Mutual Fund

Group Members

Sharyar Anjum F12BA007Kainat Saleem F12BA027Mariam Arif F12BA029Muharra Bukhari F12BA043Fiza Majid F12BA052

ContentWhat are Mutual Fund?History of Mutual FundStructure of Mutual FundTypes of Mutual FundRules that govern Mutual FundRole of SECP and MUFAPCharges in Mutual FundNet Asset ValueTaxationAdvantages and Disadvantages RiskPortfolio ManagementHow investors earn in mutual Fund?How to invest in Mutual Fund?

Mutual FundMutual Fund is an investment programme funded by shareholders that trades in diversified holdings and is professionally managed.An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities.Each investor gets a share of the pool proportionate to the initial investment.

Mutual Fund w.r.t Capital Market

Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested in capital market instruments such as shares, debentures, stocks and other securities.Mutual fund is the most suitable investment for a common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Mutual Fund w.r.t Money Market

It is a category of liquid funds in which investment is done entirely in cash/cash equivalent securities with less than one year maturity, referred to as money market instruments.The purpose of these funds is to provide a safe place for investment in easily accessible cash-equivalent assets characterized as low-risk, low-return investment.

Flow of Fund

History of Mutual FundThe first mutual fund was established in Europe.A Dutch merchant Adriaan van Ketwich created the first mutual fund in 1774. First mutual fund outside the Netherlands was the Foreign & Colonial Government Trust, which was established in London in 1868.Mutual funds were introduced in United States in 1890s. They became popular during the 1920s.In 1893, the first closed-end fund “The Boston Personal Property Trust” was formed.

History of Mutual FundIn year 1924, the first open-end fund “Massachusetts Investors’ Trust of Boston” was the formed.In Pakistan NIT(National Investment Trust) offered first open end fund in 1962.ICP(Investment Corporation of Pakistan) offered a series of closed end funds in 1966, these were later privatized in 2000.1994-95 - More funds launched in private sector 2006 - Total number of AMCs are 30 managing 56 mutual funds

Parties involve in Mutual Fund

SponsorBoard of TrusteesCustodianAsset Management CompanyFund Manager/Portfolio Manager

Parties involve in Mutual FundSponsors:- Registered companies or financial institutions are called sponsors. Sponsors are the most important entity of mutual fund. Sponsors must have a good financial record in past.Trustee:- Refers to Board of Trustees who is given the legal responsibility to hold and safeguard the fund for the benefit of the unit holders. Trustees in MUFAP are NBP, CDC, HMB, MCBFS.Custodian:-It is an independent entity that holds and safe keeps the assets. Mostly financial institutions or banks act as custodians.

Parties involve in Mutual Fund

Asset Management Company:-It is the prime entity of any fund. It manages all the investments made by the investors. Records of pricing and accounting of data is looked after by these Asset Management Companies. It also calculates the Net Asset Value of the funds.Fund Managers/ Portfolio Managers:-Under an Asset Management Company, there are Fund Managers or Portfolio Managers, who take necessary decisions related to the investments made by the investors. They are the person who monitor and manage your funds and investments.

Structure Of Mutual Fund

Mutual Funds are operated by Asset Management Companies (AMCs) which exists in the form of a public limited company registered under Companies Ordinance, 1984.

The AMC launches new funds through the establishment of a Trust Deed, entered between the Asset Management Company and the Trustee, with due approval from the SECP under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (the “Rules”).

Structure of Mutual Fund

The Trustee performs the functions of the custodian of the assets of the Fund. The trustee ensures that the Fund Manager takes the investment decisions within the defined investment policy of the mutual fund.Under Pakistan law, banks and central depository companies, approved by the SECP, can act as trustee.At present Central Depository Company of Pakistan (CDC) is acting as Trustee of most of the funds of the industry.

Structure of Mutual Fund

The Securities & Exchange Commission of Pakistan (SECP) is the regulator of mutual funds industry and is very stringent in issuing licenses to fund management companies, especially in the case of Collective Investment Scheme (CIS).The SECP also carries out continuous monitoring of mutual funds through reports that the mutual funds have to file with the SECP on a regular basis.In addition, SECP conducts on-site inspections of the AMCs.

Types of Mutual Fund according to Maturity Period

Open Ended Mutual Fund:- “An open-ended Mutual fund is one that is available for

subscription and repurchase on a continuous basis.” These Funds do not have a fixed maturity period. The scheme provide excellent liquidity facility to the investors. The fund manager buys and sells units constantly as demanded by

the investors. The capitalization of the funds changes constantly as it is always

open for the investors to buys and sells their units. The buying and selling of units takes place at a declared NAV(net

asset value).

Types of Mutual Fund according to Maturity Period

Close Ended Mutual Fund:- “A close-ended Mutual fund has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme.”Such funds have fixed capitalization. Units of close ended schemes are traded on stock exchange in the secondary market.Price is determined on the basis of supply and demand. There are 2 prices for such funds, one that is market determined and the other is NAV based .

Types of Mutual Fund according to Investment

Equity FundBalanced FundAsset Allocation FundFund of Funds SchemeShariah Compliant(Islamic) FundCapital Protected FundIndex FundMoney Market FundIncome FundAggressive Fixed Income FundCommodity Scheme

Types of Mutual Fund according to Investment

Equity Funds:- An equity scheme or equity fund is a fund that invests in equities more commonly known as stocks. The objective of an equity fund is long-term growth through capital appreciation, although dividends and capital gain realized are also sources of revenue.At least 70% of the net assets invested in listed equity securities. Remaining net assets invested in cash or near cash instruments, treasury bills.

Types of Mutual Fund according to Investment

Balanced Fund:- These funds provide investors with a single mutual fund that invests in both stocks and debt instruments (Notes, Bonds, Certificates, Mortgages and leases) and with this diversification aimed at providing investors a balance of growth through investment in stocks and of income from investments in debt instruments.Rating of bank not lower than AA-.Weighted average time to maturity of non equity assets should not exceed 2 years.Investment in CFS and spread should not exceed 25%.

Types of Mutual Fund according to Investment

Asset Allocation Fund:- These Funds may invest its assets in any type of securities at any time in order to diversify its assets across multiple types of securities & investment styles available in the market.Fund of Fund Scheme: Fund of Funds are those funds, which invest in other mutual funds. These funds operate a diverse portfolio of equity, balanced, fixed income and money market funds (both open and closed ended).

Types of Mutual Fund according to Investment

Shariah Compliant (Islamic) Scheme: Islamic funds are those funds which invest in Shariah Compliant securities i.e. shares, Sukuk, Ijara sukuks etc. as may be approved by the Shariah Advisor of such funds. These funds can be offered under the same categories as those of conventional funds.Capital Protected Scheme: In this type of scheme, the payment of original investment is guaranteed with any further capital gain which may accrue at the end of the contractual term of the Fund. Such funds are for a specific period.

Types of Mutual Fund according to Investment

Index Scheme: Index funds invest in securities to mirror a market index, such as the KSE 100. An index fund buys and sells securities in a manner that mirrors the composition of the selected index. The fund's performance tracks the underlying index's performance. Money Market Scheme: Money Market Funds are among the safest and most stable of all the different types of mutual funds. These funds invest in short term debt instruments such as Treasury bills and bank deposits.

Types of Mutual Fund according to Investment

Income Scheme: These funds focus on providing investors with a steady stream of fixed income. They invest in short term and long term debt instruments like TFCs, government securities like T-bills, or preference shares. Aggressive Fixed Income Scheme: The aim of aggressive income fund is to generate a high return by investing in fixed income securities while taking exposure in medium to lower quality of assets also.

Types of Mutual Fund according to Investment

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

Rules that govern Mutual Fund in Pakistan

There are two rules govern mutual fund in Pakistan, which are;1. Investment Companies and Investment Advisors’ Rules,

1971. (Govern Close Ended Mutual Funds)2. Asset Management Companies Rules, 1995. (Govern

Open Ended Mutual Funds)

Role of SECP

&

Role of MUFAP

Role of SECP in Mutual Funds

Enhanced role of Trustee:-Every mutual fund is required to have an independent trustee as a key stakeholder in protecting the interests of the unit-holders. So, SECP believes that the role of trustee needs to be enhanced.Empowerment of Unit Holders:-The SECP believes in empowerment of unit holders of a fund and for the purpose, envisions that the unit holders may be provided specific powers (such as change of Management Company) in relation to material aspects of a fund.

Role of SECP in Mutual FundsProduct Innovation:-In order to promote the industry, the SECP is receptive to the innovative ideas and products that offer diverse solutions to satisfy the needs of participants of the industry. For this purpose, money market funds are under consideration.Independence of MUFAP:-In order to make the association more effective in meeting its mandate, its present board structure/composition is under review. The SECP will explore ways whereby some representation on behalf of trustees and investors through independent directors is achieved.

Mutual Funds Association of PakistanMutual Funds Association of Pakistan is the trade body duly licensed by the Government of Pakistan for the mutual fund industry in Pakistan. All Asset Management Companies (AMCs) and Investment Advisory ( IAs ) licensed by SECP to launch Mutual Funds and perform Investment Advisory Services are required under NBFC Rules 2008 to become Members of MUFAP.

Role of MUFAPThe MUFAP has a mandate to develop the industry, which includes Devising ways and means for ensuring investor protection.Policy Issues & Shaping RegulationMarket Practices – developing and implementing Industry Codes and GuidelinesInvestor awareness & educationResearch & Statistics Training

Frequently Use

Terms &

NAV (Net Asset

Value)

FREQUENTLY USED TERMS

Trust Deed:- It is the principal document of formation and management of mutual funds b/w AMC’s and Trustee.

FREQUENTLY USED TERMSSale Price:- Sale price is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.Repurchase Price:- It is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

FREQUENTLY USED TERMSRedemption Price:- It is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related. Sales Load:- Is a charge collected by a scheme when it sells the units. Schemes that do not charge a load are called No Load Schemes.

How do Mutual Funds determine their Unit Price?

NAV is the price at which investors buy (bid price) fund shares from a fund company and sell them (redemption price) to a fund company.The NAV is equal to the market worth of assets held in the portfolio of a Fund, minus liabilities, divided by the number of units outstanding. Formula to calculate NAV:-NAV = Current Market Value of all the Assets – Liabilities/Total Number of Units Outstanding

Calculation of NAVExample:- Lets assume that a particular mutual fund held Rs.20,000 worth of securities, Rs.10,000 of cash, Rs.5000 of liabilities. If the fund had 100 shares outstanding then NAV would be:NAV per share=(20,000+10000-5000)/100 NAV per share= 50.00

How do Mutual Funds determine their Unit Price?

In order to determine the sale price of the unit sales load is added to the NAV. In case there is no sales load the NAV will be the sale price as well as the redemption price. A fund’s NAV will change daily as the value of fund’s securities, cash held, liabilities and the number of shares outstanding fluctuates.

Charges Involved in Mutual FundFront-end Load:- This load is charged to investor upon investing in open-end fund, however some MUF’s are not charged this fee.Back-end Load:- This load is charged to investor when he redeems his investment in mutual fund, however some MUF’s are not charged this fee.Management Fee:-This is the fee charged by the AMC’s for the management of fund.

Taxation in Mutual FundsAs funds are listed at the stock exchanges, unit holders of the mutual funds, other than a company, are entitled to a tax credit under section 62 of the Income Tax Ordinance, 2001 on purchase of new units.Rate of withholding tax on dividend income from Mutual Funds:-

Stock FundsDividend received from stock fund if dividend receipts are less than capital gain than tax rate applicable is 12.5%

Taxation in Mutual Funds

All other mutual funds other than stock fundsFor Banks and Companies: Dividend received by a company from collective investment scheme, or a mutual fund, other than stocks than tax rate applicable is 25%.For individuals and other corporate and non-corporate unit holders tax rate applicable is 10% for filers and 15% for non-filers.

Taxation in Mutual Funds

Capital Gain Tax:- Holding Period

Where holding period of a security is less than 12 months , tax rate applicable is 12.5%Where holding period of a security is 12 months or more but less than 24 months, tax rate applicable is 10%.Where holding period of a security is 24 months or more ,tax rate applicable is 0%

Why do people invest in Mutual Fund?

Mutual funds offer investors an affordable way to diversify their investment portfolios.Mutual funds allow investors the opportunity to have a financial stake in many different types of investments.These investments include: stocks, bonds, money markets, real estate, commodities, etc…Individually, an investor may be able to own stock in a few companies, a few bonds, and have money in a money market account. Participation in a mutual fund, however, allows the investor to have much greater exposure to each of these asset classes.

Advantages of Mutual FundsProfessional Management:-Mutual Funds provide the services of experienced and skilled professionals, backed by a dedicated investment research team that analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.Diversification:- Securities from hundreds or even thousands of issuers it reduces the risk of loss.

Advantages of Mutual FundsConvenient Administration:-Investing in Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.Liquidity:- Mutual fund can be bought and sold on any business day, so investors have easy access to their money. Many individual securities can also be bought and sold readily.

Advantages of Mutual FundsTransparency:- Investors get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund managers investment strategy and outlook.Flexibility:- Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans; you can systematically invest or withdraw funds according to your needs and convenience.

Advantages of Mutual FundsChoice of Schemes:- Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.Affordability:- A mutual fund invests in a portfolio of assets, i.e. bonds, shares, etc. depending upon the investment objective of the scheme. An investor can buy in to a portfolio of equities, which would otherwise be extremely expensive.

Advantages of Mutual Funds

Dividend Reinvestment:-As dividends and other interest income is declared for the fund, it can be used to purchase additional shares in the mutual fund, thus helping your investment grow.

Disadvantages of Mutual FundsManagement Risk:-When you invest in a mutual fund, you depend on the funds manager to make the right decisions regarding the funds portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers.

Disadvantages of Mutual FundsNo Guarantees:- Performance of mutual funds are not guaranteed. Value of investment may go up or down.Units of funds are neither guaranteed by AMC’s or by the government.Lack of Control:-Investors typically cannot ascertain the exact make-up of a fund's portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.

Disadvantages of Mutual FundsPrice Uncertainty:-With an individual stock, you can obtain real-time pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stock's price changes from hour to hour — or even second to second. By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the fund's NAV, which the fund might not calculate until many hours after you've placed your order. In general, mutual funds must calculate their NAV at least once every business day, typically after the major exchanges close.

Disadvantages of Mutual FundsTaxes:-During a typical year, most actively managed mutual funds sell anywhere from 20 to70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive, even if you reinvest the money you made.

Risk in MUF’s Call Risk:- The possibility that falling interest rates will cause a

bond issuer to redeem or call its high-yielding bond before the bond's maturity date.

Country Risk:- The possibility that political events (a war, national

elections), financial problems (rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a country's economy and cause investments in that country to decline.

Risk in MUF’s Credit Risk:- The possibility that a bond issuer will fail to repay interest and

principal in a timely manner. Also called default risk. Currency Risk:- The possibility that returns could be reduced for Americans

investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk.

Income Risk:- The possibility that a fixed-income fund's dividends will decline

as a result of falling overall interest rates.

Risk in MUF’s Industry Risk:- The possibility that a group of stocks in a single industry will

decline in price due to developments in that industry. Inflation Risk:- The possibility that increases in the cost of living will reduce

or eliminate a fund's real inflation-adjusted returns. Interest Rate Risk:- The possibility that a bond fund will decline in value

because of an increase in interest rates.

Risk in MUF’s Market Risk:- The possibility that stock fund or bond fund prices

overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall.

Principal Risk:- The possibility that an investment will go down in value,

or "lose money," from the original or invested amount.

Risk Return

Approaches to Portfolio Management

Mutual funds can be broadly classified into two categories in terms of the fund management style i.e.

1. Actively managed funds2. Passively managed funds(popularly referred to as index

funds).

Approaches to Portfolio ManagementPassively Managed Funds:- Passively managed funds/index funds are aligned to a particular benchmark index like KSE 100 index KSE 30 index. The endeavor of these funds is to mirror the performance of the designated benchmark index, by investing only in the stocks of the index with the corresponding allocation.

Approaches to Portfolio ManagementActively managed funds:-Actively managed funds are the ones wherein the fund manager uses his skills and expertise to select invest-worthy stocks from across sectors and market segments. The sole intention of actively managed funds is to identify various investment opportunities in the market in order to clock superior returns, and in the process outperform the designated benchmark index.

Approaches to Portfolio Management

In active fund management two basic fund management styles that are prevalent are:

1. Growth Investment Style2. Value Investment Style

Approaches to Portfolio ManagementGrowth Investment Style:- The primary objective of equity investment is to obtain capital appreciation. this investment style would make the funds manager pick and choose those shares for investment whose earnings are expected to increase at the rates that exceed the normal market levels. they tend to reinvest their earnings and generally have high P/E ratios and low Dividend Yield ratio.

Approaches to Portfolio ManagementValue Investment Style:- The funds manager looks to buy shares of those companies which he believes are currently under valued in the market, but whose worth he estimates will be recognized in the market valuation eventually.

Investor Earn in three WaysInvestors can earn money from mutual funds in three ways: 1. Dividend Payments:- A fund may earn income in the form of dividends and interest on the securities in its portfolio. The fund then pays its shareholders nearly all of the income (minus disclosed expenses) it has earned in the form of dividends. 2. Capital Gains Distributions:-The price of the securities a fund owns may increase. When a fund sells a security that has increased in price, the fund has a capital gain. At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors.

Investor Earn in three Ways

3. Increased NAV:- If the market value of a fund's portfolio increases after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases. The higher NAV reflects the higher value of your investment. With respect to dividend payments and capital gains distributions, funds usually will give you a choice: the fund can send you a check or other form of payment.

How to invest in Mutual Funds?So let’s suppose you decide that you want to start investing in the KSE Meezan Index Fund.You will be asked to fill out two forms. One is a form from the investment management company itself. The second is a form from the Central Depository Company of Pakistan. The CDC is the central registry of all investment transactions in the country. It exists to make sure that your asset management company or brokerage firm cannot simply run away with your money. It is not impossible for investors to be cheated by their broker or fund manager, but it is now more difficult because of the CDC.