INSTITUTE OF BUSINESS AND TECHNOLOGY Potential of Mutual Fund Industries in Pakistan Prepared By Murad Sulaiman BM/25175 Course Code

: MKT-606

MBA (Banking and Finance)

FACULTY OF MANAGEMENT AND SOCIAL SCIENCES

Potential of Mutual Fund Industries in Pakistan

FALL- 2010 TABLE OF CONTENTS
ACKNOWLEDGEMENT ABSTRACT CHAPTER NO.1 INTRODUCTION ACKNOWLEDGEMENT 5.................................................................................................2 ACKNOWLEDGEMENT............................................................4 Purpose of Study.....................................................................8 Research Objectives................................................................8 Research Methodology............................................................8 3.1 Introduction ....................................................................13 3.2 Concept of Mutual Funds ..............................................13 3.3 Origin of Mutual Fund.....................................................14 3.4 Mutual Fund Organization..............................................15 3.5 How a Fund is created....................................................15 3.6 Structure of Mutual Funds.............................................16 3.7 Types of Mutual Funds...................................................16 Difference between Open & Close End Mutual Funds........21 3.9 Advantages and Disadvantages of Mutual Funds.......21 4.1 Growth..............................................................................25 4.2 Government Role of Mutual Fund................................26
5 6

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4.3 Causes of Slow Growth of Mutual Funds.....................27 4.4 Reasons for Failure.........................................................29 4.5 Present Scenario.............................................................30 4.6 Present and Past.............................................................31 5.1 An Overview....................................................................33 5.2 Growth in Asset Management Companies...................34 5.3 Mutual Funds - A Comparison with other Investment Avenues..................................................................................34 5.4 Future Prospects.............................................................35 6.1 Key Players .....................................................................36 6.2 Comparison of NIT with other Funds............................40 6.3 Results Analysis..............................................................52 6.4 Government Policy ........................................................52 7.1 Worldwide Market – An Overview..................................54 7.2 Mutual Funds in South Asia...........................................56 7.3 Mutual Funds in India & Pakistan – A Comparison.....58 8.1 Present ............................................................................63 8.2 Future Challenges...........................................................64 9.1 Conclusion.......................................................................66 9.2 Recommendations..........................................................68 BIBLIOGRAPHY
73

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ACKNOWLEDGEMENT

All praises for Almighty Allah whose uniqueness, Oneness and wholeness is not challengeable. All respect for his Holy Prophet Hazrat Muhammad (P.B.U.H) who enabled us to recognize our creator. I am grateful and deeply indebted to Dr. Noor Ahmed Memon my teacher, mentor and project advisor for his helpful insights, cooperation, support and continuous encouragement throughout this project. Without his guidance I will not
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be able to do this. He really is a person from whom I learnt a lot and who knows how to motivate other person. I would like to thank Atta Muhammad Ujjan Area Manager NAFA FUNDS for his helpful insights and for sparing his precious time to help and guide me. Many people have contributed in the completion of this project and I would like to thank my fellow students Fahad Abbasi, Asad Mazhar, Mairaj Muhammad, Noshad and Noor-U-Saba, whose support and guidance help me to complete this project in time. Last but not least I would like to thank my parents for always being there for me when I need them.

Murad Sulaiman

INSTITUTE OF BUSINESS AND TECHNOLOGY
ABSTRACT SUBMITTED BY: Murad Sulaiman

DISCIPLINE:

MBA (Banking & Finance)
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TITLE OF PROJECT REPORT:

Potential of Mutual Fund Industries in Pakistan

MONTH OF SUBMISSION:

November 2010

NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon

ABSTRACT
This research work analyzes the developments of mutual fund industry in Pakistan since its inception in 1962. It also covers the comparative study of the public and private sector mutual funds, key players in this sector and their performance. This research analyzed the growth of mutual funds in USA, South Asian region and in India in comparison with Pakistan. The relevant policies that are applicable to Pakistan and those that proved to be successful over time were studied and finally recommended to Pakistan. The existing market of mutual funds in Pakistan is not fully structured and at the same time it lacks due attention to be given by common investor. It covers the problems mutual fund industry faced since its inception in the country, performance of existing Asset Management Companies, Barriers in the development of this industry since its inception and the challenges and opportunities this industry is facing. The research also covers that the growth of Mutual Fund industry in Pakistan is faster than anticipated, due to injection of new equity funds and the re-direction of Provident funds and gratuity funds from banks and NSS to the higher yielding mutual funds. A wind of change is blowing across the mutual fund industry. The future of the industry appears to be promising and is poised for growth. Mutual Fund industry can thrive on a sustainable basis only if new innovative products are continuously introduced in the industry.
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Thus, to conclude, there are many opportunities for this sector in Pakistan. Some steps have been taken but the pace of work is slow. More can be accomplished through realizing its importance.

1. INTRODUCTION
1.1 Introduction Mutual fund is a mechanism of pooling together the savings of large number of investors with an objective of attractive yield and appreciation in their value. In Pakistan mutual funds have many barriers for its development towards capital market. The lack of official rules and regulation and no proper check and balance upon them discourage many investors to invest in mutual funds in Pakistan. Over a period of time, Mutual Funds managers have developed a variety of investment products but still in our country this sector is unable to categorize different customized products that can cover investor’s needs accordingly.
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The research has tried to identify the distinguishing features of open and closed ended mutual funds. The analysis focuses on the market capitalization of mutual funds along with their comparison with other sectors. The barriers to mutual funds in the Pakistani funds market and its future outlook scenarios are also discussed in this research thesis. Purpose of Study The objective of the thesis is to study Mutual Fund market in Pakistan. It also encompasses the new rules and regulations issued by SECP and its implementation in Mutual Fund industry, so as to further analyze the post reforms scenario. Thesis analyze s the market leaders NIT, Arif Habib and Jehangir Siddiqui Mutual Funds and other Asset management companies in Pakistan. The research also covers: • • • • Problems Mutual Fund industry faced since its inception in the country Performance of existing Asset Management companies Barriers in the development of Mutual Fund industry Scope and Prospects of this industry in Pakistan

Research Objectives Scope of this research includes Mutual Fund market of Pakistan. It covers a comparative study of the public sector Mutual Funds and private sector mutual funds by making brief review of SECP rules and regulations. The research also discusses the barriers in the development of Mutual Funds in Pakistan and makes recommendations for Mutual Funds development in Pakistan. Research Methodology In order to conduct the research work a number of research methods are used which includes intensive web search, interviews, and visits of mutual fund companies like ABAMCO, Arif Habib Investments, United Asset Management Company etc. The research also includes the critical issues hindering the growth of Mutual Fund Industry in Pakistan. For this purpose the following research methodologies are followed:  Primary data

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o Questionnaires, Interviews  Secondary data o Libraries, Articles, Research material, Internet, Financial Magazines

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2. LITERATURE REVIEW
Mutual Funds have attracted a lot of attention and kindled the interest of both academic and practitioner communities. Compared to developed Market, very few studies of Mutual Funds are done in Pakistan. The literature review reveals the investor behavior studies. The researches on Mutual Fund have been extremely skewed in term of geographical coverage, most focused to develop countries like us. Mary Rowland had written “The New Common sense Guide to Mutual Funds”. It includes the guideline while investing in Mutual Fund. How should one invest in Mutual Fund and what step should be taken in a situation by investor. Mr. Talat Afza mentioned in his book Performance Evaluation of Pakistan Mutual Funds that Extensive research has evaluated mutual fund performance in different financial markets which led to mixed results, however, limited work has been done to evaluate Pakistani mutual funds. The purpose to provide guidelines to the managers of open-ended Pakistani mutual funds and benefit small investors by pointing out the significant variables influencing the fund performance. An effort has been made to measure the fund performance by using Sharpe ratio with the help of pooled time-series and cross-sectional data and focusing on different fund attributes such as fund size, expenses, age, turnover, loads and liquidity.

Dr. Amjad Waheed, CEO, NBP Asset Management Company Limited in his article Significant Impact On Fund Performance in The Lahore Journal of Economics (Vol 2, No 2) mentioned that Pakistan experienced the reverberations starting in 1988 of the changes that swept the Asian emerging markets. To create an investment friendly environment the GoP adopted liberal economic policies of deregulation, privatisation, opening of capital markets to foreigners, liberalization of foreign exchange regulations and dismantling of investment
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control - policies that lead to a significant increase in direct and indirect foreign investment in the country. These changes resulted in a drastic increase in the financial assets of Pakistan with stock market capitalization rising from Rs.l88 bn in 1991 to Rs.547 bn at present, daily trading volume improving from 2 mn shares in 1991 to 50 mn shares at present and number of listed companies rising from 542 in 1991 to 788 at present. Despite the global trend of a significant increase in financial assets and the surge in domestic market capitalisation, an average Pakistani investor is still skeptical about entering the market. The reasons for this skepticism are: • • Lack of information about capital markets. Inherent risk involved in investing in stocks.

Therefore, it is crucial for an ordinary investor to understand the way in which to overcome these drawbacks. An efficient and a risk adverse mode of doing this are by investing in a mutual fund. A mutual fund is simply a group of stocks and other financial assets managed by trained investment professionals. Such a fund offers its shares to the public who in turn, become its owners. Typically, the fund advisor uses investors' money to acquire stocks .and bonds within the legal framework of the Corporate Law Authority. Greg N. Gregoriou in his book Diversification and Portfolio Management of Mutual Funds (Finance and Capital Markets Series) addresses the important issue of diversification in an age where it is vital to reduce volatility on investments. Properly applied portfolio management can lead to greater gains. The expert authors guide investors through international portfolio diversification, make clear how to help improve the efficiency of their investments, and explain how international diversification reduces the risk of an investment portfolio. This key book educates investors about how international mutual finds enhance the performance of their portfolio. The authors analyze which factors are most essential to investors, and find that both financial factors and behavioral
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arguments must be considered. This book is a crucial tool for any investor looking to improve the profit gain from their investment.

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3. MUTUAL FUNDS
3.1 Introduction

A Mutual Fund is an institution established with the intention of investing a pool of funds in various types of Securities for the benefit of investors. A small investor is unable to diversify his portfolio of funds simply because of high investment required for diversification, so a Mutual Fund provides a means of diversification of investment to small investors. Mutual Fund normally collects the funds from small investors, and when sufficient funds are gathered then they are invested into the Securities of different types thus diversifying the portfolio. A management company manages Mutual Fund. The management company is a bank of human resources, considered to be professionally qualified personnel. A “Portfolio Manager”, whose responsibility is to invest in, and satisfies the desire of the investors, manages the portfolio of mutual fund. While selecting the securities for investment, these managers analyze economic conditions, industry trends, Government regulations and their impact on the stocks, and forecasts for the specific stocks to the project the future outcome generated by the companies. As we all know that economic and business condition do not remain constant, so these managers also revise their portfolio with the passage of time, as the circumstances demand. 3.2 Concept of Mutual Funds

A Mutual Fund is a type of Investment Company that gathers assets from investors and collectively invests those assets in stocks, bonds, or money market instruments1. Individuals and institutions invest in a Mutual Fund by purchasing shares issued by the fund. It is through these sales of shares that a Mutual Fund raises the cash used to invest in its portfolio of stocks, bonds, and other securities. Through the collective investments of the Mutual Fund, each investor shares in the returns from the fund’s portfolio while benefiting from professional investment management, diversification, liquidity, and other benefits and services.
1

www.investopedia.com
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The concept of Mutual Fund is very simple, small investors invest their money into a common pool or fund and hand over the investment decision to fund manager/ portfolio manager. This is expected to have several advantages for the small investors: no more searching for good buys or relying on the neighborhood sub-broker for advice or even waiting anxiously for the allotment. All this is taken care of by the cumulative bargaining power of the fund, which has trained professionals managing it. Every day, the fund manager/ portfolio manager counts up the value of all fund's holding, figures out how many shares have been purchased by shareholders, and then calculates Net Asset Value (NAV) of Mutual Fund, price of a single share of the fund on that day. If investor wants to buy shares, he just has to send the manager money, and they will issue new shares for him at the most recent price. 3.3 Origin of Mutual Fund

Mutual Fund industry traces its roots to England in the mid-1800s. The enactment of two British laws, the Joint Stock Companies Acts of 1862 and 1867, permitted investors, for the first time, to share in the profits of an investment enterprise, and limited investor liability to the amount of investment capital devoted to the enterprise. Shortly thereafter, in 1868, the Foreign and Colonial Government Trust formed in London. This trust resembled a mutual fund in basic structure, providing “the investor of moderate means the same advantages as the large capitalists ... by spreading the investment over a number of different stocks2.” This concept of offering the investment potential of financial markets to all individuals spawned additional “investment companies” in Britain and Scotland and, among other things, helped finance the development of the post-Civil War U.S. economy. Most of the early British investment companies or trusts resembled today’s closed-end funds by issuing a fixed number of shares to groups of investors whose “pooled” assets were invested in various companies.
2

Mutual fund Fact book 2009, 44th Edition http://www.ici.org/stats/mf/2009_factbook.pdf
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The Scottish American Investment Trust, formed on February 1, 1873 by fund pioneer Robert Fleming, was significant because it invested in the economic potential of the United States, chiefly through American railroad bonds. Many other trusts followed that not only targeted investment in America, but more importantly, led to the introduction of the investment fund concept on U.S. shores in the late 1800s and early 1900s. 3.4 Mutual Fund Organization

A Mutual Fund is organized either as a corporation or a business trust that sells its shares to investors. Mutual Funds have officers and directors or trustees. In this way, Mutual Funds are like any other type of company, such as IBM or General Motors. Unlike other companies, however, a Mutual Fund is typically externally managed: it is not an operating company with employees in the traditional sense. Instead, a fund relies upon third parties or service providers, either affiliated organizations or independent contractors, to invest fund assets and carry out other business activities. 3.5 How a Fund is created

Setting up a Mutual Fund is a complicated process performed by the fund’s sponsor, typically the fund investment adviser, administrator, or principal underwriter (also known as the distributor). The fund sponsor has a variety of responsibilities. For example, it must assemble the group of third parties needed to launch the fund, including the personnel managing and operating the fund. The sponsor provides officers and affiliated directors to oversee the fund, and recruits unaffiliated persons to serve as independent directors. It must also register the fund under state law as either a business trust or corporation.

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3.6

Structure of Mutual Funds

A mutual fund is usually either a corporation or a business trust (which is like a corporation). Like any corporation, a mutual fund is owned by its shareholders. The figure below shows the business structure of a typical Mutual Fund.

Figure 1: Structure of Mutual Funds

3.7

Types of Mutual Funds

There are two types of mutual funds, which are:

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• •

Open-end mutual funds Closed-end mutual funds

Open-End Mutual Fund

Open-end mutual funds are those where subscription and redemption of shares are allowed on a continuous basis. Price at which the shares of open-end funds offered for subscription and redemption is determined by NAV after adjusting for any sales load or redemption fee. In Pakistan there exists Fourteen Open ended mutual funds. Public Sector: 01 Private Sector: 13
Closed-End Mutual Fund

Closed-end mutual funds are those where shares are initially offered to the public and are then traded in the secondary market. The trading usually occurs at a slight discount to the NAV. In Pakistan there exist Nineteen Close-end mutual funds. Mutual fund has different risks and rewards. In general, the higher the potential returns, the higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk--it's never possible to diversify away all risk. This is a fact for all investments. Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments, and investment strategies. At the fundamental level, there are three varieties of mutual funds: 1) Equity funds (stocks) 2) Fixed-income funds (bonds) 3) Money market funds All mutual funds are variations of these three asset classes. For example, while equity funds that invest in fast-growing companies are known as growth funds, equity funds that invest only in companies of the same sector or region are known as specialty funds.

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Figure 2: Risk and Reward potential for Types of Funds

Different types of mutual funds from the safest to more risky are explained in a sequence.
Money Market Funds

Money Market consists of short-term debt instruments, mostly T-bills. This is a safe place to park money. Investor won't get great returns, but at the same time he won’t have to worry about losing your principal. A typical return is twice the amount one would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD).
Bond/Income Funds

Income Funds are named appropriately: their purpose is to provide current income on a steady basis. When referring to Mutual Funds, the terms "fixedincome," "bond," and "income" are synonymous. These terms denote funds that invest primarily in Government and corporate debt. While fund holdings may appreciate in value, primary objective of these funds is to provide a steady cash

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flow to investors. As such, audience for these funds consists of conservative investors and retirees. Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government securities; also, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of fund goes down.
Balanced Funds

Objective of these funds is to provide a "balanced" mixture of safety, income, and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed-income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed-income. The weighting might also be restricted to a specified maximum or minimum for each asset class.
Asset Allocation Fund

A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The portfolio manager is therefore given freedom to switch the ratio of asset classes as economy moves through the business cycle.
Stock/Equity Funds

Funds that invest in stock represent the largest category of Mutual Funds. Generally, investment objective of this class of funds is long-term capital growth with some income. There are, however, many different types of equity funds because there are many different types of equities. The idea is to classify funds based on both the size of the companies invested in and the investment style of the manager. The term "value" refers to a style of investing that looks for high quality companies that are out of favor with the

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market. These companies are characterized by low P/E ratios, price-to-book ratios, and high dividend yields, etc. The opposite of value is growth, which refers to companies that have had (and are expected to continue to have) strong growth in earnings, sales, and cash flow, etc. A compromise between value and growth is "blend," which simply refers to companies that are neither value nor growth stocks and so are classified as being somewhere in the middle.
Global/International Funds

An international fund (or foreign fund) invests only outside the home country. Global funds invest anywhere around the world, including the home country. It's tough to classify these funds as either riskier or safer. On the one hand they tend to be more volatile and have unique country and/or political risks. But, on the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by increasing diversification. Although the world's economies are becoming more inter-related, it is likely that another economy somewhere is outperforming the economy of your home country.
Specialty Funds

This classification of mutual funds is more of an all-encompassing "etc. category" that consists of funds that have proven to be popular but don't necessarily belong to the categories we've described so far. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy. Sector funds are targeted at specific sectors of the economy such as financial, technology, health, etc. Sector funds are extremely volatile. There is a greater possibility of big gains, but you have to accept that your sector may tank. Regional funds make it easier to focus on a specific area of the world. This may mean focusing on a region (say Latin America) or an individual country (for example, only Brazil). An advantage of these funds is that they make it easier to buy stock in foreign countries, which is otherwise difficult and expensive. Just like for sector funds, you have to accept the high risk of loss, which occurs if the region goes into a bad recession. Socially responsible funds (or ethical funds) invest only in companies that meet
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the criteria of certain guidelines or beliefs. Most socially responsible funds don't invest in industries such as tobacco, alcoholic beverages, weapons, or nuclear power. The idea is to get a competitive performance while still maintaining a healthy conscience.
Index Funds

This type of mutual fund replicates the performance of a broad market index such as the S&P 500 or KSE 100 index. An investor in an index fund figures that most managers can't beat the market. An index fund merely replicates the market return and benefits investors in the form of low fees. Difference between Open & Close End Mutual Funds

S.No
1 2

Description Size of Capital Unit Prices

Open-end No upper limit Based on NAV Its own branches / channels Its management is

Close-end Fixed Based on Market Value Stock Market

3

Can be purchased from authorized distribution

4

Redemption responsibility Listing at stock exchange

legally bound to repurchase its units from customer

Its management has no responsibility to repurchase its units from customer Compulsory

5

May or may not be

3.9

Advantages and Disadvantages of Mutual Funds

Advantages of Mutual Funds

Mutual Funds make saving and investing simple, accessible, and affordable. The advantages of Mutual Funds include professional management, diversification, variety, liquidity, affordability, convenience, and ease of recordkeeping—as well as strict government regulation and full disclosure.
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Professional Management

Even under the best of market conditions, it takes an astute, experienced investor to choose investments correctly, and a further commitment of time to continually monitor those investments. With Mutual Funds, experienced professionals manage a portfolio of securities for you full-time, and decide which securities to buy and sell based on extensive research. A fund is usually managed by an individual or a team choosing investments that best match the fund’s objectives. As economic conditions change, the managers often adjust the mix of the fund’s investments to ensure it continues to meet the fund’s objectives. a. Diversification Successful investors know that diversifying their investments can help reduce the adverse impact of a single investment. Mutual funds introduce diversification to investment portfolio automatically by holding a wide variety of securities. Moreover, since investors pool their assets with those of other investors, a mutual fund allows them to obtain a more diversified portfolio than investors would probably be able to comfortably manage on their own—and at a fraction of the cost. Mutual Funds substantially lower the investment risk of small investors through diversification in which funds are spread out into various sectors, companies, securities as well as entirely different markets. It is always the objectives of a fund manager to maximize a funds return for a given level of risk; however the dangers of "over-diversification" are always prevalent which would inevitably lead to a reduced return on the portfolio.
b. Variety

Within the broad categories of stock, bond, and money market funds, investors can choose among a variety of investment approaches. Mutual Funds are providing small investor access to the whole market, which individually, would be difficult to achieve.
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c. Low Costs Mutual Funds usually hold dozens or even hundreds of securities like stocks and bonds. The primary way you pay for this service is through a fee that is based on the total value of your account. Because fund industry consists of hundreds of competing firms and thousands of funds, the actual level of fees can vary. But for most investors, mutual funds provide professional management and diversification at a fraction of the cost of making such investments independently.
d. Liquidity

Liquidity is the ability to readily access investor’s money in an investment. Mutual fund shares are liquid investments that can be sold on any business day. Mutual funds are required by law to buy, or redeem, shares each business day. Mutual Funds mobilize the saving of small investors and channel them into lucrative investment opportunities. As a result, mutual funds add liquidity to the market. The price per share at which you can redeem shares is known as the fund’s Net Asset Value (NAV). NAV is the current market value of all the fund’s assets, minus liabilities, divided by the total number of outstanding shares.
e. Convenience

Investors can purchase or sell fund shares directly from a fund or through a broker, financial planner, bank or insurance agent, by mail, over the telephone, and increasingly by personal computer. Investor’s can also arrange for automatic reinvestment or periodic distribution of the dividends and capital gains paid by the fund. Funds may offer a wide variety of other services, including monthly or quarterly account statements, tax information, and 24-hour phone and computer access to fund and account information.

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f.

Protecting Investors

Not only are mutual funds subject to exacting internal standards, they are also highly regulated by the Federal government through the Securities and Exchange Commission (SEC) of the country. The investors save a great deal in transaction cost given that he has access to a large number of securities by purchasing a single share of mutual fund. Investors can pick and choose a mutual fund to match his particular needs.

Disadvantages of Mutual Funds

As such there is no major disadvantage attached to the Mutual Funds. However, the possible disadvantages could be: a. Economic and Business Conditions: As the business and economic conditions do not remain constant, Mutual Fund may face some difficulties in future. Especially if the manager does not shuffle the investment portfolio with the passage of time, or some other major unforeseen disaster/event changes the investment scenario.
b. Portfolio Managed by Managers:

Portfolio of a mutual fund is managed by portfolio managers due to which, the investors have no say in the affairs of a mutual fund.

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4. MUTUAL FUNDS IN PAKISTAN
4.1 Growth

Mutual Funds were introduced in Pakistan in 1962, with the public offering of National Investment (Unit) Trust (NIT) which is an open-end mutual fund in the public sector. This was followed by the establishment of the Investment Corporation of Pakistan (ICP) in 1966, which subsequently offered a series of Closed-End Mutual Funds.
1960’s Public Sector Funds Launched

Mutual funds were introduced in Pakistan in 1962, with the public offering of National Investment Trust (NIT) that is an open-ended mutual fund in the public sector. NIT remained the only open-ended mutual fund in the country for over 30 years. The Government kept it a virtual monopoly for decades. To guarantee growth in its portfolio, offer of 25% of every public limited company to NIT was made mandatory (withdrawn in 1995). This was followed by the establishment of the Investment Corporation of Pakistan (ICP) in February 1966, again in public sector, with the additional mandate to manage closed-end funds. ICP floated 26 funds.
1970-80’s Private Sector Allowed Entry

In 1971, the government cleared the way for entry of private sector in the closedend segment but denied the right to float open-ended funds due to the apprehensions of the regulators that the private sector will not be able to manage prudently.

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1990’s The Industry Takes Off

Private sector participation in the mutual funds started in early 1990s with setting up of the first open-ended fund by ABAMCO Limited. However, due to the prolonged recession of later 1990s, the private sector was also unable to make any major contribution to the overall performance of the fund industry. Eleven more closed-end funds were launched during 1994-1996, which was considered as the bullish period of nineties. The KSE100 Index was at 2,600 in March 1994, a time during which the market had opened itself to foreign portfolio investors and capital controls had been relaxed. There was a massive inflow of foreign liquidity. The first private sector open-ended fund was launched in 1996. Private sector fund managers formed the Mutual Funds Association of Pakistan (MUFAP), which was formed for self regulatory purposes. 4.2 Government Role of Mutual Fund

Until very recently, Mutual Funds were regulated by: 1. Investment Companies and Investment Advisors' Rules, 1971. (govern closed-end mutual funds) 2. Asset Management Companies Rules, 1994. (govern open-ended mutual funds) These rules however were only for private sector operated mutual funds and were not applicable to NIT and ICP mutual funds. Now these funds will be governed by The Non Banking Finance Companies (NBFC) Rules, 2007.

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Investment advisors (in case of closed end fund) / Asset Management Company (for open end schemes) will be regulated by the Securities and Exchange Commission of Pakistan (SECP). Investment Advisor of a closed end scheme will have to hold a minimum of 10% shares of the closed end fund (up to a maximum of 20%). The Investment Advisor can charge a maximum of 3% p.a. of NAV as management fee in the first five years of the fund’s existence. Thereafter, a fee of 2% of NAV can be charged for managing the funds. 4.3 Causes of Slow Growth of Mutual Funds

Mutual funds have not, until recently, received adequate attention from the government. Citing reasons for slow growth of mutual funds in Pakistan were: • • • • • • Poor Govt. policies Lack of awareness Controlled public sector High interest rates Low literacy and low savings Absence of proper marketing

For most part in the past, private sector mutual funds did bad, due to their poor entry points. They accumulated expensive portfolios just at the end of the stock boom of 1993. Moreover, in most of the private sector mutual funds, professional expertise in equity research and portfolio management was generally lacking, resulting in low quality portfolio compositions. These funds were known to have taken huge stakes in such laggards as the textile, spinning and modaraba sectors.

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Another reason is that people of Pakistan are not quite aware of the concept of mutual fund except for the people living in metropolitan cities like Karachi, Lahore, Islamabad and others but the rest of the country is not much aware of the functions and availability of mutual funds. Mutual fund industry was prevented from playing a full role in the capital market by constraints such as tax anomalies, a predominance of the public sector and regulatory weaknesses3. Inadequate surveillance by SECP, and weak implementation of policy reforms also hinder the growth of mutual fund industry since its inception. One of the biggest reasons for the slow growth of Mutual Funds in Pakistan is on the part of asset management companies to work out the best way of distribution. Most of the bigger fund management companies hooked up with banks to sell their products but were unable to make much headway since banker’s feared attrition in their own deposits. The other reason is that non-existent marketing made these funds a failure as Mutual Funds don’t have any brand recognition nationwide. The management of Mutual Funds failed to recognize that to increase the sales of these Funds in Pakistan what needed the most is marketing not the performance alone. Despite plans to step up on marketing, funds also faced a problem of severely limited supply of investment professionals. Then, fund managers also faced constraint of limited investment options. The Fund managers said that collecting money is easy but then where to invest it is very difficult in Pakistani market as Real estate is not allowed, commodities are not allowed and there are no rules for private equity funds.

3

ADP loans to Pakistan to Reform Capital market http://www.adp.org/Documents/News/1997/nr1997116.asp
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Although the government is working on new laws and permissions but fund managers say that the pace of the work is slow. Another reason because of which individual investors are reluctant to put their money in Mutual Funds is the frauds that different cooperative societies did in the past. Like in the early 1990s the Alliance Motors and other sponsors of phony finance companies which received very large funds from the people promising to multiply them and then vanished. Even the Taj Book Company, printers of the Holy Quran and other religious books, joined in this race and received very large funds. People who placed their money at its disposal thought the printers of holy books would not cheat them. But the management of the Taj Book Company indulged in excessive speculation. In the Punjab it was the cooperative societies alone which went for such speculation and swindling of funds. These fraudulent activities by some of the private sector companies make the individual investors reluctant to put their money in private sector companies thus preferred government savings schemes. 4.4 Reasons for Failure

The Annual Report 2008 of the Securities and Exchange Commission of Pakistan (SECP) noted that the mutual funds industry, in its initial years had failed to take off in the initial years due to4 • • • •
4

Frequent changes in the economic policies High rates on alternative investments such as NSS Limited Investment Options Profusion of risk free Government Securities

Dilawar Hussain, Small investors route to equity investment: Mutual Funds, 22nd August, 2009 Http://www.dawn.com/2009/08/22/ebr9.htm
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• •

Lack of awareness of collective investment schemes Low savings rate, profusion of risk-free investment options in the

government securities 4.5 Present Scenario

An interesting observation about Mutual funds in Pakistan is that in both bull and the bear market, these tend to run ahead of other stocks. Like in the recent stock market crash in March 2009 when there was a 33% drop in the stock market one of the leading Mutual Funds i.e. of Arif Habib dropped by only 14%. In the last two years, the Mutual Funds sector has more than tripled in size to Rs112 billion in assets under management (as of December 31, 2009) and the number of funds operating has jumped from just a handful to 33 with many more in the pipeline. The bulk of this growth has come from weighty investments made by a few giant financial institutions, not a smattering of savings from thousands of doctors, shop-keepers and barbers that is actually the stuff of mutual funds. Performance of mutual funds industry during financial year 2008 had shown significant improvement over the previous years. In Pakistan, even the biggest private-sector funds have not been able to entice more than 5,000 individuals, less than 0.003 per cent of the population so this couldn’t be called a great success. In fact it is only in the last two years that mutual funds have wrested control of a place of honor in the financial sector of Pakistan. The past three years have seen the revival of the mutual fund industry in Pakistan. The net assets of the industry have improved from Rs.25 billion in 2001 to Rs.124 billion as of March 31, 2010 According to the April 2010 market report by the stock brokerage firm, Taurus Securities, the mutual funds listed on the Karachi Stock Exchange were trading
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on price-to-earnings ratio of attractive 3 times, which was the lowest among the 34 sectors on the KSE. This was in spite of the fact that mutual funds produced return on equity (ROE) of 51.85 per cent, which was the highest except for the food & personal care sector's ROE at 64.92 per cent. The listed capital of all closed-end funds combined stood at Rs12, 376 million with the aggregate market capitalization at Rs18 billion. Besides the equity investment, in recent years, several kinds of funds have sprouted, such as income funds, growth funds; Islamic funds and money market funds. All these funds offer the small saver variety of choice to invest according to his inclination. 4.6 Present and Past

In Pakistan, even the biggest private-sector funds have not been able to entice more than 5,000 individuals, less than 0.003 per cent of the population. In fact it is only in the last two years that mutual funds have wrested control of a place of honor in the financial sector. Until the nineties, the sector was made up of just two state-run asset management companies, NIT and ICP. At the time, a series of closed-end funds were established but most languished below par value, a result of poor management and a slack stock market. It was only in 1996 that the sector began to creep back to life with the establishment of ABAMCO, an asset management company in the private sector. Since then, NIT also underwent extensive reform by bringing on investment professionals and switching to a system of marketbased quotations. The mutual fund industry in Pakistan has taken off at a dramatically rapid pace and the growth potential is enormous. The MD of Flow stated that the growth of mutual fund industry in Pakistan was faster than anticipated, due to injection of new equity and the re-direction of
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Provident Funds and gratuity funds from banks and NSS to the higher yielding mutual funds. A foundation for the setting up of Institute of Corporate Governance was laid, when regulators and representatives of major bodies of the private sector agreed on establishment of such an institute. The proposed institute would be named, "The Pakistan Institute of Corporate Governance (PICG)5.

5

A statement released by the Securities and Exchange Corporation of Pakistan (SECP)
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5. PERFORMANCE OF MUTUAL FUNDS

5.1

An Overview

Mutual fund industry in our country is still in its growing stages, with only $1.9bn funds under management. This is only 2 per cent of FY10E GDP. Several mutual funds were launched last year, and many are still planning to come online. Various opportunities for investors with a variety of appetites are being made available. Specific industry risk mutual funds and fixed income mutual funds are also coming up in the market, providing a set of alternatives to choose from. Investment in TFCs have also been exempted withholding tax up to the amount Rs150, 000 which will help attract a little interest towards the TFC market in our country. Mutual Funds have registered a remarkable growth in FY09 and their share in total assets has increased to 22.6 percent, as compared to 14.1 percent in FY07. This was primarily due to the low interest rates and exceptional performance of the capital markets in the country. It is quite evident from their performance that mutual funds are gaining ground as a lucrative investment option by investors.

Performance of NIT- An Example

At one time, the NIT unit price had gone down as low as 6 rupees whereas presently it’s about 42 rupees and during this period, NIT has declared very handsome dividends as well. So, during this period the equity investor has benefited substantially well and that has encouraged the individuals and institutions to put their money into equity. The raising of financial resources through equity is very important for the industrial progress of the country. Pakistan requires more and more investment in the fund industry for making rapid progress which is the only solution to many of its problems.

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5.2

Growth in Asset Management Companies

A positive trend as the number of asset management companies has grown from 6 in the year 1994 to 18 in the year 2009 thus showing a 200% increase. 5.3 Mutual Funds - A Comparison with other Investment Avenues

Mutual funds have been able to attract growing number of investors. Compared to other investment avenues, such as in currency, bank deposits and the slipping returns on national saving schemes (NSS), small investors have been tempted to dabble in stocks. Growing number of investors appear to be putting their trust and money in mutual funds. An indicator that suggests the increasing interest of investors in the sector is the average daily turnover of closed-end mutual fund, which had reached 3.1 million shares in 2008, from 1.8 million shares in 2006. The choice for investors in mutual funds is now widening. There are closed-end mutual funds, open-ended mutual funds, as well as money market and Islamic funds. The entry of Crosby Dragon Fund-the first multinational-managed foreign fund in Pakistan's financial markets early this year has provided new dimensions to the industry. Chairman Securities and Exchange Commission of Pakistan Tariq Hassan says that the entry of Crosby Dragon Fund has marked a new beginning in the development of mutual fund industry in Pakistan. In both bull and the bear market, mutual funds in Pakistan tend to run ahead of other stocks. That happened post the 12 per cent drop in the KSE-100 index, after it had peaked to 4,604 points on September 12, last year. Between February and September 2008, the market capitalization of the KSE rose by 89 per cent, but that of the mutual fund sector, paced ahead by surging 118 per cent. And after touching the magical figure of trillion rupees in market capitalization, when it slipped back by 22 per cent till November 22, the market capitalization of mutual funds took to their heals faster to the south and lost 42

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per cent6! It is difficult to conclude whether that reflects good or bad upon the management's of mutual funds in the country. 5.4 Future Prospects

Over the course of next five years it is believed that further privatization, trickle down impact of macroeconomic stability and revitalization of micro economy would lead to surge in conversion of efficient SMEs into large corporations leading to higher market capitalization and the same would be reflected in the mutual funds sector size as well. In view of the expected GDP growth we expect further price improvement in the listed stocks from their existing levels. Moreover, global trend of reliance on mutual funds as an active investment option is also emerging in the country and that will also add to the expected growth in this sector. It is believed that over the next five years the total size of Pakistan mutual funds sector would reach at least PKR 250 billion

6

Dilawar Hussain, Mutual funds getting popular, DAWN/Business, 02 February, 2010 http://www.dawn.com/business
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6. KEY PLAYERS IN THE MARKET
6.1 Key Players

At present a number of closed-end as well as open-end mutual funds are operating in Pakistan. Among the oldest are NIT and the various funds managed by Investment Corporation of Pakistan (ICP). The largest number of listed mutual funds is managed by the ICP. There are some closed-end mutual funds operating in private sector whereas NIT and ICP operate in public sector. As of March 31, 2009 there are 35 mutual funds in Pakistan, fourteen open-ended and 21 closed-ended. Out of these the leading Asset Management Companies includes Arif Habib, Jahangir Siddiqui's ABAMCO, Dawood's PVCL, Crosby Dragon of Hong Kong and also the government-sponsored NIT.
National Investment Trust

NITL was incorporated as an unquoted public limited company in 1962. The principal activity of the company is to manage NIT, an open end mutual fund. The fund is the largest open end mutual fund in Pakistan, with investments in approximately 435 of the 659 listed Pakistani Companies as at March 31, 2008. NIT's portfolio has over 96% percent correlation with the Karachi Stock Exchange All Share Index and is as such the nearest proxy to an Index Fund in Pakistan. Value of net funds under management is approximately Rs.67 billion (MAR 09). Gross assets under management are Rs.70 billion approx. The fund has a 97% weighting in equities and 3% weighting in fixed income securities. NITL’s objective is to provide its Unit-holders with a balance between their regular income needs and long term capital appreciation7. NITL has approximately 53,000 unit holders and 19 branches across Pakistan. Distribution channels include NBP, SCB, HBL and AEIB (U.A.E) branches.

7

http://www.nit.com.pk
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NIT is Pakistan’s oldest and largest open-ended mutual fund with over 58 per cent market share of the mutual fund industry with investments in about 500 out of total 659 Pakistani companies listed in KSE. By Feb 15, 2009 Presently NIT has over 53,500 unit holders, who collectively hold 1.54 billion NIT units.
Performance of NIT

NIT has emerged as a leader, and out performed the KSE 100 Index on total return, which is reflected by the financials at the end of June 20098.

The total return on funds for NIT is at 109 per cent while KSE 100 Index result in over 90 per cent NIT has achieved year on year appreciation of 89% in its per unit NAV, on top of 16% dividend yield for the year The year-end per unit NAV of Rs 20.58 plus per unit dividend of Rs 1.75 paid by the Trust, translates into a total return of 109% as compared to per unit NAV of Rs 9.89 as at June 30th, 2008

These results have been the best in eight years. The other important facet of NIT is the investor base, which reflects the participation from all social strata of the society. This performance has been made possible by a team of dedicated professionals and prudent portfolio management policies. NIT is Pakistan’s oldest and largest open-ended mutual fund with over 58 percent market share of Mutual Fund industry with Investments in about 500 out of total 659 Pakistani companies listed in KSE. The value of the Fund invested in the Market by NIT at current price is Rs 65 billion that makes it single largest institutional investor in KSE. Presently NIT has over 53,500 unit holders, who collectively hold 1.54 billion NIT units. NIT, for the financial year ending June 30, 2009 has declared the highest dividend of Rs 3.30 per unit9, which would require a payout of Rs. 4.2 billion to unit holders. The highest sales of Rs 11 billion, huge redemption of Rs 9 billion without any delay and hassle and disbursement of over 97 percent of its profits against the requirement of 90 percent under law, reflected effectiveness of
8 9

http://www.jang.com.pk/thenews/feb2009-daily/04-02-2009/business/b2.htm Pakistan Observer - Newspaper online edition - July 03, 2008.htm
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management and boards of directors. Such impressive results from a public sector fund are of a great significance. Arif Habib Investments Arif Habib Investment Management Limited is an asset management and investment advisory company. It started its business in March 2007, with a launch of two open end mutual funds (unit trusts), namely the Pakistan Stock Market Fund (PSM) and the Pakistan Income Fund (PIF), having a core capital of Rs. 250 million each. A third open end fund was added in November 2007, when the company formed a strategic alliance with Metropolitan Bank to launch the Metro Bank – Pakistan Sovereign Fund (MSF), with a core capital of Rs. 250 million. After the successful launch of three open end funds, Arif Habib Investments acquired the management rights for the closed end KASB Premier fund, renamed as Pakistan Premier fund, in December 2006. The year 2008 proved to be a phenomenal growth year for the funds under its management, with record performance in terms of asset growth and yields. Arif Habib investments started the year 2009 with a launch of a new closed end fund, the Pakistan Capital Fund (PCM) worth Rs1, 500 million. Overall, the company is presently managing funds in excess of Rs. 6.7 billion10 in three open-end and two closed end mutual funds.
Performance of Arif Habib Investments

Pakistan Income Fund (PIF) of the Arif Habib Investments (AHI) has yielded a total return of 13.71% in one year11. The funds have a strong correlation with KSE 100 Index however out performing it for the most part.

10 11

Annual Report June 2009 http://news@accountancy.com.pk> Arif Habib Investments yields 13.7% return
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Figure 10: Performance of PSM vs. KSE 100 Index

ABAMCO LIMITED

ABAMCO Limited is the first and the largest asset management company in Pakistan’s private sector. The Company was formed in 1995 as a joint venture between the International Finance Corporation (a member of the World Bank Group), AMVESCAP, the largest fund manager in Europe, and Jahangir Siddiqui & Co. It currently manages approximately Rs 17 billion in investments on behalf of hundreds of institutions and thousands of individuals12. ABAMCO has a proven history of pioneering in the investment industry. In 1997, ABAMCO's flagship fund, UTP, was the first private sector open end mutual fund to be launched in Pakistan. Since inception, UTP has had an average annualized return of approximately 25 percent. Launched in 2007, UTP-Islamic Fund was the first Shariah-compliant mutual fund in the country and has posted returns of approximately 23 percent annually since inception13.

12 13

http://www.js.com.pk http://www.js.com.pk
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Performance of ABAMCO

ABAMCO Composite Fund was a unique fund in Pakistan's closed end fund history. Launched in May, 2009, it had the largest ever paid up capital of Rs 3 billion and received the largest amount of foreign institutional investment, $5 million from IFC. Based on its market value, this fund has declared an interim dividend in excess of 18 percent on annualized basis in February 2008. ABAMCO Limited announced a staggering sum of Rs1.02 billion in cash dividends for certificate holders in its closed-end mutual funds. This is the highest dividend pay out by any private sector mutual funds in Pakistan14. 6.2 Comparison of NIT with other Funds

The Graph shows investment comparison on total return basis among various funds i.e. UTP, NIT, PSM, PIF, KSE 100 Index and T-Bills. The best performer among all is NIT, which also shows a correlation with KSE 100 Index and PSM. Although funds like PSM claim that they outperformed KSE 100 index but actual data shows a different picture. The performance of PIF is a bit similar to that of TBills rate. The UTP fund, which is oldest in private sector, is showing a poor performance. The performance of these funds can only become up to the mark if fair value of financial instruments is properly calculated, all risks like market risk, interest rate risk, credit risk, liquidity risk etc. should be identified, monitored and properly managed. Professional fund management staff and proper checks and balances by SECP are required.

14

Stated by ABAMCO chairman, Air Cdr.(Rtd) Munawar Siddiqui, 15th February, 2009, www.dailytimes.com.pk
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% Change since 11/03/02

Balanced Funds: % Change since 11/03/2007

Annualized Returns 31 Aug, 2009

PSM

385.49 %

NIT

362.61 %

Balanced Portfolio

185.91 %

PIF

11.41 %

KSE

315.34 %

UTP

128.14 %

T-Bills

2.47 %

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Change since July 2008 to 31 Aug 2009

Annualized Return since July 2008 to 31 Aug 2009

PSM

164.93 %

PSM

75.47 %

NIT UTP KSE - 100

122.69 % 45.73 % 126.14 %

NIT UTP KSE -100

55.54 % 21.51 % 57.60 %

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The above graph15 gives a very clear picture of investment comparison between NIT and KSE 100 Index and it is very clear that NIT has out performed KSE 100 index since 2008 and has maintained its best performance against all other fund managed companies. Some other funds also claim to out perform KSE 100 Index because of their proactive measures but the real picture is not that. Some asset management companies take undue advantage of customer less knowledge and unawareness about the performance of stock market so the need is to make people fully aware about their investment decision and strict monitoring of the actual performance of their funds.

15

Graph provided by Zahirrudin khan, Area Supervisor, Arif Habib Investment Management Limited.
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Analysis of Funds through Ratio’s

In order to analyze how different Mutual Funds are performing in Pakistan as compared to the market index a thorough study of their performance is required. For this purpose different calculations are done for the funds that are trading at the discount to their NAVs and are rated “safe investment16” by SC Securities. Total Return for a period of 8 months Standard deviation of KSE 100 Index 22.859 8.244

CLOSE END MUTUAL FUNDS Pakistan Premier Fund

Total Return for a period of 8 months (TRp) Standard deviation of Pakistan Premier fund (SDp) Beta of Portfolio (βp) Correlation Risk Free Rate of Return (RF) RVAR (Sharpe's Measure) RVOL (Treynor Measure) Jenesen's Alpha α (TRp-RF)/SDp (TRp-RF)/βp (Rp-RF)-[βp(Rm-RF)]

14.172 5.330 0.3193 0.533 8% 1.133 22.457 2.432

16

http://www.scsecurities.net
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PPF Monthly Returns 3.7445 5.2718 -9.1639 -2.9197 3.8872 5.4516 7.0808 -2.1807

KSE 100 Index Monthly Returns 7.4938 20.2640 -6.5432 -5.4792 0.3885 5.1334 -3.8270 4.4286

Figure 11: Correlation between KSE 100 Index & PPF

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Pakistan Capital Market Fund

PAKISTAN CAPITAL MARKET FUND
Months
Jan Feb Mar Apr May Jun Jul Aug

Opening
3/1/2009 1/2/2009 1/3/2009 1/4/2009 2/5/2009 1/6/2009 1/7/2009 1/8/2009 9.2 9.8 11.95 8.85 11.40 11.00 11.95 12.70

Closing
31/01/09 28/02/09 31/03/09 29/04/09 31/09/09 30/06/09 29/07/09 26/08/09 9.8 11.95 8.85 11.40 11.00 11.95 12.70 13.10

% Return
4.882 9.648 -16.573 14.736 -3.509 7.636 5.276 3.150

Total Return Standard deviation of PCM fund Beta of Portfolio Correlation Risk Free Rate of Return RF RVAR (Sharpe's Measure) RVOL (Treynor Measure) Jenesen's Alpha α

28.247 9.238 0.3766 0.389 8% (TRp-RF)/SDp (TRp-RF)/βp (Rp-RF)-[βp(Rm-RF)] 2.075 55.421 14.65

PCM Monthly Returns 4.882 9.648 -16.573 14.736 -3.509 7.636 5.276 3.150

KSE 100 INDEX Monthly Returns 7.494 20.264 -6.543 -5.479 0.389 5.133 -3.827 4.429

Figure 12: Correlation between PCM & KSE 100 Index
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OPEN END MUTUAL FUNDS Pakistan Stock Market Fund

KSE 100 INDEX
Months Jul-03 Aug-03 Sep-03 Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-08 Opening 1/7/2008 1/8/2008 1/9/2008 1/10/2008 3/11/2008 2/12/2008 1/1/2009 6/2/2009 3/3/2009 1/4/2009 4/5/2009 1/6/2009 3432.55 4,018.61 4,523.52 4,066.82 3,793.82 4,308.45 4,473.57 4,887.68 4,852.46 5,141.03 5,524.54 5,453.74 Closing 31/07/2008 29/08/2008 30/09/2008 31/10/2008 25/11/2008 31/12/2008 30/01/2009 27/02/2009 31/03/2009 30/04/2009 31/09/2009 30/06/2009 3,933.37 4,461.47 4,026.34 3,781.03 4,067.29 4,473.85 4,841.59 4,838.59 5,105.87 5,430.72 5,497.49 5,280.96 % Return 13.590 9.993 -9.969 -6.090 6.235 3.911 7.227 -1.004 4.243 4.635 -0.490 -3.168

Total Return of KSE 100 Index for 1 year

33.152

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Months Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09

Monthly Returns of PSM 15.4 13.68 -3.33 -4.45 6.39 7.89 5.46 -1.95 5 4.99 1.18 -2.25 62.26 6.097 0.8199 0.945 8% (TRp-RF)/SDp 6.646 (TRp-RF)/βp 65.180 (Rp-RF)-[βp(Rm-RF)] 33.368

Total Returns (yearly including dividend) Standard deviation of PSM Beta of Portfolio Correlation Risk Free Rate of Return RF RVAR (Sharpe's Measure) RVOL (Treynor Measure) Jenesen's Alpha α

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PSM Monthly Returns 15.4 13.68 -3.33 -4.45 6.39 7.89 5.46 -1.95 5 4.99 1.18 -2.25
Correalation Betw ee n PSM & KSE 10 0 INDEX 40 Monthly Returns 30 20 10 0 -1 0 -2 0 Mon ths 1 2 3 4 5 6 7 8 9 10 11 1 2

KSE 100 INDEX Monthly Returns 13.590 9.993 -9.969 -6.090 6.235 3.911 7.227 -1.004 4.243 4.635 -0.490 -3.168

KSE 100 INDEX Monthly Returns PSM Monthly Returns

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ABAMCO Stock Fund

Months Jan Feb Mar Apr May Jun Jul Aug

KSE 100 INDEX Opening Closing % Return 3/1/2009 6220.28 31/01/09 6747.62 7.494 1/2/2009 6868.29 28/02/09 8261.28 20.264 1/3/2009 8403.49 31/03/09 7,770.52 -6.543 1/4/2009 7,595.87 29/04/09 7,103.65 -5.479 2/5/2009 6,833.60 31/09/09 6,860.15 0.389 1/6/2009 7,020.37 30/06/09 7,450.96 5.133 1/7/2009 7,463.60 29/07/09 7,177.93 -3.827 1/8/2009 7,194.10 26/08/09 7,584.69 4.429 Total Return 22.859

Standard deviation of KSE 100 Index 8.244 ABAMCO STOCK FUND
Months Jan Feb Mar Apr May Jun Jul Aug Opening 3/1/2009 1/2/2009 1/3/2009 1/4/2009 2/5/2009 1/6/2009 1/7/2009 1/8/2009 11.8 12 13.2 11.50 8.50 8.75 8.95 11.25 Closing 31/01/09 28/02/09 31/03/09 29/04/09 31/09/09 30/06/09 29/07/09 26/08/09 12 13.2 11.50 8.50 8.75 8.95 11.25 9.40 % Return 1.695 9.000 -12.879 -16.391 2.632 2.091 13.065 -6.556

Total Return Standard deviation of ABAMCO stock fund Beta of Portfolio Correlation Risk Free Rate of Return RF

-7.383 9.699 0.5462 0.5393 8%

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RVAR (Sharpe's Measure) RVOL (Treynor Measure) Jenesen's Alpha α

(TRp-RF)/SDp (TRp-RF)/βp ((Rp-RF)-(βp(Rm-RF)))

-1.531 -28.996 -23.498

ABAMCO Stock Fund Monthly Returns 1.6949 9.0000 -12.8788 -16.3913 2.6316 2.0913 13.0653 -6.5556

KSE 100 Index Monthly Returns 7.4938 20.2640 -6.5432 -5.4792 0.3885 5.1334 -3.8270 4.4286

C o r r e lat io n Be tw e e n KSE 1 0 0 In d e x & A BA M C O S to c k Fu n d

40.0000 30.0000 20.0000 10.0000 0.00 00 -10.0000 1 -20.0000 -30.0000

Monthly Returns

KS E 1 0 0 Ind e x Mon thly Re tur n s

2

3

4

5

6

7

8

A BA MCO Sto c k Fun d Mon th ly Re turns

Mon th s f r om Ja n -0 5 to A u g-05

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Table 7: Calculations of Beta, RVAR, RVOL & Jensen’s Alpha

Mutual Fund
ABAMCO Stock Fund Pakistan Premier Fund Pakistan Capital Market Fund Pakistan Stock Market Fund

Std. Deviation
9.699 5.330 9.238 6.097

Beta
0.5462 0.3193 0.3766 0.8199

RVAR
-1.531 1.133 2.075 6.646

RVOL
-28.996 22.457 55.421 65.180

Jensen’s Alpha
-23.498 2.432 14.65 33.368

6.3 Results Analysis As we know that Beta is a relative measure of systematic risk. Here betas are calculated using monthly returns of stocks. Thus beta shows how risky the stock is as compared to market. All the above four funds are taking less risk than the market as their beta comes out less than one. Sharpe’s Measure (RVAR) is calculated to measure the excess return per unit of standard deviation. The higher the RVAR and RVOL, the better the portfolio performance is. Therefore in this case Pakistan Stock Market Fund is best performing stock among all as its RVAR is 6.646 and Treynor Measure (RVOL) is 65.18 which are much higher than the rest. ABAMCO Stock Fund is the worst performing stock for this time period. Also the Jensen’s Alpha of Pakistan Stock Market Fund is significantly positive; this is evidence of its superior performance as compared to ABAMCO Stock Fund which is significantly negative. 6.4 Government Policy

From this we can conclude that in Pakistan the Mutual Funds are not taking more risk. These funds only take risk less than the market risk thus obviously they will show less returns. This means these funds are not following the theory of more risk, more returns. As these funds provide only limited amount of returns to their
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investors thus these are not gaining success in the eyes of millions of individual investors in the country. The need is to start a wide range of funds for different kinds of investors with different kind of investment objectives. This way full benefit out of professional management can be taken. The asset management companies should introduce funds that are for risk taker investor and thus the management should take more calculated risk than the market and try to outperform the market returns by its professional and forecasted expertise.

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7. COMPARISON WITH OTHER MARKETS
7.1 Worldwide Market – An Overview

Over the past few decades, there has been explosion of the mutual fund industry both in the U.S. and elsewhere. This industry is considered as the most successful financial innovations in the past decade. The Mutual fund industry in aggregate holds assets worth $11.7 trillion or 13.8% of primary securities globally. In some countries, the industry is over a century old, but in others, it is a more recent innovation. The fund industries in Luxembourg and Ireland are at the top by holding assets that are 484% and 82% of their country’s primary assets At the end of 2008, the worldwide mutual fund industry held $13.0 trillion in assets. This includes $ 6.4 trillion in the US fund market, and 5.5 trillion in 38 other reporting nations. The countries with the largest fraction of the industry were the U.S. (60 percent), Luxembourg (5.5 percent), France (5.1 percent), Italy (3.1 percent) and Japan (2.9 percent).
Figure 15: Worldwide share of mutual fund industry
S hare o M In f F dustry W orld ide w

O h rCou t ie te nr s 2% 1

Ja a pn 3 % Ita ly 3 % U S 6% 0

Fr n a ce 6 % Lu e b r x m ou g 7 %

The mutual fund industry shows signs of continued growth. Over the period from 1996 to 2008, the ratio of fund industry size to GDP increased by 6.9 percentage
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points on average (median = 4.1 percentage points). Not all countries’ fund industries have grown at the same rate, with the slowest growth over this period being -0.9 percentage points (Japan) and the fastest being 25.6 percentage points (South Korea). 57 percent of worldwide mutual fund assets, or $7.0 trillion, are held in nations in the Americas, with U.S. assets composing 93 percent of the total for the region. Approximately $555 billion are held by mutual fund markets in Argentina, Brazil, Canada, Chile, Costa Rica, and Mexico. Europe, if considered as one unified market, would represent $3.6 trillion, or 33 percent of the total worldwide mutual fund assets as of year-end 2007. France and Luxembourg, with fund assets of $1.1 trillion each, constituted the second and third largest mutual fund markets in the world and the largest in Europe. Investors in the Asia/Pacific and Africa regions held 10 percent of worldwide mutual fund assets. Australia and Japan, with fund assets of $518 billion and $349 billion, respectively, were the largest Asia/Pacific and Africa mutual fund markets and among the top 10 markets worldwide.
Figure 16: Composition of world wide mutual fund assets

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7.2

Mutual Funds in South Asia

As far as growth of mutual funds in South Asia is concerned there are only two countries in the region which contribute almost more than 80% of the economic activity of the region. Over the last five years Indian mutual funds sector has grown by more than 5% which lead to its current size of USD 22 bn. Out of these assets 59% were contributed by open-end bond funds, 19% by open-end money market funds the rest is constituted by equity funds, balanced funds and government securities.
Mutual Fund Industry in India

The last decade witnessed the maturity of India's financial markets. Since 1991, every governments of India took major steps in reforming financial sector of the country. Assets under management by mutual funds in India have increased from Rs. 250 million to approx. Rs. 1,531 Billion.

Future of Mutual Fund Industry in India

The corpus of Indian mutual fund industry had reached Rs1,50,537 crore in December 2009, it still had a long way to go as it is still behind the bank deposit figure of Rs16,22,579 crore. American mutual fund industry’s corpus stood at three times that of bank deposits and therefore the Indian mutual fund industry had a long way to go. The total assets of all scheduled commercial banks by end-DEC 2010 is estimated at Rs 40,90,000 crore. Banks assets are expected to grow at an annual composite rate of growth of 13.4% during rest of the decade. In short term, mutual fund assets could fluctuate but over the period we could see big jump in industry assets.

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Mutual fund assets have grown with an annual growth rate of 9% over the last 5 years. Going by current annual growth rate, mutual fund assets would be doubled by year 2010 but considering the growing appetite of retail investors for investments & booming Indian economy, Indian industry could see bigger jump in mutual fund assets.

Lessons Learnt from Indian Mf Industry

Indian Mutual Fund industry is developing at a fast pace because of the good practices and applications of rules and regulations along with the strict imposition of code of corporate governance. Thus Pakistan MF industry should also look into the actions, which Indian industry has taken to make the industry grow in Pakistan. Following are few segments on which India is paying special focus: • India is paying special focus on the participation of retail segment in the MF industry. They are trying to make mutual fund a part of asset allocation of common man, so as to achieve the true sense and purpose of mutual funds. • To channelize the savings from household sector, Indian market is concentrating on the ‘B’ and ‘C’ class cities, which are growing at a rapid pace. Today most of the mutual funds are concentrating on ‘A’ class cities since the cost involved in acquisition of big investors is small. But they should realize that stability in the fund would come with the presence of small retail investors. • Mutual funds are trying to penetrate into rural population by taking the clues from the Indian insurance industry whereby they have separate set of products for the urban as well as rural sector. The products in the rural sector are simple and less in number, which are easy for them to understand. • Now a days number of bank-sponsored mutual funds are established in India as such funds can enjoy the established faith by the people and thus it does not have brand equity to build. Further, it gets a readymade

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clientele base of the bank to pitch the sales .It can also get the leads from the existing clients. • Indian Mutual Funds are trying to remove special advantages, which a foreign multinational mutual fund has over any other Indian mutual fund through expertise, proven track record, faith and a global perspective. SEBI is making special rules and regulations to implement these in their true sense. It is also focusing on formal research and proper marketing of innovative products. • Asset management companies have been pressing the market regulator to allow them to invest in commodity futures, where volumes are picking up. The industry is also looking forward to invest in equity and debt with appropriate internal regulations and risk management measures in place.

7.3

Mutual Funds in India & Pakistan – A Comparison

The first mutual fund UTI was set up by the Government of India in 1964, under the Unit Trust of India Act 1963 where as they were introduced in Pakistan in 1962, almost two years before they were introduced in India, with the public offering of National Investment Trust (NIT) so Pakistan was ahead of India at that time but because of lack of proper planning and absence of capital market reforms it has left far behind Indian industry. In India UTI mutual funds schemes were the only choices available to investors until 1987 when public sector banks and insurance companies were permitted to set up mutual funds. Though the 1988 year saw some new mutual fund companies, but UTI remained in a monopoly position. Also in Pakistan NIT remained the only open-ended mutual fund in the country for over 30 years. The performance of mutual funds in India in the initial phase was not even closer to satisfactory level. People rarely understood, and of course investing was out of question. But yes, some 24 million shareholders were accustomed with guaranteed high returns by the beginning of liberalization of the industry in 1992.

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This good record of UTI became marketing tool for new entrants. The expectations of investors touched the sky in profitability factor. In India the 1993 regulations set the stage for the entry of private sector mutual funds, many of which were set up in collaboration with foreign partners, contributing to more competition, improvements in product varieties and investor services, and substantial growth of the industry over the past decade. Total assets under management by mutual funds increased at an annualized rate of 12% from Rs360.5 billion in April 1992 to Rs1.08 trillion in August 2006.
Figure 21: Assets under management by Mutual Funds in India
Assets under management by Mutual Funds in India
1,080,000

1,200,000 1,000,000 800,000 600,000 400,000 200,000 0

Rs. in Million

360,500

1992 Years

2002

In 1993, the Securities and Exchange Board of India (SEBI), the capital market regulator, formulated the Mutual Funds Regulations, which for the first time established a comprehensive regulatory framework to govern all mutual funds except UTI. The regulations required the separation of the sponsor, trustee, and asset management company (AMC) in a mutual fund, to bring about an arm’s length relationship for proper checks and balances; introduced disclosure and reporting requirements; standardized offer documents; and formulated investment and other rules to govern mutual funds operations. Private sector participation in the mutual funds started in early 1990s with setting up of the first open-ended fund by ABAMCO Limited. However, due to the prolonged recession of later 1990s, the private sector was also unable to make
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any major contribution to the overall performance of the fund industry. The performance of the mutual fund industry has shown a significant improvement in the last four years. The net assets went up by approximately 300% from Rs. 25 billion in FY2007 to Rs. 100 billion in FY2008.
Figure 22: Assets under management by Mutual Funds in Pakistan
Assets under management by Mutual Funds in Pakistan 100

Years

2004 25 2002 0 20

40

60 Rs. in Billion

80

100

120

Assets under management by Mutual Funds in Pakistan

The mutual fund industry in Pakistan started picking up steam only within the last decade despite its 42 year old history. Out of many reasons behind its slow growth is a lack of planning which has played a negative role since mutual funds cannot flourish when capital market reforms have not taken place. But Indian Government has made reforms for the development of capital market and also implemented these successfully thus show a great rise in this industry.

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Figure 23: Total Assets under Management in India & Pakistan

Total Assets under m anagem ent by M utual Funds in 2002 A Com parison betw een India & Pakistan

1,080,000 1,200,000 1,000,000 Rs in Million 800,000 600,000 400,000 2,500 200,000 0 Pakistan India Pakistan India

This graph shows how small the Pakistani mutual fund industry is as compared to India although mutual funds were started almost at the same time in both countries. Although in FY 2009 net assets under management by mutual funds went up to 120 billion but these are still far behind against India’s Rs. 1.08 Trillion assets. A total of 31 mutual funds boost of record net assets of $1.66 billion in Pakistan, which is equal to 1.7 per cent of the GDP. But India's 33 mutual funds, offer more than 400 schemes and their net assets totals $33 billion (4.9 per cent of the GDP). A private sector local mutual fund market has developed rapidly but is still dominated by an efficiently-run state-owned National Investment Trust.
REASONS BEHIND THE GROWTH OF MUTUAL FUNDS IN INDIA

Primary drivers behind this growth paradigm witnessed in India are: • • • Improvement in tax regulation Establishment and rebalancing of regulatory procedures Board reforms and lifting of government controls
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In India mutual funds have grown in number and size mainly due to the keen interest of individual investors— who have realized the advantage on investing in mutual funds.

Furthermore, capitalizing upon the advantages with reference to IT sector growth also reflected in deepening and broadening of the financial markets.

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8. PRESENT AND FUTURE CHALLANGES
8.1 Present

Pakistan’s Mutual Fund industry holds a promising future because: • Low interest rate scenario prevailing in the country, investors are greatly attracted towards equities especially current low returns on National Saving Schemes (NSS) created an opportunity For Mutual Fund Industry to grow by attracting more and more investors through better returns. • Mutual Fund industry got an opportunity for growth after Central Bank last year barred banks to establish separate asset management subsidiaries and allow them to invest more than 20 % of their equity directly in the Stock Market. • Mutual funds are popular only in few big cities of the country and huge market in smaller cities of the country is still untapped. So these funds have an opportunity to attract those markets. • As recently SBP has given permission to mutual funds to invest abroad this decision brings in new opportunities for growth of this sector now mutual funds could initially look towards such countries as Sri Lanka, Bangladesh, Thailand and Malaysia for making foreign investment there. Later on they can even move in Chinese, Middle East and North African markets selectively 17. Thus can diversify the risk for their portfolio and can earn better returns. Now these funds will not solely dependent upon performance of Pakistani market and stock exchange but also on other foreign markets. • By investing abroad fund managers will be able to bring back returns earned on it, to home thus paying taxes to the Government.

17

Stated by Nasim Beg, CEO of Arif Habib Investments
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Another opportunity for the mutual fund industry is to establish real estate investment trusts (REITs). The benefit of REITs will be that property will become earning assets and small investors would also be able to gain from the real estate boom. Another benefit of REITs would be that a comparison will be available between the performance of those mutual funds investing in stock market and those investing in real estate (REITs). This way the boom in real estate sector will provide benefit to the individual investors as well.

More recently, mutual funds were allowed exposure in new types of financial instruments including derivatives and foreign securities, and expand their activities into such businesses as pension funds, provident funds, and venture capital funds management.

8.2

Future Challenges

Pakistan’s Mutual Fund industry is facing many challenges to reach on the successful and prosperous position in the economy: • Since mutual funds are now allowed to make investment abroad a risk of misuse of the facility that can have a drain on Pakistan’s foreign exchange reserves, thus SBP has to put safeguards in place. For this purpose a proper regulatory frame work needs to be developed to safeguard the vested interests of the investor. • As mutual funds were allowed exposure in new types of financial instruments thus, regulations and operating standards related to disclosure, valuation, performance measurement as well as internal control, governance, and risk management systems need to be expanded to take into account these new activities. Further, the enforcement and investigative capabilities of the regulator require strengthening to cope with the increasingly complex financial transactions and expansion in the scope of mutual funds operations.

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There is a dire need for the reformation of regulatory framework. This will also ensure more growth in investment. The Mutual fund reforms are essential for the development of capital market. These should be brought under the regulation of SECP18.

There is a need to strengthen the legal and judicial structure of the Securities and Exchange Commission of Pakistan (SECP) aimed at restoring the investors’ confidence in the capital market.

The challenge is to expand the accessibility to funds and timely monitoring of these funds is necessary as well.

The level of corporate governance at the listed companies is required to improve by SECP and it should be fully implemented and followed. Regulations also need to be properly imposed to gain the confidence of investors.

18

Habib ur Rehman, chairman and chief Executive ABAMCO
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9. CONCLUSION & RECOMMENDATIONS
9.1 Conclusion

The market is an ever-changing place – new concepts and products are being introduced continuously. Some products are common in other markets but not as yet in Pakistan. I have attempted to address the hurdles arises time to time in mutual fund industry of Pakistan. The number of mutual funds, their paid-up capital and number of investors in mutual funds is too small in Pakistan as compared to other countries. This can be attributed to a number of factors, worst being the GOP policies. NIT in Pakistan and UTP in India were established around the same time. But the value of portfolio of UTP India exceeds Rs. 44 million. The portfolio of NIT is too small compared to that of its Indian counterpart. In Pakistan, even the biggest privatesector funds have not been able to entice more than 5,000 individuals, less than 0.003 per cent of the population Even if one keeps the population of India and Pakistan in Mind, the ratio is still dismal. For Pakistan to attain and sustain economic growth similar to that of the newly industrialized countries (NICs) and its ASEAN neighbors, it must it must improve its ability to mobilize investment funds. This means that savings mobilization should be enhanced. Mutual funds, however, did not flourish in Pakistan the way it did in other countries. The development of this industry was stunted because of the absence of a proper legislative framework. But the recent years have not only seen the revival of the mutual funds industry in Pakistan but also the activity has shifted from the public sector to the private sector with open-ended mutual funds having more attractiveness as compared to closed end mutual funds. Now the government and private sector has started giving attention to the development of the industry. Foremost, the government is now developing a legislative framework that allows an environment of prudent regulation, balanced

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with adequate flexibility, in order to encourage participants in the industry as well as promote stability and security. To bring in growth in the mutual fund industry the present government is paying attention to the following factors19: • • • • • • An effective monitoring and regulatory regime Capital Market Reforms Higher Corporate earnings Reduction in interest rates Entry of more players A buoyant stock market

The government should also update the amount of minimum paid-up capital required of investment companies. To encourage management companies to offer different types of funds that would cater to various kinds of investors and permitting them to switch from one fund to another at minimal cost, the bill should allow lower capitalization requirements for subsequent funds managed by existing management companies, which had already compiled with the minimum paid-up capital. In recent past, these funds have launched a number of new products such as Balanced Funds, Equity Funds, Money Market Funds, and Islamic Funds. Other innovative products are in the pipeline, which include Annuity Funds, Pension Funds, Infrastructure Funds, Real Estate Funds, Capital Guarantee Funds, Offshore Funds, etc. Furthermore, mutual funds or open ended investment companies should be allowed to increase their authorized capital stock without requiring them to subscribe to the increase in authorized capital stock. This is because the whole idea of mutual funds is to be able to sell the shares to many small investors.

19

10th Asia Oceania Regional Meeting, Manila Philippines, March 7-11,2009
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The present Government is giving full support to the Mutual Fund industry, particularly the management of funds for the pensioners. Real key to success for the mutual funds in Pakistan will be that how effectively these funds market and distribute/sale itself to individual customers because this is what lacks in the industry from the very beginning. Moreover, global trend of reliance on mutual funds as an active investment option is also emerging in the country and that will also add to the expected growth in this sector. It is believed that over the next five years the total size of Pakistan mutual funds sector would reach at least PKR 250 billion. Development of a vibrant mutual funds industry is essential for a country like Pakistan, where the savings rate and the number of equity investors is low as compared to other countries in the region. Thus present situation and Government policies are very favorable for the growth of this industry. If Government will take more steps to improve this industry it will soon become a lucrative market for investors. All the indicators are very positive and hopeful. 9.2 Recommendations

After analyzing the existing situation of mutual funds market in Pakistan I want to present recommendations on Internal Factors as well as on External factors.
Internal Factors 1) Scrutiny of Fund managers

Credentials of fund managers need to be scrutinized to ensure smooth and transparent flow and process of investment.
2) Reforms in Regulatory framework

There is a dire need for the reformation of regulatory framework. This will also ensure more growth in investment. The Mutual fund reforms are

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essential for the development of capital market. These should be brought under the regulation of SECP20.
3) Proper Marketing

The exposure of individuals to mutual funds should increase to other smaller cities of Pakistan. Thus there is a need to have a trained manpower to do the marketing for the Mutual Funds. To make the distribution network of funds more broad the asset management companies can use third party distributor to sell the funds.
4) Innovative Products

Mutual fund industry should come up with new innovative products to attract the investors. The industry should also bring in the concept of specialized funds and it should focus on the development, mobilization of income, commodity, real estate, provident, pension and prudential funds. The mutual fund companies should make different personalized products for investors with different risk appetites and investment objectives. For Example if we look globally we can see that very specialized funds can meet the specific investor needs such as education, marriage, house mortgage funds etc.
5) Strengthen the structure of SECP

The Government of Pakistan should strengthen the legal and judicial structure of the Securities and Exchange Commission of Pakistan (SECP) aimed at restoring the investors’ confidence in the capital market.
6) Accountability of Directors

Directors of closed end funds made accountable. Effective monitoring of these funds must be initiated. Analyzing the monthly statements of Profit and Loss, investments in listed and unlisted securities and brokerage commissions could be a good monitoring tool. Also auditors must be made

20

Habib ur Rehman, chairman and chief Executive ABAMCO
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separate for the fund and its manager. The will result in more transparent function of the fund.
External Factors 1) Government policies

Government of Pakistan should allow establishment of more and more open-end funds to ensure greater liquidity for the capital market. As it is seen that companies now are prefer to mobilize funds through debt instruments rather than borrowing from financial institutions.
2) Corporate Governance

SECP should improve the level of corporate governance at the listed companies and should make sure that all these are fully implemented and are followed. Regulations should be properly imposed. This step will help to boost investor’s confidence in equities market and make this market more efficient and attractive.
3) Breaking the monopoly

To encourage investments from the general public government’s national savings schemes should be discouraged and banking sector monopoly of deposit should go out. The private sector can replace the said instruments by developing mutual funds.
4) Elimination of systematic Risk

Government must rationalize rate of interest and systematic risk must also be eliminated from the stock market by virtue of reforms introduced by SECP.
5) Education and Information

There must be proper arrangement for the education of investors. There must be no hurdles in information flow. More access to information with accuracy will ensure more success to investors.
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6) Accessibility and Timely monitoring

There must be expansion in accessibility to funds and timely monitoring of these funds is necessary as well. 7) Teaming of Mutual funds and SECP The problem is Mutual Funds and institutions have all teamed in a way that they come together for buying of shares and leave market together, which increases speculative activity in the market. Investors follow them and in the process get affected. They sell in forms of groups. The Securities and Exchange Commission should look into these factors.
8) Credit Rating

There must be proper credit rating of funds on the mandatory basis, as this will make the funds perform much better as competition to get a good rating will rise.
9) Strengthening the Role of Trustees and Fund Managers

Role of trustees and custodians must be strengthened. Qualified professionals with proven track record must be allowed to function, as Fund Managers. This will encourage more investment growth in Mutual Fund industry. 10) General Public Awareness General public needs to be made aware of the fact that investments in mutual funds could be really lucrative as compared to normal bank accounts and they need to broaden their horizons. A normal bank account in days of extreme interest rates could pay maximum of around 10 percent but a mutual fund like ABAMCO paid 30% in the year 2008. Hence the difference is huge and people are missing out on handsome profits by just being afraid of investments in the managed funds. 11) Banks could form Mutual Funds
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Many international banks like Citibank have their own mutual funds. In this way banks could benefit in a huge way. Also people will trust it more because of its established repute and brand name in the market. This way banks can attract most of their customers to pool their money in their funds and get handsome amount of money. Thus Government should encourage credible banks to open their own asset management companies, as this will increase investments from general public because of their confidence in the bank. 12) Investing abroad It should be ascertained that only those allowed, who have out-performed the KSE index consistently for the last three years should be ensured that only those should be allowed who have distributed all of their income earned. That investment should be permitted in only shares not in options and futures where the element of risk is higher. Investment should be restricted to listed securities which have not suffered a loss for last three years and investments can be made only in debt instruments which are of investment grade i.e. BB rating. Given the prevailing economic opportunities and investment scenario in Pakistan, there is no reason why mutual funds cannot show improved performance and stimulate this key sector of Pakistan’s economy.

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BIBLIOGRAPHY
BOOKS  A Guide to Understanding Mutual Funds published by investment company institute (ICI) .How mutual fund works by Albert J. Fedman. Russwilles, Chapter 2 page 34  ICP annual report 2009-2010  Investor Wonders Why He should Buy Mutual Funds by General News Publication October 26 2008  Mutual Funds Management and Working by Indian author Lalit K Bansal.  NIT annual report 2008  Research Publication by ICI (Investment Company Institute) Under Section Research by Publication: “Mutual Fund Book 2008”  SECP Annual Report 2009  Source data provided by SECP, Interview with Mr Channa of Specialized Company Division  The Morning Star Approach to Investing Wiring into Mutual Fund Revolution by Andrew Leckey page 35. ARTICLES  10th Asia Oceania regional meeting Makati Shangri-la hotel, Manila, Philippines march 7 - 11, 2009  An interview with Furqan Ahmed, Associate, ABAMCO Limited, A Jahangir Siddiqui Group Company  An interview with Mr. Ahmed Hassan, Area Supervisor, NAFAF FUNDS Investments Management limited  Article by Azhar Mahmood, SECP drafts rules for real estate trusts: The News- Jang Group; August 06, 2009  Article by Dilawar Hussain, Mutual funds getting popular: DAWNBusiness; 02 February, 2009
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 Article by Dilawar Hussain, Small investors route to equity investment: Mutual Funds-DAWN-Business;22 August,2009  Article by Mohiuddin Aazim, Mutual Funds can invest abroad: DAWNBusiness; August 14, 2009  Article by Naween A. Mangi, Real estate investment trusts on the cards: DAWN-Business; June 6, 2009  Article published in DAWN: Mutual funds net asset value up: DAWNBusiness; 25 April,2009  Dilawar Hussain, Mutual funds getting popular, DAWN/Business, 02 February, 2009 http://www.dawn.com/business  http://www.jang.com.pk/thenews/dec2009-daily/16-122009/business/b18.htm  Mutual Fund Association of Pakistan (MUFAP) address to press – THE DAWN 2008 issue – The investors guide.  News article published in dawn on 24th august 2009,”mutual fund industry assured of tax benefits.” WEB LINKS  http://www.nit.com.pk  http://www.scsecurities.net/market_report.asp  http://www.jang.com.pk/thenews/feb2009-daily/04-022009/business/b2.htm  http://www.dawn.com/2009/08/14/ebr6.htm  http://finance.indiamart.com/india_business_information/mutual_funds_per formance.html  http://www.uamcl.com/download/article.pdf  http://www.privatisation.gov.pk/finance/NITL/nit.htm  http://www.arifhabib.com.pk/ahi_home.asp  http://www.sbp.org.pk/publications/FSA-2008/Contents.pdf  http://www.kse.com.pk/kse4/index.html

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 http://www.ubl.com.pk/investment/key.asp

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