
period.
The other component of the document contains details of; i) Investment Objectives,
policies and Restrictions if any along with the possible risks involved in the investments.
This is followed by the portion which contains the details of the Operators and Principals
of the Fund the Management Company (Asset Management Company), financial
highlights, experience of Directors and Principal Shareholder of the AMC. This also
contains full details of the Trustees, External Auditors, Registrar and the Legal Adviser.
Then there is information about the type of Units and Minimum investments, Opening
and Closing of Initial Offering Period. The information about the determination of NAV,
Offer Price, procedures of purchase and redemption of the units that is followed by
information about distribution Policy of income and liquidation proceeds. There is a
separate section dedicated to the disclosure of the Fees and Charges that includes; i)
Management Company Remuneration; ii) Trustee Fee; iii) Formation Cost; iv) Allocation
of Front End/Back End Load Fee and v) Charges of the Fund. There is also the
information about Taxation, Accounts and lastly there is General information including
warnings.
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TRUST DEED
The trust deed specifies the responsibilities of the trustees and the Investment Advisor/
Asset Management Company which need to be strictly adhered to by each concerned
party. Emphasis is laid on good governance and ethical behaviour by all stakeholders in
the mutual fund business. In order to gain acceptability with the investing public, it is
imperative that the affairs of the funds are conducted in a most transparent manner,
with dissemination of the maximum amount of information to the investors. Trust deed
also spells out the objective and Investment policy, valuation of assets, pricing, fee and
charges and details of dealings of the funds.
4.2 know Investor Services and requirements including:
 Account Statements
 Electronic Issuance and Certificates
 Minimum Balance Requirements
 Fund Expenses
 Transaction Costs
 Sales and Purchase of Units/ Offer and Redemption
 Register and Registration of Unit Holders/ Investors
ACCOUNT STATEMENT
The Registrar sends, directly to each unit holder, a non-transferable statement of
account, each time there is a transaction in the account, i.e. each time units are
subscribed, redeemed, transferred to third person, transferred from a third person,
consolidated/split, additional units issued against bonus issue or reinvestment of
dividend. A statement of account is posted to the investor after each relevant
transaction.
ELECTRONIC ISSUANCE AND CERTIFICATES

When an application, duly filled in is delivered to the authorized branch along with the
payment in the prescribed form to a fund distribution company, units applied for are
allotted (issued) to the investor as per policy of the Fund. In most cases the effective
date is the date of realization of the funds in the mutual funds accounts.
Certificates are issued only if requested by the unit holders. However, no certificate is
issued under certain administrative arrangements that exclude issuance of certificates.
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MINIMUM BALANCE REQUIREMENTS

Most mutual fund accounts come with minimum balance requirements. This is usually
the minimum amount necessary to earn profit, qualify for services, or extend waiver.
Accounts that fall below the minimum balance requirements may be subject to special
service charges if the average balance remains below the prescribed threshold.
FUND EXPENSES
Mutual Fund Fees and expenses are charges that may be incurred by investors who hold
mutual fund units. Running a mutual fund involves costs that include share/unit holders
transaction costs, investment, advisory fees and similar other expense. Before a new
Mutual Fund starts its operations, it needs to procure Seed Capital of Rs.100 million, in
which Rs.50 million can be withdrawn immediately after the IPO and then there is a
holding period requirement of 2 years for the remaining Rs.50 million. The Subscribers
are issued the Fund’s Units at Face Value for this invested amount, with the condition
that they may not sell the same for at least 2 years. Such Subscribers are usually banks,
companies; high net worth individuals, etc., their units cannot be redeemed for 2 years.
These initial subscribers undertake the investments because they have confidence in the
competence and integrity of the Fund Manager and anticipate good returns on their
investment.
All expenses, incurred in connection with managing of the Fund, (e.g. salaries,
perquisites, rents, printing, advertising, etc.) are borne by the Asset Management
Company (AMC). The main expenses payable by the Fund to the AMC are:
 Management Fee to the AMC is allowed at a maximum of 3% for first five years
and there after a maximum of 2% is allowed.
 Trustee Fee to the Trustee (Usually 0.5%)
 Audit Fee to the Auditors
 Brokerage to the Brokers (Variable)
 Formation cost including legal fee
 Rating fee
 Legal fee
 Printing of Accounts
Funds pass these costs to investors in a number of ways.
Front End Load:

Front Load funds are mutual funds that have sales charges. When an investor purchases
units of a mutual fund the investor pays a fee for the sale (transaction) of the units. A
front load fund is where the broker receives all his commission when the first funds are
received from the investor. The investors pay the brokers entire commission before any
of his funds go toward the purchase of the units.
58

These are the simplest type of load: paying the fee when purchasing the fund. If an
investor invests Rs. 1,000 in a mutual fund with a 5% front-end load, Rs.50 will be paid
for the sales charge, and Rs.950 will be invested in the fund.
Front-end Load is thus the difference between the Offer Price and the Net Asset Value
(NAV), the Offer Price, being higher than the NAV and is usually the Front-end Load is
expressed as a percentage of the Offer Price. Therefore, if the Front-end Load is 2.5%, it
means that it is 2.5% of the Offer Price.
Example:
Suppose the Net Asset Value (NAV) is Rs.60/-- per unit and the Front-end
Load is 2.5%.
What is the Offer Price?
Offer Price = NAV (1+ Front end load rate)

Since the Front-end Load is 2.5% of the Offer Price, therefore:
Offer Price = 60 (1+2.5%)

= 61.5
Hence, Offer Price is Rs.61.5 and Front-end Load is Rs.1.5 (2.5% of Offer
Price).
While some AMCs calculate the offer price with the formula as under:
Offer Price = NAV / (100-FEL)*100
The Front-end Load, charges are normally used by the AMC to pay commissions to Sales
Agents for finding investors for the Fund. Such Agents can be Banks, Securities/
Distribution Companies or individuals.
Backend Load:
Backend load is also known as Deferred Sales Charge, this is a fee paid when shares are
sold. This fee typically goes to the agent who sells the fund’s units. The amount of this
type of load can be straight forward like front end load or may depend on how long the
investor holds his or her units and typically decreases to zero if the investor holds
his/her shares for long enough a period.
This reducing backend load is a bit more complicated. In such a fund investor pays the
back-end load if they are selling the units of the fund within a certain time frame. A
typical example is a 6% back-end load that decreases to 0% in the seventh year. The
59

load is 6% if units are sold by the investor in the first year of purchase, 5% in the second
year and so on. If investors don't sell the mutual fund until the seventh year, then
he/she doesn’t have to pay the back-end load at all.
This is a percentage deducted from the Net Asset Value (NAV) when redeeming Units.
Example:
Suppose the total investment amount in a fund is Rs.10,000 while there
was no front-end load paid at the time of purchase of fund. The fund
generates a total return over one year of 8% while the back-end load is
applied as 2%.
The value of back-end load will be calculated as:
Back-end load = NAV * Back-end load rate
Whereas NAV = investment (1 +return rate)

NAV of Fund = 10,000 (1+0 .08)
= 10,800
So
Back-end load = 10,800 *0.02
Back-end load = Rs.216
No-load Fund: (Zero-Load)

As the name implies, this means that the fund does not charge any type of sales load.
But, as outlined above, not every type of unit-holder fee is a “sales load”. A no-load fund
may charge fees that are not sales loads, such as purchase fees, redemption fees, and
account fees.
No-load funds do not charge an upfront fee for the sale transaction. In a no-load fund
the broker receives his commission from managers of the Fund. Total funds of investor
go towards purchase of shares/units subject to adjustment of any other charges, if any.
In order to cover their expenses mutual funds charge some fees to the investors and
these fees are only a few percentage points a year.
Some fees that are charged are:

 Redemption fees: A mutual fund may charge fees when the investor sells
units back to the mutual fund. The redemption fee is paid to the fund and
normally covers the costs incurred by the fund on shareholders redemption.
 Contingent deferred sales charge: A mutual fund may charge sales charges
that are reduced at certain time intervals.
For example, the fund may charge 6% of the sale prices the first year
after the shares are bought. Each year thereafter the fee would be
60

reduced by 1% until no fee would be charged. This is an incentive for

investors to leave their money in the fund.
 Management fees: Mutual funds charge fees to cover their expenses that
include miscellaneous expenses like advertising, etc.
 Transfer Exchange fee: A fee is charged by some fund managers each time
the investor transfers money within the same company’s fund or family of
funds.
After paying operating costs and retentions by the AMC, the earnings of the mutual
fund are distributed to the investors in proportion to the number of units held. To
qualify for exemptions from tax, AMC’s are required to distribute at least 90% of its net
income to the unit holders. An investor may choose to receive dividends, or he may
reinvest these into the fund. Many funds automatically reinvest dividends with the
investor authorization.
The mutual fund management company (AMC) must send to the investors an
information statement so that the investors can submit their tax returns and claim
adjustments/credit.
TRANSACTION COSTS
Costs are one of the major concerns with mutual funds. These costs are incurred in
trading of funds’ assets. The on-going expense of a mutual fund is represented by the
expense ratio. This is sometimes also referred to as the management expense ratio
(MER). The expense ratio is composed of the following:
 The cost of hiring the fund manager(s) - Also known as the management fee, that
is allowed at maximum of 3% for first five years and there after a maximum of
2% is allowed on an average.
 Administrative costs - These include necessities such as postage, record keeping,
customer service, etc.
On the whole, expense ratios range from as low as 0.2% (usually for index funds) to as
high as 3%. The average equity mutual fund normally charges around maximum of 3%
for first five years of purchase of units by the investors and there after it charges a
maximum of 2%.
Loads are just fees that a fund uses to compensate brokers or other salespeople for
selling the mutual fund and have already been explained under ”Fund Expenses”.
SALE/PURCHASE OF UNITS
First there is an Eligibility Criteria for the purchase of units by the investor. The investors
are required to be:
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 Citizens of Pakistan resident in Pakistan
 Application of minors, below the age of 18, years, is required to be made by their
Guardians
 Companies, corporate bodies, financial institutions, banks partners of firms,

societies, trusts, etc., incorporated in Pakistan as, long as their underlying
formation documents (memorandum and articles of associations bylaws trust
deed, etc.) permit them to make such investments
 Pakistani’s resident abroad, foreign national and companies incorporated

abroad, subject to rules and regulations of the State Banks of Pakistan and the
Government of Pakistan and such law that may apply at their place of residence
and citizenship.
o Payment of dividends and redemption proceeds to such investors is

subject to the relevant taxation and other applicable foreign exchange
regulations/ laws.
 Any person applying for issue of units of funds has also to warrant that he is duly
authorized to purchase such units.
Application Procedure: The designated procedure is designed for paper–based

transactions and fully completed application form, along with payment through a
crossed-cheque or pay order or demand draft, and required documents are to be
delivered at any of the authorized branches of the fund management company or the
fund distribution companies.
The required documents to be submitted depend on status of the applicant and are:
For Individuals
 Copy of Computerized National Identity Card (In case of Pakistan's citizens)
 Copy of Passport (In case of foreign citizen)
For Corporate, Societies and Trusts, etc.

 Memorandum and Articles of Association/charter/bylaws or rules of the
investing institution
 Resolution of board of directors/governors/trustee’s approving the investment

and the authorized signatories
 Computerized National Identity Card of the authorized signatories
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 Latest financial statement/accounts of the partnerships, trusts, society associate.
Joint Applications
 Joint applications can be made by a group of 2 to 4 related applicants, who are
deemed to hold the units on first-holder basis. Each holder must sign the
application form and submit a copy of his Computerized National Identity Card
(CNIC) or other relevant identification document.
Principal Account Holder

 The principal account holder receives all notices and correspondence in respect
of the account as well as the proceeds of any redemption or dividend payments.
The said holder’s receipt or payment into his designated bank account is
considered a valid discharge by the trustees of their obligations.
 In the event of the principal account holder’s death, the person first in the order
of survivors, as stated in the application form, takes the place of the deceased in
all respects.
 Where units are registered in the names of Joint-Holders and, subsequently,

additional units are purchased by the same Joint-Holders, but their names
appear in the application form in a different order, such additional units are
registered under a different account.
Other Requirements:
 For existing unit holders, either individuals or corporate, fresh submission of
documents are not required at the time of subsequent investment(s)
 Applicants are given a copy of the application form, duly stamped and signed by
an authorized officer of the distributor/ agent, acknowledging receipt thereof
along with its attachments
 Cash up to a maximum of Rs.50,000 can be deposited, through a specially

designed pay-in slip in a bank account maintained with banks designated by the
AMC
 A receipt copy of the pay-in slip is also to be provided as evidence of deposit
 Acknowledgement for applications and payment instruments other than cash

are only issued by the relevant distributor
 The distribution company normally reject the application(s) in case of any

incorrect information or discrepancy which the applicant fails to rectify
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 If subsequent to the receipt of the applications by the distributor, but prior to

issue of the units, the application is found, by the distributor or the registrar to
be incomplete or incorrect in any material manner, the registrar or the
distributor advises the applicant, in writing, to remove the discrepancy.
Meanwhile, the application is held in abeyance for 15 days and, in case the
discrepancy is not removed in the specified time; the amount received is
refunded without any interest or mark-up. However, if a material discrepancy is
discovered after the issuance of units, the registrar or distributor advises the
applicant, in writing, to remove the discrepancy within 15 days. If the investor
does not do so, in the opinion of the registrar, without good cause, the units are
to be redeemed at the redemption price applicable on the date the units are so
redeemed and the applicant unit holder is not entitled to any other payment in
this regard.
Payment Proceedings:
 Payment for the purchase of units can be made either by bank transfer, demand
draft (outside city), pay order or crossed cheque “Account Payee Only” which is
drawn on a bank in the same city as the authorized branch of the distribution
company to which the application form has been submitted.
 Payment for units in cash is not accepted by the AMCs. However, the AMC do
notify details of an account in the trustee's name in which funds are deposited
through a specially-designed pay-in slip.
DIVIDENDS
DECLARATION OF DIVIDEND
The AMC decides, not later than 45 days after the end of the accounting period,
whether to distribute the profits, if any, available for distribution, in the form of
cash dividends or bonus units to the units holders.
REINVESTMENT OF DIVIDENDS
Dividends (net of tax, if any) are automatically reinvested (where instructed so)
in additional units. The offer price of such units is the NAV as at the close of the
period for which the dividend is being distributed, as certified by the auditors,
after appropriation of the income of that year.
If unit holders instruct the AMC, in writing not to reinvest their future dividends,
in which case their future dividends (net of tax, if any) are transferred to their
designated bank accounts.
ENCASHMENT OF BONUS UNITS

In the event dividend is declared in the form of bonus units, such units are added
to the holding of the unit holders. Unit holders can instruct the AMC, in writing
64

to pay them the cash value of bonus units issued in future, in which case their
future bonus units can be enchased.
PAYMENT OF DIVIDEND
All payments for dividend are made by the registrar, by transfer of funds to the
unit holder’s (or principal account holder’s or pledge/ charge / lien-holder’s )
designated bank account, usually within 30 working days of the declaration of
the dividend.
DISPATCH OF DIVIDEND WARRANT

Dividend warrant is dispatched to the unit holder’s for (or first- named joint –
holder’s or pledge / charge / lien – holder’s) registered address within 30 days of
the declaration of dividend.
REGISTER OF UNIT HOLDERS

A register of unit holders is maintained by the registrar. Every unit holder has a separate
account identification number. This specific account number is used for recording the
units held by the unit holder in various schemes, the specific instructions that the unit
holder has given with respects to his account and also reflects all the transactions made
in that account.
The register of the unit holders maintained by the registrar normally contains the
following information:
Unit holder’s name, address, CNIC number, Father’s/husband’s name; unit holders’
occupation and bank account details of a single unit holder. In case of joint account
additional information like the name of principal account holder; names and CNIC
numbers of the remaining joint-holders along with Instructions about reinvestment or
payment of dividend or encashment of bonus units; about operations of the account
(whether singly or jointly, etc. ) are also registered. The register also has information
about pledge of units, about nominees; in case of death of the unit holder about pledge
of units about nominees in case of death of the unit holder, about changes in previously
given particulars, information or instructions.
The AMC closes the register by giving at least 30 days’ notice to the unit holders in case
of listed funds, whereas, in case of non-listed funds only seven days advance notice is
required. However, such closure must not exceed six (6) days at a time and collectively
45 days in the entire calendar year. During the closure periods, purchase redemption
and transfer applications are not entertained.
4.3 understand the investment planning and various funds asset allocation
strategy
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The table below gives at a glance a general picture of matching of the investment
objectives with capacity to take risk and suitability of the fund type along with its asset
allocations to match these:
If the Suitable Fund These Funds Invest Potential Potential Potential

Investment Type: Primarily In: Capital Current Risk:
Objective Is: Appreciation: Income:
Maximum Aggressive Common stocks with Very High Very Low High to
Capital Growth Growth potential for very rapid Very High
growth. May employ
International certain aggressive
strategies
High Capital Growth Common stocks with High to Very High Very Low High
Growth long-term growth
Specialty/ potential
Sector
International
Current Income Growth & Common stocks with Moderate Moderate Moderate
& Capital Income potential for high to High
Growth dividends and capital
appreciation
High Current Fixed Income Both high-dividend- Very Low High to Very Low to
Income paying stocks and bonds High Moderate
Equity Income
Current Income General Money Money market None Moderate to Very Low
& Protection of Market Funds instruments High
Principal
Tax-Free Tax-Exempt Short-term municipal None Moderate to Low

Income & Money Market notes and bonds High
Protection of
Principal
4.4 understand the Net Asset Value (NAV) of the Fund and be able to calculate the
return of the Fund as per MUFAP Total Return Methodology
NET ASSET VALUE (NAV)

The Net Asset Value or NAV is the value of a fund's investments. For a mutual fund, the
net asset value per unit usually represents the fund's offer, subject to a possible sales or
redemption charge. For a closed end fund, the market price may vary significantly from
the net asset value. Units of an open end Mutual Fund are sold to the public at the NAV
66

adjusted for offer/redemption price. How well the fund is performing is reflected in the
rising or declining NAV.
Open-ended fund units are issued and can typically be purchased or redeemed as
needed at the offer or repurchase price per unit whereas units of the closed-end funds
are listed on the stock exchanges and are freely traded as shares of any other listed
company and their market price is not linked to their NAV but is determined by normal
demand and supply mechanism.
The Net Asset Value (NAV) of a fund is computed by deducting the total liabilities of the
Fund from the total assets, and dividing the result by the total number of outstanding
units.
NAV = Total Assets - Total Liabilities
Units Outstanding
4.5 know the Zakat applicability, exemption and should be able to calculate Zakat
on Units/ investment
Except for the unit holders exempted from payment of Zakat in accordance with the
provisions of the Zakat and Usher Ordinance 1980, units held by a Muslim resident
Pakistani unit holder who is also sahib-i-nisab are subject to the deduction of Zakat @
2.5% of the face value or NAV, whichever is less, as on the Zakat valuation/deduction
date. Unit holders can also pay Zakat on their holdings in a mutual fund themselves. All
they have to do is provide the AMC with ‘Non-Declaration of Zakat Form’ one month
prior to the beginning of the holy month of Ramadan.
The due Zakat amount is collected by deducting it from the first pay-out (redemption or
cash dividend) after the aforementioned Zakat valuation date.
4.6 understand the Fund Redemption and Transfer procedure including:
 Payment of redemption proceeds

 Partial redemption
 Partial transfer
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REDEMPTION OF UNITS
Application procedures for redemption of the Units as defined under the Law are
designed for paper based transactions and not for electronic transmission. The
procedure provides that:
 A unit holder redeems units by lodging a request, on the prescribed form

(redemption form), with an authorized branch of a distribution company.
 In case certificates have been issued to represent the units, they (the
certificates) are also lodged with the request and acknowledgement on the
investor’s copy of the redemption form is taken by the unit holder.
 Redemption forms are obtained from an authorized branch of a distribution

company or a facilitator or the AMC, through post or electronic mail.
 The units are redeemed based on the repurchase (redemption) price that is fixed
on the basis of NAV determined on the day of receipt of the duly completed
redemption form, along with certificates, where applicable.
 The payment of the redemption value is made by AMC through transfer to the
unit holder’s account (principal account holder, if units are jointly held) in the
designated bank account or through a crossed cheque or pay order, within 6
working days of the receipt of the request.
 In case of joint account ownership, unless otherwise specified, all the joint
holders have to sign the redemption form.
 Partial redemption of units covered by a single certificate is not permitted. In

such a case the certificate should be submitted for splitting, prior to request for
Redemption.
 The registrar verifies the holding and the signature of the unit holder.
TRANSFER OF UNITS
- A unit holder can transfer units held by him, by completing the prescribed
‘transfer application form’. The form is required to be signed by the transferor
submitted to an authorized branch of a distribution company along with the
relevant certificate, on any working day during banking hours and also paying
any applicable charges;
- A person on becoming entitled to hold units as a consequence of the death,

insolvency, or winding-up of a sole holder, or the survivor of a joint holder , can
be registered as the holder or joint holder upon submitting evidence proving his
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entitlement to the units, in addition to completing the foregoing requirements.

However, in case of transmission the processing fee is not payable by the
successors or beneficiaries of the deceased’ estate. Such fee is paid by the AMC
to the registrar. The registrar verifies the holding and the signature of the unit
holder.
PARTIAL TRANSFER
- Partial transfer of units covered by a single certificate is not permitted. In that
case the certificate should be submitted for splitting prior to request for
redemption.
4.7 understand the Fund Valuation and Taxation including:
 Taxation on Mutual Fund Units

 Taxation on Dividends and Bonus
 Tax Credit On Investment to Individual
 Tax Exemptions, Rebates and Allowances
TAX ON MUTUAL FUND UNITS

Under current Pakistani income tax law, the income of all Mutual Funds is tax-exempt,
provided they distribute at least 90% of such income amongst the mutual fund unit-
holders by way of Cash Dividends or Bonus Certificates/ Units.
Under the current tax regime, Capital gain tax is applicable from July 2017 on all gains
made on the sale of securities. At present, Mutual fund or Collective Investment Scheme
are required to deduct Capital Gains Tax, at the following rates, on redemption of units:
A mutual fund or a collective investment scheme or a REIT scheme shall deduct Capital
Gains Tax at the rates as specified below, on redemption of securities as prescribed,
namely:-
Table 3: Rate of Tax Deduction

Category Filer Non-Filer
Individual and 10% for stock funds 17.5%

Association of Persons 10% for others
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Company 10% for stock funds 25%

25% for others
In case of a stock fund if dividend receipts of the fund are less than capital gains, the
rate of tax deduction shall be 12.5%
One must also know that withholding tax on capital gains is different from tax on sale of
mutual fund units.
Table 4: Capital Gain Tax on Sale of Shares
S.No. Period Tax Rate of Securities Acquired Securities Acquired on

Year Tax before July 1, 2016 or after July 1, 2016
Filer Non-Filer Filer Non-Filer
(i) Where holding period 2011 10%
of a security is less 2012 10% 15%
than six months. 2013 10% 15%
2014 10%
2015 12.5%
2016 15%
2017 18%
2018 18% 15% 20%
(ii) Where holding period 2011 7.5%

of a security is more 2012 8%
than six months but 2013 8%
less than twelve 2014 8%
months. 2015 12.5%
2016 15%
2017 15% 18%
2018 15% 18% 15% 20%
(iii) Where holding period 2015 10%

of a security is more 2016 12.5%
than one year but less 2017 12.5% 16%
than twenty four 2018 12.5% 16% 15% 20%
months.
(iv) Where holding period 2015 0%
of a security is more 2016 7.5%
than twenty four 2017 7.5% 11%
months or more but 2018 7.5% 11% 15% 20%
70

the security was

acquired on or after
1st July, 2013
(v) Where holding period 2015 0%
of a security is more 2016 0%
than forty eight 2017 0% 0%
months/ Where the 2018 0% 0% 0% 0% 0%
security was acquired
before 1st July, 2013
(vi) Future commodity 2015 0%
contracts entered into 2016 0%
by the members of 2017 5% 5%
Pakistan Mercantile 2018 5% 5% 5% 5%
Exchange.
“No loss shall be carried forward to the subsequent tax year.”
Tax on dividend income:

For the year 2016-17 (tax rate of 12.5%)
For the year 2017-18 (tax rate of 15%)
Tax on Mutual Fund dividend income:

For the year 2016-17 (tax rate of 10%)
For the year 2017-18 (tax rate of 12.5%)
Tax on disposal of Debt Securities:

Sub-section (3)A: Tax on disposal of debt securities shall be charged at:
Where profit on debt does not exceed Rs. 5,000,000 (tax rate is 10%)
Where profit on debt exceeds 5,000,000 but does not exceed Rs. 25,000,000 (tax rate is
12.5%)
Where profit on debt exceeds Rs. 25,000,000 (tax rate is 15%)
Debt securities have been defined by inserting sub-section (3A) in this section as under:
“(3A) For the purpose of this section, “debt securities” means-

(a) Corporate Debt Securities such as Term Finance Certificates (TFCs), Sukuk Certificates
(Sharia Compliant Bonds), Registered Bonds, Commercial Papers, Participation Term
Certificates (PTCs) and all kinds of debt instruments issued by any Pakistani or foreign
company or corporation registered in Pakistan; and
(a) Government Debt Securities such as Treasury Bills (T-bills), Federal Investment
Bonds (FIBs), Pakistan Investment Bonds (PIBs), Foreign Currency Bonds,
71

Government Papers, Municipal Bonds, Infrastructure Bonds and all kinds of debt
instruments issued by Federal Government, Provincial Governments, Local
Authorities and other statutory bodies.”
CORPORATE TAX
Corporate tax or company tax refers to a tax imposed on entities that are taxed at the
entity level in a particular jurisdiction. Such taxes may include income and other taxes.
Generally, the taxes are imposed on net taxable income. Net taxable income for
corporate tax is generally financial statement income with modifications, and may be
defined in detail within the system. The tax may have an alternative base, such as
assets, payrolls, or income computed in an alternative manner.
Corporations are also subject to property tax, payroll tax, withholding tax, excise duty,
customs duty and other common taxes, generally in the same manner as other
taxpayers. Corporations may also be taxed on their existence or equity structure. These,
however, are referred to as “corporate tax”. In Pakistan Corporate Tax is levied at the
rate of thirty percent (30%).
Generally, the income tax is imposed at a specific rate of taxable income as defined
within the system. There is a separate body of law and separate provisions that relates
to corporate taxation. In such cases, the law may apply only to entities and not to
individuals operating a trade. Such laws may differentiate between broad types of
income earned by corporations and tax on such types of income differently.
TAX CREDIT ON INVESTMENT TO INDIVIDUAL

According to Section 62 of the Income Tax Ordinance, 2001, a resident who is also a tax
payer other than a company, is entitled to tax credit on investment in new shares
offered to public by a public company listed on a stock exchange in Pakistan. This tax
credit is available on an investment amount of maximum of:
(a) 20% of Taxable Income for the tax year or
(b) Rs. 1.5 million
The tax credit availed on acquisition of such shares will be paid back if such shares are
disposed-off within 24 months or two years of the date of acquisition.
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Table 5: Total Tax Credit- Salaried Individuals

Taxable Permissible Permissible Tax Effective Tax Credit Tax Credit Total Tax
Income (PKR) Investment Investment Amount Tax Rate (PKR) (PKR) Credit (PKR)
for Tax for Tax (PKR) % Mutual Pension
Credit (PKR) Credit (PKR) Funds Funds
Mutual Pension
Funds Funds
900,000 180,000 180,000 29,500 3.28% 5,900 5,900 11,800

1,550,000 310,000 310,000 99,500 6.42% 19,900 19,900 39,800
2,450,000 490,000 490,000 250,750 10.23% 50,150 50,150 100,300
4,500,000 900,000 900,000 734,500 16.32% 146,900 146,900 293,800
8,000,000 1,500,000 1,600,000 1,722,000 21.53% 322,875 344,400 667,275
10,000,000 1,500,000 2,000,000 2,322,000 23.22% 348,300 464,400 812,700
20,000,000 1,500,000 4,000,000 5,322,000 26.61% 399,150 1,064,400 1,463,550
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Table 6: Total Tax Credit- Self- Employed Individuals
Taxable Permissible Permissible Tax Effective Tax Tax Credit Total Tax
Income Investment for Investment for Amount Tax Rate Credit (PKR) Credit
(PKR) Tax Credit Tax Credit (PKR) % (PKR) Pension (PKR)
(PKR) Mutual (PKR) Pension Mutual Funds
Funds Funds Funds
900,000 180,000 180,000 54,500 6.06% 10,900 10,900 21,800
1,500,000 300,000 300,000 144,500 9.63% 28,900 28,900 57,800
2,400,000 480,000 480,000 324,500 13.52% 64,900 64,900 129,800
4,500,000 900,000 900,000 869,500 19.32% 173,900 173,900 347,800
8,000,000 1,500,000 1,600,000 2,019,500 25.24% 378,656 403,900 782,556
10,000,000 1,500,000 2,000,000 2,719,500 27.20% 407,925 543,900 951,825
20,000,000 1,500,000 4,000,000 6,219,500 31.10% 466,463 1,243,900 1,710,363
TAX EXEMPTIONS, REBATES AND ALLOWANCES

Current tax law allow two different kinds of tax credits; first is available under Section 62
of I.T. Ordinance for investment on listed open end funds and investment plans. As per
tax laws, the investor needs to hold such investments for a period of twenty four (24)
months. If the investment is held for a period of less than 24 months, tax credit availed
needs to be refunded. The other benefits can be availed through contributions made
towards Pension Funds (Voluntary Pension Scheme).
Tax Credit available for investments in Open-end Mutual Fund (Section 62):
The Tax Credit can be calculated using following steps:
Step 1: Determine the maximum amount on which tax credit can be claimed.
This amount has to be lesser of the following three:
a) the total cost of acquiring the units;
b) Twenty (20%) of the person’s taxable income for the year; or
c) Rupees One Million and Five Hundred Thousand (PKR 1,500,000/-).
Step 2: The formula applied to calculate the average tax rate:
Amount of tax payable without Tax Credit*

Taxable Income
Step 3: Tax Credit is calculated as:
Tax credit = Average Tax Rate (%) × Maximum Amount for Tax Credit
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The following illustrations has been developed for different income levels, these
examples demonstrate the tax benefit that can be availed per annum and the maximum
investment amount that is required by different income groups in achieving the
maximum permissible tax benefit through investments in the Mutual Funds.
Table 7: Maximum Tax Credit

Gross Rs. 50,000 per month (All figures are in Rs.)
Income Exempt Income Taxable Income
Basic 363,636 Nil 363,636

House Rent Allowance (45% of basic) 163,363 Nil 163,636
Utility (10%of basic) 36,364 Nil 36,364
Medical Reimbursement (Exemption of up to 10% of basic 36,364 36,364 -
salary) 36,364 563,636
Total Annual Income 599,999
Tax Payable on Rs. 563636 @4.5% Rs. 25,363/-

Investment required for maximum tax credit Rs. 112,727/-
Maximum Tax Credit per annum (56,363×4.5%) Rs. 5,073
4.8 Know the Mutual Fund ratings, Fund Manager ratings and benchmarks
PERFORMANCE AND RATINGS: Introduction

Performance is the most recognizable component of mutual fund ratings. This
component is easy to follow and does not require in-depth knowledge of the market.
However, "chasing performance" has led many investors into what is known as the
"performance trap".
This is when money flows heavily into a fund that was highly rated in the previous year.
That same fund may not be able to match previous year’s impressive performance in
the following period or/future. Ratings firms using their expertise and under the
75

guidelines provided by the regulator evaluate a fund's performance both on a relative as

well as on absolute basis. One of the biggest problems with mutual fund ratings is that
during a long-term bull market, investors and those who rate funds can easily become
complacent.
Mutual funds are evaluated on many levels that go much beyond just performance. The
factors of evaluation include peer group comparisons, sector weightings, quality of
management, professionalism and even cash holdings. Though not infallible, ratings
system does provide investors with relative guidance and directions.
Mutual Fund Ranking

The increasing number of asset managers as well as funds had created the need for an
independent opinion on their performance. There are presently two credit rating
companies operating in Pakistan; i) The Pakistan Credit Rating Agency (PACRA) and; ii)
JCR-VIS Credit Rating Ltd. The credit rating companies undertake the rating of two
distinct ingredients of the mutual fund industry – i) Asset managers and, ii) the Funds;
these two are rated on separate scales.
The asset manager rating seeks to determine the professional capacity of asset
managers, while the rankings/ratings of mutual funds aim to highlight relative
positioning of a particular fund with reference to certain identified parameters.
The mutual fund performance ranking (commonly referred to as "Star Ranking"),

focuses on relative actual recorded performance of a mutual fund. The ranking
methodology is designed by both the credit rating companies in a manner that the star
ranking of a fund conveys a sense of how skilfully the fund has been managed; that is,
the relative star rankings of any two funds in a category should be affected more by
managerial skills than by market circumstances or events that lie beyond the fund
managers’ control.
The star rankings to funds are assigned identically by the two credit rating companies
within the five 5 categories and are as described below:
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Fund Manager Rating

Asset Manager Ratings are announced through press releases and followed by entity
reports published on the agency’s websites, www.pacra.com and www.jcrvis.com.pk
Rating, Scale and Definitions

JCR-VIS and PACRA issue AM ratings to provide investors with an independent
assessment of an asset manager’s capabilities, these are;
AM1 Asset manager meets or exceeds the overall investment

management industry best practices and highest benchmarks in all
criteria under review.
AM2 Asset manager meets very high investment management industry
standards and benchmarks with noted strengths in several of the
rating factors.
AM3 Asset manager meets high investment management industry
standards and benchmarks.
AM4 Asset manager demonstrates an adequate organization that
meets investment management industry standards and
benchmarks.
AM5 Asset manager does not meet the minimum investment
management industry standards and benchmarks.
Note: The ratings are on a scale of ‘AM1' to ‘AM5', with ‘AM1' being the
highest. “+” or “-” may be appended to a rating to denote relative status
within major rating categories bar the ‘AM1' and ‘AM5' rating categories.
For more details the two credit rating agencies can be consulted at their websites
www.pacra.com and www.jcrvis.com.pk
4.9 Understand and be able to calculate the Tax treatment of pensions
TAX TREATMENT
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Death before attaining the retirement age

In case of death of the participant before reaching the retirement age the VPS Rules,
2005 provide the following guidance to nominees of deceased participant:
 He/she can redeem the balance under provisions of Income Tax Ordinance, 2001
 He/she can transfer the balance to his Individual Pension account (existing or
new) with same or new Pension Fund Manager
 He/she can purchase an annuity from an insurance company if his/her age is 55
years of more
 If he/she is under 55 years of age, he/she can purchase a deferred annuity from
an insurance company to commence at the age of 55 years or later
Disability before attaining the retirement age

If a Participant suffers from a disability before attaining the planned retirement age, the
VPS Rules, 2005 provide the following guidance:
 A participant shall be considered to have reached the retirement age, subject to
production of an assessment certificate from a medical board approved under
VPS
 He/she shall then have the same options as available on achieving planned
retirement age
Option of withdrawal before retirement under Voluntary Pension System

A Participant may withdraw his/her accumulated balance or a part thereof, from his/her
individual pension account before attaining the retirement age, subject to payment of
tax under the provisions of Income Tax Ordinance, 2001
Options at retirement under the VPS

On attaining the retirement age, a Participant has the following options:
 He/she can withdraw 50% of the accumulated balance free of tax

 From the remaining balance, he/she can either:
o purchase an annuity from a life insurance company; or

o an Income Payment Plan from a Pension Fund Manager for up to the age
of 75 years
Insurance Coverage
There are two kinds of insurance covers being offered under VPS as an additional
security. These are:
 Free Insurance Cover

 Paid Insurance Cover
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Separate Forum for handling complaints under VPS

For dispute resolution under VPS, The VPS Rules, 2005 require the dispute to be
referred to the Insurance Ombudsman.
4.10 Know Legislation and taxation benefits on Pension Funds
The VPS framework in Pakistan is governed by the following major laws and enabling
regulations/rules:
 Voluntary Pension System Rules, 2005

 Companies Ordinance, 1984
 Income Tax Ordinance, 2001
 NBFC Rules, 2003
The VPS Rules are set up under the framework of the NBFC Rules, which in turn are
issued under the Companies Ordinance, 1984. The VPS Rules allow for asset
management companies and life insurance companies to be licensed by the SECP as
Pension Fund Managers, while the Pension Fund itself is authorised by the SECP as a
unit trust scheme and structured under the Trust Act. The Income Tax Act provides the
tax breaks.
Guidelines about VPS are regularly issued by SECP. Those issued to date to provide
further clarity under VPS include:
 Fit and Proper Test for applicant Pension Fund Manager

 Investment and Allocation Policy for Pension Funds
 Guidelines for registration of Pension Fund Manager
 Guidelines for appointment of trustee to a Pension Fund
 Guidelines for authorization of Pension Fund
 Guidelines for preparation and presentation of annual and quarterly accounts
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ELEMENT 5
Ethics, Disclosures and Best Practices
5.1 know the methods of information dissemination and disclosure requirements
The term dissemination of information in the context of the Mutual Funds is understood
to mean the process of making maximum possible information available to the investors
and the general public. The regulations lay down the minimum standards of the quality
and quantity of information that the management company is obliged to disseminate to
the public. The management companies use different mediums like internet, print,
brochures; publications (Reports, Newsletters, Briefs) for dissemination of information
All the information an investor needs to know to make an informed investment decision
is available in the mutual fund's prospectus (offering document). This is one of the most
important documents that a mutual fund provides to meet regulators disclosure
requirements. By reading the prospectus, the investor can get all the information on the
fund's investment objectives, potential risk, what sort of assets it is investing in and
what sort of fee it will charge. Investor also finds out who is responsible for managing
the fund, their qualifications and past experience.
Mutual funds also provide investors copies of their annual and semi-annual reports.
These reports are important documents that contain a lot of information on
performance that is useful to investors. The reports contain detailer information on the
funds audited financial statements and investment holdings. Management also
compares the returns on its fund investments to returns on some suitable yardstick to
provide an idea about the fund's performance. Management also discusses strategies
and summarizes developments over the period.
5.2 know the requirements and importance of NAV announcement related to:
 Matching investments and redemption

 Cut-off timings
 Performance
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MATCHING INVESTMENTS AND REDEMPTION

Investors at times use funds to park money for the short term and that creates higher
than normal volatility in the fund flows. Investment approach of the fund manager has
to consider that aspect into consideration and build Fund with financial instruments
where as far as possible maturities of the invested funds match with investor’s
redemptions. Fund managers also do not know exactly when their investors will need
funds but with experience and past records they develop a good knowledge base about
investor behavior and when funds may be withdrawn.
This matching of investments and redemptions is achieved by the fund managers by

spreading their investments across several securities of different maturities and also
some very liquid equity stocks so that they are not caught off-guard when redemption
requests are received. Liquidity management in the fund is one of the biggest challenges
that Fund Managers face
CUT-OFF TIMINGS
In a normal Open-End Mutual Fund, the ‘offer price’ for investments and the
‘repurchase price’ for redemptions on any day are derived from NAV of the fund on that
particular day. This is relatively more important for an equity fund than an income fund
because there are usually more chances of volatility in the former as opposed to the
latter.
It is usually made clear by the Asset Management Company to all concerned through a
policy statement that NAV of any particular day will be applicable to all transactions up
to an exact predetermined time of that day (called the cut-off timings) and that, after
such time, the NAV of the following business day normally applies.
PERFORMANCE
The movement of the NAV is normally considered as a good indicator of the
performance of the fund and is used as the measure for comparison with the
performance of the benchmark (in case of an equity Fund) and peer funds in that
category. This NAV and comparison with the benchmark and other peer group fund is
updated on a daily basis and the information is available on the website of MUFAP.
5.3 understand the disclaimers, policies and their disclosure requirements

related to Investments and Risks
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The AMCs use disclaimers to mitigate their responsibilities; these disclaimers have a
nexus with warning and disclosures. Some of the common disclaimers made by mutual
funds in their offering documents include:
 “If an investor is in any doubt about the contents of this offering document, he/
she should consult the mutual fund company, distributor, agent, legal adviser or
other financial adviser”.
 “The price of Units and the income from them (where income is distributed) may
increase or decrease”.
 “The Units of the Fund are not bank deposits and are neither issued by, insured
by, nor otherwise supported by the SECP, the Stock Exchanges, any Government
agency, the Trustee, the Management Company, any of the sponsors,
shareholders or employees of the Management Company, any of the Pre-IPO
Investors”.
 “The target return/dividend range for the Fund cannot be guaranteed. It should
be clearly understood that the portfolio of Fund is subject to market fluctuations
and risks inherent in all such investments”.
Duties and Responsibilities of Fund Management Company

Some of the Duties and Responsibilities of Fund Management Company are:
 The responsibilities of the Management Company is to promote the sale of Units

in Fund, invest and manage the assets of Fund according to the provisions of the
Trust Deed, in good faith, to the best of its ability and without gaining any undue
advantage for itself or any of its Connected Persons and/or Group Companies or
its officers.
 The Management Company is required to maintain proper accounts and records

of the Fund to enable a complete view of assets and liabilities, income and
expenditure and amounts received in respect of; Units sold, amount paid out on
redemptions of Units and also by way of distribution.
 The Management Company within four months of closing of the Accounting Date
is to prepare and transmit to Unit Holders and SECP the annual report together
with balance sheet, income and expenditure account and auditors report for the
Accounting period.
 The Management Company has also to prepare and transmit to Unit Holders and
the SECP, the balance sheet and income and expenditure account within one
month of the close of the first quarter and third quarter and within two months
after the close of the first half of the year or within the time frame prescribed by
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the SECP. The Management Company may transmit the accounts to the Holders
either electronically (via website and/or email) or in physical form if so
requested.
 The Management Company has to make available to the Trustee all information
relating to the Fund and also Account to Trustee for any loss in value of the
assets of the Fund caused by its negligence. The Management Company also
instruct the Trustee on purchases and redemptions, including placement of cash
and sale of investments.
 The Management Company is obliged to obtain a rating of the Fund from the
Rating Agency approved by the SECP.
 The Management Company is also obliged to process the payment instrument

immediately on receipt of application.
5.4 understand the duty to investors related to under and overselling
UNDER SELLING
The concept of under selling in the context of mutual funds is to sell to an investor less
than what meets his investment objectives/needs despite his capacity to invest to meet
his future needs. In other words, if the units of the funds sold to an investor are less
than the numbers which are expected to benefit and meet the investment needs and
objectives of the customer despite his capacity to buy will be termed as underselling.
This may occur if current circumstances and investment need/objectives of the

customer are not properly assessed and he is not rightly and/ or properly provided
optimum investment advice to achieve the desired investment objectives. With respect
to an individual investor, risk implicit in under selling is that an investor may not be able
to achieve his investment targets/ needs despite his financial capacity of being in a
position to do so.
Underselling in the general context of a fund also implies that it may not be able to get
potential customers interested in buying the Fund units despite the fund’s
appropriateness and suitability to the needs.
OVER SELLING
Over selling; is in same manner is similar to mis-selling. In the context of the mutual
fund it occurs when the seller deliberately oversells the funds units to an investor which
are much more than the investment needs and capacity of the investor to invest. One
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simple example can be like selling high risk products to an investor who has limited
resources little free cash flows and low risk appetite. A mutual fund distributor should
carefully assess the financial resources of the investor and his investment objectives and
then advise him/ her on purchasing the most suitable type of investment vehicle,
considering investment capacity of the investor.
For example, consider a person of age 65 with limited regular income and
savings, to whom a mutual fund distributor sells a sizeable quantity of units of a
growth fund. Here neither the needs of the investor were rightly assessed nor his
risk appetite was given due consideration. At this retirement age, the need of the
investor is a regular stream of income rather than growth or capital appreciation.
Also the availability of free cash flow after the investment, for any emergency
needs, should have been considered.
MIS-SELLING
Mis-selling occurs by misrepresenting the facts or misleading an investor about the
characteristics of a mutual fund. In an effort to make a sale to a potential customer,
sometimes a mutual fund distributor could leave out essential details in disclosing
certain crucial information or describe a financial product as being something different
to what it really is and impose and force the sale of the product on the investor, even
though sound financial judgment would come to the opposite conclusion.
An obvious example of mis-selling can be seen in the life insurance

industry. Consider an investor who has a large amount of savings and
investments but no dependent children and a deceased spouse. This
investor would arguably have little need for whole life insurance and,
therefore, an insurance salesperson describing the product as something
the investor urgently needed to protect his or her assets in the event of
death could be considered a case of mis-selling.
5.5 understand the importance and methods of investor profiling for

affordability and suitability
Proper investor profiling is essentially important to avoid any wrong selling. It helps in
defining individual investor’s investment objectives, risk appetite, investment capacities
and preferences of investment products that are best suited to meet his investment
needs; a normal profile has to have the basic information about the investor like, for
example:
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1. The profile of the investor is determined by factors like;
 Personal investment objectives and other factors such as age, gender, income,
wealth, family size, tax implications etc.
 Attitudes, linked to the temperament (emotions) and the beliefs of the investor.
 The investor's financial return / risk objectives.
2. Some of the other information that is to be necessarily included in the investor

profile is:
 Marital status and number of dependents

 Accommodation status
 Monthly savings
 Foreseeable expenditures of at least next two years
 Retirement needs, if any
 Current investments in stocks, bonds, real estate, mutual funds, bank, etc.
 Estimated investment size
 Investment objective(s)
 Expected returns
 Risk tolerance
 Investment preferences, if any
3. Investor Preferences:
 Short term trading (active management) or long term holding (buy and hold)
 Risk averse or risk tolerant / seeker
 All classes of assets or just one
 Growth fund, quality stocks, defensive or cyclical fund
 Domestic funds only or international diversification
5.6 know the importance of maintenance of investor records
Correct management of investor’s records is essential to ensure retention of the client’s

business and for possible additional sales to the investor meeting his evolving
investment objectives and also to meet the needs of regulatory compliance and
protecting the investor.
Some of the important functions and uses of managing the investor records are:
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 A database of current, historical and prospective investors (whether they are

individuals or corporate);
 The ability to categorize investors - ensuring clear records of who is currently
invested and who is seeking to invest;
 The ability to profile investors according to their specific interests and
circumstances;
 The ability to build distribution lists for communication of reports and
announcements;
 Tracking information flows e.g. which investor has received which version of
what document through which medium;
 Maintenance of records of all communications with each investor, be it
telephonic, electronic or as a meeting in person.
 Creating a long term communication link and relationship with investors on the
data base.
The NBFC (Establishment and Regulation) Rules, 2003 and NBFC and Notified Entities
Regulations, 2008 require that original record of all book of accounts, reports, analysis,
memoranda containing investment advice be maintained for at least ten years.
5.7 understand confidentiality related to:
 Clients Information
CLIENT ASSETS
A Management company should be able to account to all of its clients for amounts held
on their behalf at all times. When money from clients deposited with the firm is held in
a pooled account, the firm should be able to demonstrate that an amount owed to a
specific client that is held within the pool can be reconciled with the records showing
that individual’s client balance and is, therefore, identifiable.
Internationally agreed ‘Principles for Collective Investment Schemes’ issued by the

IOSCO oblige all jurisdictions that their regulatory systems should provide for rules
governing the legal form and structure of collective investment schemes and also for the
segregation and protection of client assets.
The Non-Banking Financial Companies (Establishment and Regulation) Rules, 2003

require a firm to arrange adequate protection for clients’ assets, when the firm is
responsible for them. An essential part of that protection is the proper accounting and
handling of client money and that the NBFC should not “encumber or mortgage or
86

pledge or transfer clients’ assets deposited with the company as security against any
facility extended to the client, for securing its own (company’s) obligations”.
5.8 know the relevant sections of Anti Money Laundering Act 2010 and KYC/CDD
requirements
To create compliance with the Anti-Money Laundering Act 2010 the SECP has issued
Circular No. 12 of 2009 that has to be read with Section 9 of Non-Banking Finance
Companies and Notified Entities Regulations, 2008; the section relates to prevention of
NBFCs involvement in money laundering and other illegal trades.
The SECP through the Circular has instructed all the NBFCs to formulate and put in place
a comprehensive Customer Due Diligence/Know Your Customer (CDD/KYC) policy. The
circular also lists the minimum information that must be obtained by the NBFCs from
the customers and ensure that the customers are not acting on behalf of others. The
verification of documents has also been obligated.
The high Risk customer with respect to Due Diligence have been indicated and include i)
Non-residents customers, ii) Non-governmental organizations, iii) customers with links
to offshore tax havens; iv) Politically exposed persons; v) high net worth individuals and
similar others. Publically listed companies are regarded as low risk because of their
regulatory disclosures. The circular also provides for retention and up-gradation of
records.
(For details, Candidates may refer to the Circular No. 12 of 2009 and the Anti-Money
Laundering Act 2010, available on the websites of the SECP and the IFMP)
5.9 know the requirements of Fair Dealing including:
 Risks & Rewards of Investing

 Maintenance of Records
 Time Stamps
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RISK & REWARD OF INVESTING

People save for different reasons but most of these reasons are common and can be
classified under one of the following;
 their own education/marriages

 their children’s education/marriages
 the difficult times in their life
 their own old age
 their heirs to inherit
Ideally, the people want to put their savings in investments that would fetch them the
maximum returns with the minimum risk. However, this is not possible and
rewards/returns have a direct linkage with the risks and the norm of the market is; “The
higher the risk, the higher the reward” or conversely “the lower the risk, the lower the
reward”.
In any case, while balancing the ‘risk/reward’ equation, investors want to earn enough
on their investments to, at least, beat the inflation rate, so that the purchasing power of
their savings are not diminished with the passage of time.
There is a wide array of mutual funds that individually have different degrees of risks
and rewards. An investor can create a portfolio choosing right mutual fund or
combination of fund that match his/ her own risk tolerance and investment goals. When
one chooses a mix of funds with different objectives and strategies, this also provides
diversification that helps to reduce the risk by spreading the saving among multiple
investments. If one of the fund declines in value, the loss to overall portfolio may be less
because of other investments that may even rise.
MAINTENANCE OF RECORDS
Non-Banking Finance Companies and Notified Entities Regulations, 2008 requires all
AMCs to maintain books of accounts and other records of the Open End and Close End
Schemes for a period of not less than ten years.
Similarly, NBFC Rules 2003 also obligate all Open End and Closed End mutual funds to
keep the original record of all reports, analysis and memoranda containing investment
advice distributed and maintain books of accounts and other records, as prescribed
under the Ordinance, for a period of not less than ten years.
TIME STAMPS
AMC’s are required by the SECP to designate and disclose the location of its official
points for acceptance of applications for issuance, redemption, conversion, etc. of units
in the offering document of the Open-End Scheme(s) as well as on their website. AMCs
can receive the applications only at such designated points. AMCs ensure that all the
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designated points for acceptance of applications for issuance, redemption, conversion,

etc. of units of Open-End Scheme(s) have appropriate date and time stamping
mechanism in place for timely acknowledgement of the applications that have been
deposited.
AMCs are also required to clearly specify cut-off timings for acceptance of applications
for issuance, redemption, conversion, etc. of units of their Open-End Scheme(s)
including approved administrative plans in the constitutive documents, on the website
of AMC’s and at the designated points. Such cut-off timings are to uniformly apply on all
the investors/unit holders.
5.10 know the process and handling of Investor Complaints
The transactions and interactions of investors with the Asset Management Companies
and distributors do at times give rise to causes of complaints. Normally these complaints
are handled within the AMC’s at a level that is senior to the level where it has occurred.
However, issue like where the client has lost money while investing in funds doesn’t
mean that he/she has a case against the AMC. The Financial markets have always gone
through periodic down turns and upturns and these fluctuations are not always the fault
of the mutual fund. However, it is the responsibility of the AMC and sales agents/
distributors to invest money according to the client’s instructions.
There are however, certain possible malpractices against which a client can lodge a
complaint, such as:
 Unauthorized trading (Sale/Purchase)

 Unauthorized transfer/movement of fund units
 Non-supply of statements of account
 Overcharged loads/Commission
 Failure to execute investors’ instructions/orders
 Suspension of payment
 Wrong announcement of the NAV, and
 Delay in payments
There is no defined procedure or standard operational practice (SOP), however, the

complaints can be made to the SECP and the Commission being the apex regulator and
responsible for stability of capital markets tries to identify financial transaction
violations, which could impact the investor confidence or affect fairness in the markets.
Using complaint information the SECP can identify the weak areas in relevant
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regulations or in their compliance and take necessary measures (like show cause AMC
and in extreme cases penalize) for fixing the same.
SECP Grievance Redressal Mechanism for Investor Protection
FILE CASE AGAINST APPEAL

COMPLAINT ASSET PROVISION
WITH SECP MANAGEMENT AGAINST
COMPANY ORDER
Procedure
Document
s Through:
Cost
-SECP DECISION
-COURTS
Complaint
Acknowledgeme
nt
FILE COMPLAINT WITH SECP

It is extremely necessary to bring receipt of complaints to the attention of SECP. This will
enable them to identify trading violations and weak areas in their compliance which
could affect investor confidence.
Procedure
In case of any complaint, an investor can approach to Investors’ Complaints Wing (ICW)
by filling up the complaint registration form which is available on the website of SECP.
Documents
Copy of CNIC and all the related documents which support the claim are required to be
submitted. If a client is unable to provide the relevant documents then the reason for
not submitting the documents must be given to the authority.
Cost
Securities and Exchange Commission of Pakistan doesn’t charge anything for handling
the complaints.
Complaint Acknowledgement
After the client sends information to the SECP, the complaint shall be immediately
acknowledged. A client can inquire the status of complaint from ICW if he/she doesn’t
receive any acknowledgement after 5 days.
CASE AGAINST ASSET MANAGEMENT COMPANY

The client is not allowed to file a complaint against AMC if he has lost money while
dealing in mutual funds because the fluctuations in financial markets are not always the
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fault of AMC. However, AMC must invest money according to the instructions of clients.
The investor can lodge a complaint in case of:
- Unauthorized movement of units

- Investor’s orders are not executed
- Units are not delivered
- Payments are suspended
- Non-supply of statements of account
- Overcharged Management Fee
- Non-supply of trade confirmation within 24 hours
Forums Available
There are different forums available for pursuing a claim against the Asset Management
Companies:
Amicable Settlement: It is always advised that the complaint should first be taken up
directly with the AMC although the client has the right to file complaint against the
company with SECP or the courts.
SECP: A wing has been setup at Securities and Exchange Commission of Pakistan which
is known as Investor Complaint Wing (ICW) where the clients can file the complaints
which will be heard in an efficient and quick manner.
Civil Courts: The client can also lodge a complaint against Asset Management Company
with civil courts.
APPEAL PROVISION AGAINST ORDER

There is an appeal provision against the order according to which any party to the claim
still resentful has recourse to file an appeal under Section 33 of the SECP Act against the
order of the Commission. This order will be reviewed by the Appellate Bench.
DECISION
It takes time before a complaint is decided so there is no fixed time limit for the
completion of procedure. The final decision depends on a number of factors such as
availability of documents, size of the claim, cooperation of parties, nature of complaint
and etc.
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GLOSSARY
A
ALL or NONE
A limit price order that instructs the broker/dealer to buy or sell the whole order at the
stated price or not at all. If there is insufficient supply or demand to meet the quantity
requested or offered for sale by the order then it is cancelled at the close of the market.
ALPHA
Alpha is a measure of selection risk (also known as residual risk) of a mutual fund in
relation to the market. A positive alpha is the extra return awarded to the investor for
taking a risk, instead of accepting the market return. For example, an alpha of 0.4 means
the fund outperformed the market-based return estimate by 0.4 %. -0.6 means a fund's
monthly return was 0.6 % less than would have been predicted from the change in the
market alone. It is thus a measure of performance on a risk-adjusted basis. Alpha takes
the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to
a benchmark index. The excess return of the fund relative to the return of the
benchmark index is a fund's alpha.
AMERICAN DEPOSITARY RECEIPTS

Certificates issued by a U.S. Depositary Bank, representing foreign shares held by the
bank, usually by a branch or correspondent in the country of issue. One ADR may
represent one share or a bundle of shares of a foreign corporation. ADR's carry the same
currency, political and economic risks as the underlying foreign share; the prices of the
two, adjusted for the SDR/ordinary ratio, are kept essentially identical by arbitrage.
American Depositary Shares (ADS) are a similar form of certification.
AMERICAN-STYLE OPTION
It is an option contract that can be exercised at any time between the date of purchase
and the date of expiry. Most exchange-traded options are American style.
ANALYST
A professionally qualified and experienced person, normally an employee of a brokerage
firm, an asset management company or an independent research firm who studies
companies, commodities and capital markets, and makes buy and sell recommendations
on stocks, commodities and financial instruments. Most analysts specialize either in a
specific industry, sector or commodity.
ANNUAL REPORT
An Annual Report is the yearly record of a company's financial condition that includes a
description of the firm’s operations, its balance sheet and income statement.
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ARBITRAGE
Profiting from differences in the price of a single security that is traded on more than
one market. Taking advantage of certain prices in different markets by the purchase or
sale of any instrument and at the same time taking an equal and opposite position in a
related market to profit from any small price differential.
ASK
The price at which a broker or dealer is willing to sell a stock, commodity or any other
financial instrument.
AUTOMATIC EXECUTION
Any order that is automatically executed by a computer without any human
intervention based on pre-set terms and conditions.
ASSIGNMENT
Assignment is the receipt of an exercise notice by an option writer that requires him to
sell (in the case of a call) or purchase (in the case of a put) the underlying security at the
specified strike price. Assignment occurs when an option holder exercises his option by
notifying his broker, who then notifies the Clearing System.
AUTOREGRESSIVE
Using past data to predict future movement of market or financial instrument. As a
general application it is using of past data or variable of interest to predict future values
of the same variable.
AVERAGE MATURITY
The average time to maturity of securities held by a mutual fund is called average
maturity. Changes in interest rates have greater impact on funds with longer average
life.
BACK OFFICE
The clerical or back office operations of a financial intermediary that supports, but do
not include, the trading of stocks and other securities or marketing and sales of mutual
funds and other financial instruments. It includes all communications and settlement of
trades, record keeping and regulatory compliance.
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BALANCE OF PAYMENTS
This is a summary of money flowing in and out of a country. If a country is spending
more for imported goods and services than it receives for goods and services it exports,
a deficit results. If the country received more money by selling goods, services and other
payments in foreign markets than it spent on imports and other outgoing payments, it
will result in a surplus.
BASIS POINTS
One hundredth of a percentage point (0.01%). Basis points are often used to measure
changes in or differences between yields on fixed income securities, since these often
change by very small amounts.
BEAR
An investor who believes a stock or the overall market will decline. A bear market is a
prolonged period of falling stock prices, usually by 20% or more.
BEAR RAID
Bear raid is phenomenon or a situation in which large traders sell positions with the
intention of driving prices down.
BETA
It is a measure of non-diversifiable risk or the extent to which a firm’s (or asset’s) or
stock return changes because of a change in the market’s return. It is a measure of the
risk of a stock’s financial returns, as compared with the risk of the financial returns of
the general stock market.  = 1 means that the stock is as risky as the general market; 
< 1 means the stock is less risky, whereas  > 1 means that the stock is more risky than
the overall stock market.
Beta () may be estimated by applying linear regression analysis to explain the
relationship between the dependent variable, stock returns (R j), and the independent
variable, market returns (Rm). The intercept or constant term (also referred to as ‘alpha’)
of the regression equation provides a measure of Stock Returns (Rj) performance as
compared to the performance of the general market during the regression period.
Rj = α + Rm (regression equation formulation)
Rj = Rm + (Rm – Rf)
= Rf + Rm - Rf
= Rf (1 - ) + Rm (CAPM formulation)
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BETA (STOCKS)
Beta is a measure of a stock's risk in relation to the market. A BETA of 0.7 for a stock
means that a stock price is likely to move up or down 70 % of the market change; while
a BETA of 1.3 means the stock is likely to move up or down 30 % more than the market.
BETA (MUTUAL FUNDS)

It is the measure of a fund's risk in relation to the market. A BETA of 0.7 for a mutual
fund means that the fund's total return is likely to move up or down 70 % of the market
change; while a BETA of 1.3 means total return is likely to move up or down 30 % more
than the market.
BID
A bid price is the highest price that a buyer (i.e., bidder) is willing to pay for a good. It is
usually referred to simply as the "bid." In bid and ask. Thus it is the price at which a
broker/dealer is willing to buy a stock, commodity or any other financial instrument.
BLANK SALE
“Blank Sale” means “a sale by a party that does not own shares or the sale does not
constitute a sale with pre-existing interest or is a sale by a party that has not entered
into a contractual borrowing arrangement to meet delivery requirements”. Blank sale is
legally not permissible in Pakistan.
BLOW-OFF TOP
A steep and rapid increase in prices that immediately followed by a steep and rapid drop
in price. This is an indicator seen in charts and used in technical analysis of stock price
and market trends.
BONUS SHARES
The term ‘bonus shares’ means dividend paid by a Joint Stock Company to its
shareholdings in the form of shares from its accumulated profits; the free shares thus
issued to existing shareholders are known as a bonus shares. These bonus shares are
issued to the existing shareholders by the company by converting free reserves or share
premium account to equity capital without taking any consideration from investors.
Bonus shares do not directly affect a company’s performance.
Issue of Bonus shares has following major implications/effects:
1. Share capital gets increased according to the bonus issue ratio.

2. Liquidity in the stock increases.
3. Effective Earnings per share, Book Value and other per share values stand reduced.
4. Markets take the action usually as a favourable act.
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5. Market price gets adjusted on issue of bonus shares.

6. Accumulated profits get reduced.
BREAKOUT
Rises in a security’s price above a resistance level (commonly its previous high price) or
drop below a level of support (commonly the former lowest price). A breakout is taken
to signify a continuing move in the same direction. Can be used by technical analysts as
a buy or sell indication.
BROKER
In general a broker is an individual or a firm that matches buyers and sellers for a fee or
a commission.
BUSINESS CYCLE
The business cycle has four phases: Expansion, Peak, Recession and Trough:
These cycles create price changes, which lead to changes in total spending in relation to
the amount of goods and services being produced.
BULL MARKET
A market which is on a consistent upward trend is regarded a bull market.
BUYOUT
Purchase of a controlling interest of a company's stock. A leveraged buyout is done with
borrowed money.
CALL OPTION
An option contract that gives the holder of the option the right (but not the obligation)
to purchase, and obligates the writer to sell, a specified number of shares, commodity
or financial instrument at the given strike price, on or before the expiration date of the
contract.
CAPITAL EXPENDITURES
Amount used during a particular period to acquire or improve long term assets such as
property, plant, or equipment.
CAPITAL GAIN
When a stock, commodity or a financial instrument is sold for a profit, it's the excess of
the net sales price over their net cost that is called Capital Gain.
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CAPITAL LOSS
When a stock, commodity or a financial instrument is sold at a loss, it is the excess of
net cost over the net sales price that is called capital loss.
CASH DIVIDEND
A dividend paid in cash to a company's shareholders. The amount is normally based on
profitability and is taxable as income. A cash distribution may include capital gains and
return of capital in addition to the dividend.
CASH AND EQUIVALENTS
The assets that can be converted into liquid cash immediately are regarded as cash
equivalents. Usually this includes bank accounts and marketable securities, such as
government bonds and Bankers Acceptances. Cash equivalents on balance sheets also
include securities (e.g., notes) that mature within ninety days.
CASH FLOW
In investments, it represents earnings before depreciation amortization and non-cash
charges. Sometimes it is called cash earnings. Cash Flow from operations (called Funds
from Operations (FFO) by real estate and other investment trusts, is important because
it indicates the ability to pay dividends.
CASH SETTLED FUTURES

It is a method of settling certain futures or options contracts whereby the seller and the
buyer exchange the difference (profit or loss) in the cash value of the underlying assets
like securities/indices/commodity/etc. At the time of settlement the difference in the
contract value when traded according to a procedure specified in the contact.
CHANGES IN FINANCIAL POSITION

Sources and uses of funds provided from operations which alter a company's cash flow
position.
CHURNING
Excessive trading of a client's account in order to increase the broker's commissions is
called churning.
CIRCUIT BREAKERS
A system of harmonized trading halts and/or price limits on securities and derivative
markets designed to provide a cooling-off period large intraday market movements.
CLOSING PURCHASE
Closing purchase is a transaction in which the purchaser's intention is to reduce or
eliminate a short position in a stock, or in a given series of options.
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CLOSING SALE
It is a transaction in which the seller's intention is to reduce or eliminate his long
position in a stock, options or commodity.
COLLECTIVE INVESTMENT SCHEME

Collective Investment Scheme (CIS) is an investment vehicle which allows investors to
pool their assets into a single portfolio in order to gain access to the stock market
generally or to specific markets or sectors. Collective investment scheme includes a
closed-end fund and an open-ended scheme that provides control of the investments to
the company (AMC) pooling and investing the money. The idea behind this is to
maximize the returns by combining resources of the participants and making it possible
to acquire a larger portion of the investment, thus generating more return that is
distributed among the investors.
For small investors, CIS allows access to professional investment management and
spreads the risk of investing in equities and other securities by giving investors a share
of a much larger portfolio than they could invest in on their own. The investors also
benefit from the lower dealing costs that a large fund can command.
COMMON STOCK EQUITY

Value of outstanding common/ordinary shares at par, plus accumulated retained
earnings. It is also called shareholders equity.
CONFIDENCE INDICATOR
Confidence indicator is a measure of investor’s faith in the economy and the securities
market. A low or deteriorating level of confidence is considered by many technical
analysts as a bearish sign.
CONFIDENCE LEVEL
The degree of assurance that a specified failure rate is not exceeded.
CONFIRMATION
Confirmation is the written statement that follows any "trade" in the financial markets.
Confirmation is issued immediately after a trade is executed. It spells out settlement
date, terms, commission, etc. depending on the nature of trade.
CONSUMER PRICE INDEX (CPI)

This is the indicator of the change in prices of goods and services. Included in the index
are food, transportation, medical care, entertainment and other items purchased by
households and individuals.
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CONVERGENCE
The movement of the price of a futures contract toward the price of the underlying cash
commodity. At the start, the contract price is higher because of the time value. But as
the contract nears expiration, the futures price and the cash price converge.
CORNER a MARKET
To purchase enough of the available supply of a commodity or stock so as to be able to
manipulate its price in future.
COUNTERPARTY
Counter party is any one of the participants in a transaction.
COUPON RATE
In bonds, notes or other fixed income securities, the stated percentage rate of interest,
usually paid twice a year.
COVERED CALL
Covered call is primarily a short call option position in which the writer owns the
number of shares of the underlying stock represented by the option contracts. Covered
calls generally limit the risk the writer takes because the stock does not have to be
bought at the market price, if the holder of that option decides to exercise it.
COVERED PERSON
Covered person means persons associated with a broker, but not including an
associated person that has no officers or employees in common with the broker and
where the broker maintains and enforces written policies and procedures reasonably
designed to prevent the broker or any of its controlling persons, officers, or employees
from influencing the activities of research analysts and the content of research reports
prepared by the associated person
CURRENT ASSETS
Current assets of company are defined as sum total of all Value of cash, accounts
receivable, inventories, marketable securities and other assets that could be converted
into cash in less than 1 year.
CURRENT LIABILITIES
Amount owed for salaries, interest, accounts payable and other debts due within 1 year.
CURRENT RATIO
Indicator of short-term debt paying ability that is determined by dividing current assets
by current liabilities. The higher the current ratio, the more liquid the company is
regarded.
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CURRENT YIELD
For bonds or notes, the coupon rate divided by the market price of the bond is known as
current yield.
DAY ORDER
An order to buy or sell stock that automatically expires if it cannot be executed on the
day it is entered.
DEBT/EQUITY RATIO
Debt/equity ratio is an indicator of financial leverage. The ratio compare assets provided
by creditors to assets provided by shareholders and is determined by dividing long term
debt by common stockholders’ equity.
DECLARATION DATE
The date on which a firm's directors meet and announce the date and amount of the
next dividend.
DEFERRED TAX
It is a non-cash expense or income that provides a source or application of free cash
flow. Deferred tax is an accounting concept (also known as future income taxes),
meaning a future tax liability or asset, resulting from temporary differences or timing
differences between the accounting value of assets and liabilities and their value for tax
purposes.
DEFLATION
Deflation is a decline in prices, where production exceeds demand. Deflation normally
occurs during recessions and leads to a rise in unemployment.
DEPRECIATION
It is a non-cash expense that provides a source of free cash flow. Amount allocated
during the period to amortize the cost of long term assets over the useful life of the
assets.
DERIVATIVE
It is a financial instrument, such as an option, or future, whose value is derived in part
from the value and characteristics of the underlying security. Some of the common
forms of the derivative instruments are forwards, futures, options, swaps etc.
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DIRECT TRANSFER UNDER VPS

It is the movement of tax-deferred retirement assets from one plan directly to another.
A direct transfer is not a withdrawal and does not incur any taxes or penalties. This
allows a person to move his/her retirement assets as many times as he/she wants to
plans that might be more suitable for him/her at that point in time.
DISTRIBUTIONS
The payments from fund or corporate cash flow that may include dividend from
earnings, capital gains from sale of portfolio holdings and return on capital.
Distributions can be made by cheque or by reinvesting in additional shares/units.
DIVERGENCE
When the price of an asset and an indicator, index or other related asset moves in
opposite directions, this is called divergence. In technical analysis, traders make
transaction decisions by identifying situations of divergence, where the price of a stock
and a set of relevant indicators, such as the money flow index (MFI), are moving in
opposite directions.
DIVIDEND
Dividend is the distribution of a portion of a company's earnings, cash flow or return of
capital to shareholders, in cash or through issuance of additional stocks.
DIVIDEND YIELD (STOCKS)

Dividend Yield represents annual dividend divided by current stock price.
DIVIDEND YIELD (FUNDS)

Dividend Yield (funds) represents return on a share of a mutual fund held over the past
12 months. Assumes fund was purchased 1 year ago. Reflects effect of sales charges (at
current rates), but not  98 redemption charges.
DIVIDENDS PER SHARE

Dividends paid for the past 12 months divided by the number of common shares
outstanding, as reported by a company. The number of shares often is determined by a
weighted average of shares outstanding over the reporting period.
DOWNGRADE
It is a classic negative change in ratings for a stock or other rated security of a company
by a credit rating company.
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EARNINGS
Earnings reflect the amount of profit that a company produces during a specific period.
EARNINGS PER SHARE (EPS)

EPS is also referred to as Primary Earnings per share of common stock. It is computed by
dividing the net income for the past 12 months by the number of common shares
outstanding as reported by a company. The company often uses a weighted average of
shares outstanding over reporting period. It is an important variable to determine the
market value of a share
EARNINGS YIELD
The ratio of Earnings per Share after allowing for tax and interest payments on fixed
interest debt, to the current share price and is the inverse of the Price/Earnings ratio.
It's the Total Twelve Months Earnings divided by number of outstanding shares, divided
by the recent price, multiplied by 100. The end result is shown in percentage.
ENTRY ORDER
An order to enter a position in the market at a specified price is regarded as Entry Order.
EQUITY
The value of the common stockholders equity in a company as shown on the balance
sheet is called Equity.
EUROPEAN-STYLE OPTION
It is an option contract that can only be exercised on the expiry date only.
EXCHANGE
An exchange is the marketplace in which shares, options and futures, stocks, bonds,
commodities and indices are traded.
EXCHANGE TRADED FUND

An Exchange Traded Fund is an open-end investment instrument issued by an asset
management company that trades on a stock exchange. By investing in the units the
Exchange Traded Fund makes available to small investors to invest in the index or the
commodity. For example, a Tola of gold may cost Rs 35000, but a unit/share in the
Exchange Traded Fund may cost only Rs 5000, making it viable for more people to
invest.
EX-DIVIDEND DATE
The first day of trading when the seller who owned the stock at the start of the day,
rather than the buyer, of a stock will be entitled to the most recently announced
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dividend payment. After the ex-date has been declared, the stock will usually drop in
price adjusting for the expected dividend.
EXECUTION
The process of completing an order to buy or sell securities is called the execution of a
trade. Once a trade is executed, it is reported by a Confirmation Report and settlement
(payment and transfer of ownership) occurs usually 2 days after an order is executed
depending on the system of the exchange where it is traded.
EXERCISE
Exercise is to implement the right of the holder of an option to buy (in the case of a call)
or sell (in the case of a put) the underlying security.
EXPENSE RATIO (FUNDS)

Expense Ratio (of funds) is the percentage of the assets that were spent to run a mutual
fund. An expense ratio is determined through an annual calculation, where a fund's
operating expenses are divided by the average value of its assets under management.
FOREX
Foreign Currency Exchange
FOREX TRADER
A Person or a firm who buys and sells foreign currencies to make a profit or acts on
behalf of customers to meet their needs of foreign currencies
FUND FAMILY
It refers to various mutual funds offered by an Asset Management Company to achieve
different investment objectives. Usually, investors can move assets between different
funds of a fund family at little or no cost, and can receive a single statement describing
their holdings in all the funds in the fund family. It is also called family of funds or
mutual fund family.
FUTURES CONTRACT
Agreement to buy or sell a set number of shares of a specific stock in a designated
future month at a price agreed upon by the buyer and seller. The contracts themselves
are often traded on the futures market. A futures contract differs from an option
because an option is the right to buy or sell, whereas a futures contract is the promise to
actually make a transaction.
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GOOD TILL CANCELED

Sometimes simply called "GTC", it means an order to buy or sell stock or any tradable
financial instrument that is good until cancelled by the client.
GROSS DOMESTIC PRODUCT (GDP)

Total value of products and services produced within the territorial boundary of a
country
GDP = consumption + investment + (government spending) + (exports − imports).
GROSS NATIONAL PRODUCT (GNP)

GNP is an indicator of national economy that includes GDP, plus any income earned by
residents from overseas investments, minus income earned within the domestic
economy by overseas residents. In other words it is the total value of Goods and
Services produced by all nationals of a country (whether from within or outside the
country)
GNP = GDP + NR [Net income from assets abroad (Net Income Receipts)]
GROWTH RATES
This typically represents the compounded annualized rate of growth of a company's
revenues, earnings, dividends and even macro concepts - such as the economy as a
whole
HAIRCUTS
In calculating the value of assets for purposes of capital, segregation or margin
requirements, usually a percentage reduction from the stated value (e.g. book value or
market value) to account for possible losses in value that may occur before assets can
be liquidated.
HEAD and SHOULDERS

In technical analysis, a chart formation in which a stock price reaches a peak and then
declines, rises above its former peak and again declines and rises again but not to the
second peak and then again declines. The first and third peaks are shoulders, while the
second peak is the formation's head. Technical analysts generally consider a head and
shoulders formation to be a very bearish indication.
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HEDGING
The use of derivatives instruments to protect against price risks. A hedging transaction
has the specific intent of protecting and existing or anticipated physical market
exposure from unexpected or adverse price fluctuations.
In practical terms it is a strategy designed to reduce investment risk using "call" options,
"put" options, "short" selling, or futures contracts. A hedge can help lock in existing
profits. The purpose of hedging is to reduce the potential volatility of a portfolio, by
reducing the risk of loss.
HIGH PRICE
For stocks the highest (intraday) price of a stock over the past 52 weeks, adjusted for
any stock splits. The same applies for commodities and other financial instruments.
HOLDING COMPANY
A holding company is a corporation that owns enough voting stock in another firm to
control management and operations by influencing or electing its board of directors.
IMMEDIATE FAMILY MEMBERS

Spouse, parents and grandparents, children and grandchildren, brothers and sisters,
mother in law and father in law, brothers in law and sisters in law, daughters in law and
sons in law. Adopted and step members are also included in immediate family
INDUSTRY
It is a category of business that describes a company's primary line of business. This
usually is determined by the largest contribution towards the revenue of the company.
INFLATION
The overall general upward price movement of goods and services in an economy (often
caused by an increase in the supply of money), which is usually measured by the
movements in Consumer Price Index and the Producer Price Index is denoted as
inflation. Over time, as the cost of goods and services increase, the value of a Rupee is
going to fall because an individual is not able to purchase as much with that Rupee as
he/she previously could. It is an opposite of deflation.
INITIAL MARGIN REQUIREMENTS

When buying securities on margin, the proportion of the total market value of the
securities that the investor must pay for cash /collateral.
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INITIAL PUBLIC OFFERING (IPO)

IPOs are the company's first sale of stock to the public. Securities offered in an IPO are
sometimes those of young, small companies seeking outside equity capital and a public
market for their stock and/or by large privately owned companies looking for a public
market for their shares/stock.
INSIDER INFORMATION
Any information that can have effect on the price of the of the share of a company and
that has not yet been made public. It is illegal for holders of this information to make
trades based on the information that is not in public knowledge irrespective of the fact
that how this information has been received.
INVENTORY
For companies: Raw materials, items available for sale or in the process of being made
ready for sale. These can be individually valued by several different means, including
cost or current market value, and collectively by FIFO, LIFO or other methods of
valuations. The lower value of alternatives is usually used to preclude overstating
earnings and assets. For security firms the inventory means the securities bought and
held by a broker or dealer for resale.
INVENTORY TURNOVER
The ratio of annual sales to inventory of a company is referred as Inventory Turnover.
Low turnover is in most cases considered an unhealthy sign, indicating excessive stocks
and/or poor sales.
INVESTMENT ADVISORY RELATIONSHIP

A relationship by which a person or organization employed by an individual or mutual
fund to manage assets or provide investment or financial advice is called investment
advisory relationship.
LEVERAGE
The use of various financial instruments or borrowed capital, such as margin, to increase
the potential return of an investment is termed as Leverage.
Leverage also refers to the amount of debt used to finance a firm's assets. A firm with
significantly more debt than equity is considered to be highly leveraged.
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LIMIT ENTRY ORDER

Limit Entry orders are entry orders to enter the market at a more favourable price.
When buying a stock, the limit entry order will be placed below the current market
price. When placing a limit entry order to sell, the order will be placed above the current
market price.
Limit entry orders are often conducive to strategies pertaining to range-bound markets,
where clients can place orders to buy at the bottom of the range and sell at the top.
LIMIT ORDER
An order to a broker to buy a specified quantity of a security at or below a specified
price or to sell it at or above a specified price (called the limit price). This ensures that a
person will never pay more for the stock than whatever price is set as his/her limit. This
is one of the two most common types of orders, the other being a market order. It is an
opposite of no limit order.
LONG POSITION
The buying of a security such as a stock, commodity or currency, with the expectation
that the asset will rise in value, or in other words a position which gives profit from an
increase in price is called Long Position. It occurs when an individual owns securities or
financial instruments. For example, an investor holding 1000 shares of stock with
expectations that the price of stock will rise is said to be "Long in the Stock” or
possessing Long Position for those specific shares.
LONG TERM ASSETS
The value of property, equipment and/or other capital assets less accumulated
depreciation is known as Long Term Assets. These assets are recorded in the books of
accounts of a company, usually on a “cost” basis and thus do not necessarily reflect the
market value of the assets.
LONG TERM DEBT

The loans and obligations with a maturity of longer than one year; usually accompanied
by interest payments are referred to as Long Term Debts.
LONG TERM DEBT/CAPITALIZATION

Long term debt is the indicator of financial leverage which shows long term debt as a
proportion of the capital available. It is determined by dividing long term debt by the
sum of long term debt, preferred stock and common stockholders’ equity.
LONG TERM LIABILITIES

Amount owed by a company for loans, leases, bond repayment and other liabilities due
for payment after 1 year.
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LOW PRICE
For stocks the lowest (intraday) price of a stock over the past 52 weeks, adjusted for
stock bonus. The same applies for commodities and other financial instruments.
MANUAL EXECUTION
It is an order that is entered or executed by a person.
MARGIN
Is a deposit that allows to open a position i.e. a 1% margin gives you the right to open a
Rs.100,000 worth of a position with a Rs. 1,000 deposit.
MARGIN CALL
Margin Call is a requirement by the broker to deposit more funds in order to maintain
an open position. Sometimes a "margin call" means that the position which does not
have sufficient funds on deposit will simply be closed out by the broker. This procedure
allows the client to avoid further losses or a debit account balance.
MARKET MAKER
It is a dealer who is making a market in pairs and provides liquidity displaying a two way
price quote.
MARKET ORDER
The client's instruction to a broker to buy or sell the item immediately, at the current
best price available is called Market order. In contrast, a limit order is executed within a
specified range of prices, and a stop order when a specified price is reached. Market
order is the most common way of executing orders and is also called ‘at the market’.
MINI ACCOUNT
It allows an in investor to trade with small -- mini -- lot sizes.
MARGIN ACCOUNT (STOCKS)

It is an account in which stocks can be purchased for a combination of cash and a loan.
The loan in the margin account is collateralized by the stock and, if the value of the
stock drops sufficiently, the owner will be asked to either put in more cash, or sell a
portion of the stock. Margin rules are regulated by the SECP.
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MARGIN REQUIREMENT (OPTIONS)

The amount of cash an uncovered (naked) option writer is required to deposit and
maintain to cover his daily position valuation and reasonably foreseeable intraday
price changes.
MARKET CAPITALIZATION
The total rupee value of all outstanding shares is called Market Capitalization. It is
computed as shares times’ current market price. It is a measure of corporate size.
MARKET MAKER
Market maker is a dealer who makes a market, i.e. quotes bid and offer prices to
counterparties and is prepared to deal at those prices.
MINIMUM PURCHASES
For mutual funds, the amount required to open a new account (Minimum Initial
Purchase) or to deposit into an existing account (Minimum Additional Purchase). These
minima may be lowered for buyers participating in an automatic purchase plan.
MONEY MARKET FUND

A mutual fund that invests only in short term securities, such as banker’s acceptances,
commercial paper, and government securities.
MONEY SUPPLY
This is the total amount of available money and credit in a country. The Central Bank
attempts to control money and credit to create a stable, growing economy.
MOVING AVERAGE
Used in charts and technical analysis, the average of security or commodity prices
constructed in a period as short as a few days or as long as several years and showing
trends for the latest interval. As each new variable is included in calculating the average,
the last variable of the series is deleted.
MUTUAL FUND
Mutual Fund is an open end fund operated by an Asset management/investment
company that pools investor’s money and invests it in a variety of stocks, bonds, or
other securities. Mutual Fund raises money by issuing units to the public, while redeems
these depending on the demand.
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NAKED OPTION
The sale of a call or put option without holding an equal and opposite position in the
underlying instrument is called Naked Option.
NET ASSET VALUE (NAV)

It is the value of a mutual fund's investments. For a mutual fund, the net asset value per
share usually represents the fund's market price, subject to a possible sales or
redemption charge. It is calculated by dividing the total net asset value of the fund or
company by the number of shares outstanding. It is also referred to as "book value per
share". For a closed end fund, the market price may vary significantly from the net asset
value as per demand and supply.
NET INCOME
The company's total earnings, reflecting revenues adjusted for costs of doing business,
depreciation, interest, taxes and other expenses.
NET POSITION
The difference between the open long contracts and open short contracts held by a
trader in any one commodity is called Net Position.
NO LOAD MUTUAL FUND

No load mutual fund means that the funds which do not charge any type of sales load. A
no-load mutual fund may charge other fees that are not sales loads, such as purchase
fees, redemption fees, and account fees etc.
OBJECTIVE (MUTUAL FUNDS)

The fund's investment strategy and the categorization as stated in the prospectus. There
are more than 20 standardized categories of funds.
OPTION
Is a contract that grants the buyer the right, but not the obligation, to buy (a call option)
or sell (a put option) commodity or financial security at a specified price on or before a
given date. Investors, not companies, issue options. Investors who purchase call options
bet the stock will be worth more than the price set by the option (the strike price), plus
the price they paid for the option itself. Buyers of put options bet the stock’s price will
go down below the price set by the option.
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OTHER CURRENT ASSETS

Value of non-cash assets, including prepaid expenses and accounts receivable, due
within 1 year.
OTHER SOURCES
Amount of funds generated during the period from operations by sources other than
depreciation or deferred taxes such as funds generated from changes in working capital
and these forms are part of Free Cash Flow calculation.
OUT OF THE MONEY

A call option is out-of-the-money if the strike price is greater than the market price of
the underlying security. A put option is out-of-the-money if the strike price is less than
the market price of the underlying security.
OVERBOUGHT/OVERSOLD INDICATOR
The indicator that attempts to define when prices have moved too far and too fast in
either direction and thus are vulnerable to reaction are referred to as Overbought/
Oversold position.
PAYMENT DATE
The date on which a declared stock dividend or a bond interest coupon is scheduled to
be paid is termed as Payment Date.
PREFERRED STOCK
A security that shows ownership in a corporation and gives the holder a claim, prior to
the claim of common stockholders, on earnings and also generally on assets in the event
of liquidation are known as Preferred Stock. Mostly preferred stock pays fixed dividend
as a percentage of a par value. This stock does not usually carry voting rights.
PRICES
It is the price of a share of common stock on the date shown. Highs and lows are based
on the highest and lowest intraday trading price.
PRICE/BOOK RATIO
The ratio that compares a stock's market value to the value of total assets less total
liabilities (book value) is called Price/Book Ratio. It is determined by dividing current
price by common stockholder’s equity per share (book value), adjusted for stock splits. It
also called Market-to-Book.
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PRICE/EARNINGS RATIO
Shows the "multiple" of earnings at which a stock sells. It is determined by dividing
current price by current earnings per share. Earnings per share for the P/E ratio are
determined by dividing earnings for past 12 months by the number of common shares
outstanding. Higher "multiple" means investors have higher expectations for future
growth, and have bid up the stock's price. The Price Earnings Ratio is calculated as per
following formulae:
PRICE/SALES RATIO
It is determined by dividing stock's current price by revenue per share. Revenue per
share for the P/S ratio is determined by dividing revenue for past 12 months by number
of shares outstanding.
PRIMARY MARKET
The first buyer of a newly issued security buys that security in the primary market. All
subsequent trading of those securities is done in the secondary market.
PROFIT MARGIN
Profit Margin is an Indicator of being profitable. It is determined by dividing net income
by revenue for the same 12-month period. Result is shown as a percentage.
PROGRAM TRADING
Trades based on signals from computer programs, usually entered directly from the
trader's computer to the market's computer system and executed automatically.
PROSPECTUS
Formal written document to sell securities that describes the plan for a proposed
business enterprise, or the facts concerning an existing one, which an investor needs to,
make an informed decision. Prospectuses are used by Mutual Funds to describe the
fund objectives, risks and other essential information.
PUBLIC APPEARANCE
Public appearance means any participation by a research analyst in a seminar, forum
(including an interactive electronic forum), or radio or television or other interview, in
which the research analyst makes a specific recommendation or provides information
reasonably sufficient upon which to base an investment decision about a security or an
issuer.
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PUT OPTION
An option contract that gives the holder the right to sell a certain quantity of an
underlying security to the writer of the option, at a specified price (strike price) up to a
specified date (expiration date of the contract); here it also called ‘put’.
QUOTATION
The actual price or the bid or ask price of either cash commodities or futures contracts.
QUICK RATIO
It is an indicator of a company's financial strength (or weakness). It is calculated by
taking current assets less inventories, divided by current liabilities. It also called Acid
Test.
R
RANGE
The difference between the high and low price during a given period is termed as Range.
REDEMPTION CHARGE
The commission charged by a mutual fund when redeeming shares. For example, a 2%
redemption charge (also called a "back end load") on the sale of shares valued at 1000
will result in payment of 980 (or 98 % of the value) to the investor. This charge may
decrease or be eliminated as shares are held for longer time periods.
RELATIVE STRENGTH
A stock's price movement over the past year as compared to a market index (e.g. KSE
100). Value below 1.0 means the stock shows relative weakness in price movement
(underperformed the market); a value above 1.0 means the stock shows relative
strength over the 1-year period. Equation for Relative Strength: [current stock
price/year-ago stock price] minus (KSE 100 current value – KSE 100 one year ago).
REMUNERATION
Sum of direct benefits (such as salary, allowances, bonus, and commission) and indirect
benefits (such as insurance, pension plans, vacations) that an employee receives from
an employer
RESEARCH ANALYST
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Research analyst means any natural person who is primarily responsible for the
preparation of the content of a research report
RESEARCH REPORT
Research report means a written communication (including an electronic
communication) that includes an analysis of a security or an issuer and provides
information reasonably sufficient upon which to base an investment decision
RETRACEMENT
The price movement in the opposite direction of the previous trend is called
retracement.
RETURN
The percentage gain or loss for a mutual fund in a specific time period is referred to as
Return. This number assumes that all distributions are reinvested.
RETURN ON ASSETS (ROA)

It is an Indicator of profitability. It is determined by dividing net income for the past 12
months by total assets. Result is shown as a percentage.
RETURN ON EQUITY (ROE)

ROE is the most important indicator of profitability. Determined by dividing net income
for the past 12 months by common stockholder’s equity (adjusted for stock splits).
Result is shown as a percentage.
RIGHTS OFFERING
The issuance of "rights" to existing shareholders allowing them to purchase additional
shares, usually at a discount to market price is known as Rights Offering. Shareholders
who do not exercise these rights dilute their holdings in the company by the offering.
Rights are transferable, allowing the holder to sell them on the open market to others
who may wish to exercise them.
SALES CHARGE
The fee charged by a mutual fund when purchasing shares, usually payable as a
commission to a marketing agent, such as a financial advisor, who is thus compensated
for his assistance to a purchaser. It represents the difference, if any, between the shares
purchase price and the share net asset value.
SECONDARY MARKET
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A market that provides for the purchase or sale of previously owned securities. Most
trading is done in the secondary market. The Stock Exchanges and the bond markets,
etc., are examples of secondary markets.
SETTLEMENT DATE
It is the date on which payment is made to settle a trade. For stocks traded on
exchanges, settlement is currently 2 business days after the trade (T+2). For mutual
funds, settlement usually occurs the day following the trade. In some regional markets,
foreign shares may require longer period to settle.
SHARES
These are certificates or book entries representing ownership in a corporation or similar
other entity.
SHARE REPURCHASE
It is a programme by which a corporation buys back its own shares in the open market.
It is usually done when shares are undervalued. Since it reduces the number of shares
outstanding and thus increases earnings per share, it tends to elevate the market value
of the remaining shares held by stockholders.
SHORT SALE
"Short Sale" means except in accordance with regulations, a person shall not sell any
listed securities that he or his principal does not own either for his own account or for
the account of another person. -(Securities Act, 2015)
SLIPPAGE
Slippage is the difference between estimated transaction costs and actual transaction
costs. The difference is usually composed of revisions to price difference or spread and
commission costs.
SPREAD
The term ‘spread’ has different meaning depending on the products being dealt. It is the
difference between the current bid and the current ask (in over-the-counter trading) or
offered (in exchange trading) of a given security; it is also called bid/ask spread.
The purchase of one option and the simultaneous sale of a related option, such as two
options of the same class but different strike prices and/or expiration dates. It is also
called spread option. More generally, spread is the difference between any two prices.
STOCK DIVIDEND/ BONUS SHARES

The payment of a corporate dividend in the form of stock rather than cash is the stock
dividend (also called Bonus shares). It may be additional shares in the company, or it
may be shares in a subsidiary being spun off to shareholders. Stock dividends are often
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used to conserve cash needed to operate the business. Unlike a cash dividend, stock
dividends are not taxed until sold.
STOP (-LOSS) ORDER

The order to sell a stock when the price falls to a specified level is known as Stop (Loss)
Order.
STRIKE PRICE
It is the stated price per share for which underlying stock may be purchased (in the case
of a call) or sold (in the case of a put) by the option holder upon exercise of the option
contract.
TICK INDICATOR
A market indicator based on the number of stocks whose last trade was an uptick or a
downtick. Used as an indicator of market sentiment or psychology to try to predict the
market's trend at a certain point in time and also relevant in context of “Regulations for
Short Selling under Ready Market, 2002” (Amended in 2011).
TIME VALUE
The portion of the premium that is based on the amount of time remaining until the
expiration date of the option contract, and that the underlying components that
determine the value of the option may change during that time. Time value is generally
equal to the difference between the premium and the intrinsic value.
TRADE
A verbal (or electronic) transaction involving one party buying a security from another
party is called Trade. Once a trade is consummated, it is considered "done" or final.
TRADE DATE
It is the date on which a trade occurs. Trades generally settle (are paid for) 2 business
days after a trade date.
TRADING RANGE
The difference between the high and low prices traded during a period of time; with
commodities, the high/low price limit established by the exchange for a specific
commodity for any one day's trading.
TURNOVER
Mutual Funds: A measure of trading activity during the previous year, expressed as a
percentage of the average total assets of the fund. A turnover ratio of 25 % means that
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the value of trades represented one-fourth of the assets of the fund. Finance: The
number of times a given asset, such as inventory, is replaced during the accounting
period, usually a year. Corporate: The ratio of annual sales to net worth, representing
the extent to which a company can grow without outside capital. Markets: The volume
of shares traded as a percent of total shares listed during a specified period, usually a
day or a year.
VALUE AT RISK (VaR)

It is the maximum loss that can occur with a specified confidence over a specified
period. VaR is the statistical measure that uses distribution analysis and sensitivity
analysis to determine how much value of a portfolio may be lost given certain market
conditions.
VARIABLE COSTS
These are the costs that change as the level of output changes.
VARIANCE
It is an average value of squared deviations from mean. It is a measure of volatility.
VOLUME
The number of transactions in securities and futures made during a specified period of
time and is also called turnover.
WANTED FOR CASH

A statement displayed on market tickers which indicates that a bidder will pay cash for
same day settlement of a block of a specified security.
WARRANT
A security entitling the holder to buy a proportionate amount of stock at some specified
future date at a specified price, usually one higher than current market. This "warrant"
is then traded as a security, the price of which reflects the value of the underlying stock.
Warrants are usually issued as a "sweetener" bundled with another class of security to
enhance the marketability of the latter.
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WATCH LIST
A list of securities selected for special surveillance by a brokerage, exchange or
regulatory organization; firms on the list are often takeover targets, companies planning
to issue new securities or stocks showing unusual activity.
WITHDRAWAL PLAN
The ability to establish automatic periodic mutual fund redemptions and have proceeds
mailed directly to the investor.
WRITER
The seller of an option contract is known as a Writer.
YIELD
The percentage annualized rate of return paid on a stock in the form of dividends, or the
interest paid on a bond or a note.
YIELD TO CALL
Yield to call is the percentage rate of return on a TFC/bond or a note, if the investor has
to buy and hold the security until the call date. This yield is valid only if the security is
called prior to maturity. Generally bonds are callable over several years and normally
are called at a slight premium. The calculation of yield to call is based on the coupon
rate, length of time to the call and the market price.
YIELD TO MATURITY
The percentage rate of return paid on a TFC/bond, note or other fixed income security if
it is held to its maturity. The calculation for YTM is based on the coupon rate, length of
time to maturity and market price. It assumes that coupon interest paid over the life of
the bond will be reinvested at the same rate.
ZERO COUPON
The term refers to a debt instrument that does not make coupon payments, but, rather,
is issued at a discount to par and redeemed at par at maturity.
**********
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IFMP Mutual Funds Basics Certification (Study and Reference Guide) PDF

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ICM - Mutual Fund Distributors Certification

Study and Reference Guide

Institute of Financial Markets of Pakistan © 2017

Study and Reference Guide

Study and Reference Guide

Institute of Financial Markets of Pakistan (Formerly Institute of Capital Markets)

Study and Reference Guide

1. Objective of the Examination……………………………………………………………. 05

2. Exam Specification ……………………………………………………………………………. 06

3. Summary Syllabus ……………………………………………………………………………… 07

4. Recommended Readings ………………………………………………………………….. 14

5. Detailed Study Material…………………………………………………………………..… 15

7. Element 1 - Introduction to Financial Services and Products …………..… 17

8. Element 2 - Introduction to Mutual Funds ………………………………………... 25

9. Element 3 - Regulatory Framework …………………………………………………. 55

10. Element 4 - Fund Features and Mechanics ………………………………………. 57

11. Element 5 - Ethics, Disclosure and Best practices………………………………. 80

Study and Reference Guide

OBJECTIVE OF THE EXAMINATION

Study and Reference Guide

Element number Element Questions

Study and Reference Guide

SUMMARY OF THE SYLLABUS

Study and Reference Guide

1.2 know the products and asset classes including:

1.3 know the difference between retail and institutional investors

1.4 understand the role and functions of Primary Market

1.5 understand the role and functions of Secondary Market

Study and Reference Guide

2.1 know the Concept and Role of Mutual Funds including:

2.2 know the structure of Mutual Funds

2.3 know the benefits of Mutual Funds

2.4 know the types of Mutual funds in Pakistan including:

2.6 know the Categories of Mutual Funds including:

2.7 Pension Funds

2.7.3 Understand and be able to calculate the Tax treatment of pensions

2.7.4 Know Legislation and taxation benefits on Pension Funds

2.8 know the Risks associated with Mutual Funds including:

Study and Reference Guide

 Shariah Compliant Equity Fund

Study and Reference Guide

 Section 38: Obligations of the Asset Management Company

3.3 understand the SECP Directives to Fund Management Companies on Conduct of

Study and Reference Guide

4.1 understand the structure and importance of Regulatory Documents including

4.2 know Investor Services and requirements including:

4.6 understand the Fund Redemption and Transfer procedure including:

 Payment of redemption proceeds

4.7 understand the Fund Valuation and Taxation including:

 Taxation on Fund Units

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4.9 Understand and be able to calculate the Tax treatment of pensions,

4.10 Know Legislation and taxation benefits on Pension Funds.

Study and Reference Guide

5.1 know the methods of information dissemination and disclosure requirements

 Matching investments and redemption

5.6 know the importance of maintenance of investor records

5.7 understand the confidentiality related to:

5.9 know the requirements of Fair Dealing including:

 Risks & Rewards of Investing

5.10 know the process and handling of Investor Complaints

Study and Reference Guide

1. Code of Corporate Governance, 2012