Mutual Funds

INTRODUCTION

Mutual Fund

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

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

The savings to GDP ratio is already low in Pakistan. With the reduction in purchasing power and declining rates of return on bank deposits and national savings schemes, analysts fear further decline in savings rate. Therefore, it is of prime importance for the people to know about the various available investment options to maximizereturn on their savings.At present equities offer very attractive dividend yields. However, an average person neither has the expertise nor the required information to take the best advantage of the available opportunities.

A Mutual Fund is an ideal investment vehicle where a number of investors come together to pool their money with common investment goal. Each Mutual Fund with different type of schemes is managed by respective Asset Management Company (AMC). An investor can invest his money in one or more schemes of Mutual Fund according to his choice and becomes the nit holder of gee scheme. The invested money in a particular scheme of a Mutual Fund is then invested by fund manager in different types of suitable stock and securities, bonds and money market instruments. Each Mutual Fund is managed by qualified professionals, who use this money to create a portfolio which includes stock and shares, bonds gilt, money market instruments or combination of all. Thus Mutual Fund will diversify your portfolio over a variety of investment vehicles. Mutual Fund offers an investor to invest even a small amount of money.

Mutual Fund schemes are managed by respective Asset Management Companies sponsored by financial institutions banks, private companies or international firms. Mutual Funds offer several benefits to an investor such as potential return, liquidity, transparency, income growth, good post tax return and reasonable safety. There are number of options available for an investor offered by a mutual fund.

A Mutual Fund may float several schemes which may be classified on the basis of its structure, its investment objectives and other objectives.

While building a high yielding portfolio is very difficult, one can maximize his or her return by investing in mutual funds. Theoretically, a mutual fund is a pool of money belonging to a group of investors entrusted to a Fund Manager hired by the group. The Fund Manager invests the money on behalf of the investors. The Fund Manager is paid a management fee. If there is a profit or gain on investments, it belongs to the investors. In case there is a loss, it is also borne by the investors.

The Mutual Funds sector has been growing in size and also attaining greater diversity of portfolio. The growth in paid-up capital may look substantial but the size is still too small as compared to international standard. The in-road made by the private sector and transfer of management rights of ICP managed funds to private sector has reduced the quantum of funds being managed by the public sector. More and more funds are being listed and contributing towards the growth of capital market.

A Mutual Funds is a pool of money set up for the purpose of investing in financial instruments according to its objective. It is a professionally managed investment company that offers investors through the issuance of Certificates/Units an array of benefits unique in the investment world. Typically there are two categories open-end and closed-funds. Mutual funds generate income from dividend received from its investment and capital gains.

Mutual Funds face two types of risks, system risk and non-system risk. The system risk primarily constitutes the country risk and market risk, which cannot be mitigated due to its very nature. In some cross border mutual funds this risk is minimized but cannot be eliminated completely. The non-system risk is the risk taken on the capability of the Fund Management Company to sure diligent and effective execution of a market-based investment strategy for optimization of returns.

Until beginning of nineties, mutual funds were the exclusive domain of public sector. NIT was floated in 1962 and ICP was established in 1966. NIT remained the only open-end fund for more than three decades. Over the years, ICP floated 26 closed-end funds only. During 1991-96 period 12 funds were floated by the private sector but all of them were closed-end funds. The regulators at that time did not consider private sector competent enough to manage open-end funds. However, the time has proved that it was an incorrect policy.

Over the last few years, as the market experienced 'over flowing liquidity' and interest rates declined. Particularly the return on National Savings Schemes was curtailed to reduce the GoP's debt servicing. This led to influx of savings to equities market at tremendous volume. While a large number of investors may have made large gains by investing in equities market, even larger number lost the life-savings. Simply because they did not have the complete insight of the market. The lack of knowledge is not exceptional to Pakistan, it is more or less a universal phenomenon. What could be the way out?

Globally mutual funds are considered an appropriate investment vehicle for small investors. This is evident from the size of mutual funds sector and the number of investors in such funds. One of the indicators is percentage of bank deposits invested the funds. In the USA, mutual funds are 125% of the bank deposits, it may be an exception. In India the size is about 15% of the bank deposits. As against this the level in Pakistan is as low as 5% of the bank deposits. The only encouraging sign is that it has grown from 3% to current level in last couple of years. There it can be said conveniently that the sector enjoys enormous growth potential.

However, one of the concerns is, will the investors face the similar situation that they faced in nineties. The immediate and categorical reply of the fund managers is No. They say that both the fund managers and the regulators have learnt a lot from past mistakes and are acting very cautiously at present. In early nineties, the regulators dished out licenses rather recklessly and also lacked competence to monitor. As against this, at present Securities and Exchange Commission of Pakistan (SECP) is autonomous body with qualified and knowledgeable personnel. Licensing procedure is very stringent and demands greater disclosure. Therefore, it is expected that working of funds would be monitored more effectively.

Another indicator of realization of market realities is the growing size of open-end funds. Some of the analysts say that managers of open-end funds have to be more vigilant simply because they have to announce unit price periodically, ranging from daily to weekly basis. The unit sale/purchase price is based on net asset value (NAV). Any reduction in NAV automatically reduces the unit price. The fear of higher redemption, in case of substantial fall in NAV, is always there.

Against this, there are more chances of price manipulation of shares of closed-end funds. Investors get information about the financial health of funds only when they received quarterly reports. On top of this. if an investor wish to sell the shares he/she gets a price which is based on demand and supply phenomenon. Whereas, an investor in open-end fund can redeem the units more conveniently.

Similarly the fund managers are now following better practices and acting more prudently in picking up equities for investment. One of the indicators is that in nineties fund managers bought scrips at earning multiple of as high as 22. Whereas, they are cautious at 10 times multiple. The historic earning multiple in Pakistan has been around the same level.

However, some of the analysts say that the probability of 'parking bad investment in mutual funds' is still a serious concern. They say that most of the funds have been floated and are being managed by brokerage houses. Therefore, probability of parking bad investment in closed-end remains high.

They also say that some of the mutual funds also take active part in day-trading. Since the market is bullish at present they have sold out some of the investments made in the past to achieve capital gains and diverted the funds to scrips offering growth as well higher earnings potential. The concern is that some of these scrips still face rather fragile economic fundamentals.

Whereas, the fund managers say, "We constantly review our portfolio and make regular adjustments as we cannot remain contended on a few scrips. We do follow dividend yield methodology but we also take into account dividend payment ability of the companies and payout track record. On top of every thing now the typical portfolio of a fund is balanced. The portfolio normally comprise of equities, debt instruments and some times also include investment in money market."

Some of the analysts also say that most of the funds do not have any contingency plan, in case of a fall out. This expression is based on the perception that the KSE-100 index will continue its upward movement. No one seems to be ready even to listen that the index may plunge one day. However, one should always remember an old say that any thing that goes up has to come down eventually.

In this regard it would be more appropriate to mention the various rationale being put forward and let the investors make informed decision. The first argument is that while the index has attained the present level, the investment in quality scrips is still justified on dividend yield parameter. The second argument is that a number of scrips were being traded at a discount to their fair value and the recent increase in their prices is based on the earnings potential. The third argument is that with the decline in interest rates, revival of the economy and increase in investment in new ventures per capita income of an average person has led to greater spending. The growth in profitability of companies belonging to FMCG and services sectors substantiate greater spending. On top of this, the GoP's policy of divestment of shares of state-owned entities and listing of new companies are providing additional impetus. Therefore, the equities market is expected to remain vibrant in the foreseeable future. Only an external event can lead to free fall. In such a scenario all the investors will be affected and mutual funds cannot remain an exception.

The Concept of Mutual Funds:

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

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

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

Types of Mutual Funds:

There are two types of mutual funds, which are:

Open-end mutual funds

Closed-end mutual fundsOpen-Ended Mutual Fund:Open-end mutual funds are those where subscription and redemption of shares are allowed on a continues basis. The price at which the shares of open-end funds offered for subscription and redemption is determined by the NAV after adjusting for any sales load or redemption fee. In Pakistan there exists thirteen open ended mutual funds; National Investment (Unit) Trust (NIT) in the public sector and Pakistan Stock Market Fund (PSM), Pakistan Income Fund (PIF), Unit Trust of Pakistan (UTP), UTP Income Fund, UTP Islamic Fund, United Money Market Fund (UMMF), Dawood Money Market Fund (DMMF), Atlas Income Income Fund (AIF), Crosby Dragon Fund, Meezan Islamic Fund (MIF) and Faysal Balanced Growth Fund in private sector.

Closed-Ended Mutual Fund:

Closed-end mutual funds are those where the shares are initially offered to the public and are then traded in the secondary market. The trading usually occurs at a slight discount to the NAV. In Pakistan there exists Eighteen close-end mutual funds.

Over a period of time, the mutual fund managers have developed a variety of investment products to cater for the requirement of investors, having different needs.

These include:

1. Growth funds

2. Balanced funds

3. Income funds

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

2. Balanced Funds

The "growth and income funds" or "balanced funds", offer prospects of both moderate appreciation in share value as well as current income. The fluctuation in share price may be low. Such funds invest in stocks, corporate debts and Government paper.

3. Income FundsThe "bond fund" or "income funds", offer good current income but very little potential for growth. Such funds invest in government paper, bonds issued by municipal or local bodies, corporate debts and in stocks of utility companies, offering regular return.

CLOSED-END MUTUAL FUNDS AS ON JANUARY 30, 2004

FUNDPAID UP CAPITALQUOTED RATE(RS IN MILLION)

Al-Meezan Mutual Fund775.0014.45

Asian Stocks Fund100.005.50

BSJS Balanced Fund1,054.0012.95

Dominion Stock Fund50.002.95

First Capital Mutual Fund150.007.00

Golden Arrow100.5011.00

Investec Mutual Fund100.003.05

1st ICP Mutual Fund125.0014.50

2nd ICP Mutual Fund57.5016.50

3rd ICP Mutual Fund122.5016.50

4th ICP Mutual Fund122.5036.50
















21st ICP Mutual Fund100.006.80

22nd ICP Mutual Fund230.0013.90

23rd ICP Mutual Fund200.007.35



ICP SEMF1,260.0051.80

Pakistan Premier Fund675.0015.25

Prudential Stocks Fund60.002.55

Safeway Mutual Fund165.008.00

Tri-Star Mutual Fund50.002.50

OPEN-END MUTUAL FUNDS FUNDNAV

Dawood Money Market FundRs 104.27

Meezan Islamic Fund57.60

NIT28.00

Pakistan Income Fund53.37

Pakistan Stock Market Fund102.31

United Money Market Fund103.29

UTP82.45

UTP - Income Fund521.5

UTP - Islamic Fund641.75

Net Asset Value (NAV)

A fund's NAV is equal to the market value of its underlying assets, which include stocks, bonds and other securities and assets which are held in the portfolio, minus liabilities, divided by the number of units or shares outstanding. The quality of underlying assets representing NAV is very important. To assess, the investor has to rely on mutual fund rating and refer to the annual report. Investment Managers would like the NAV of their fund to grow by the accretion of income or appreciation in market value of investment

Fund Types According to Investment Objective

Fixed-Income

These funds primarily invest in assets that pay a fixed-Rupee amount e.g., bank deposits, treasury bills, term finance certificates and government bonds. They are generally not affected by volatility at the stock exchanges. The element of risk is low and so is the return

Balanced

These funds carry in their portfolio, a reasonable mix of equity and fixed income securities. These types of funds put more emphasis on equity investments when the outlook is bright and will tend to switch to fixed income securities when the future is expected to be less attractive for shares. The element of risk in a balanced fund is moderate and the return is relatively high because of diversification.

Equity

These funds invest mainly in equity of companies and undertake the risk of price movement at the stock exchange. Such funds are clearly expected to out-perform other types of funds in a rising market. When the market Janlines, equity funds tend to under-perform, when compared with other types of funds. Their strength is the expected capital appreciation and windfall income through capital gains. However, such funds are prone to losses when the market

Mutual funds enjoy strength because of availability of professionals, ability to diversify, expertise to match investment with risk and large liquidity. An average investor is not well versed with the market, may not have access to adequate information or does not have time to acquire information and analyze it. By investing through a mutual fund, the investor is able to acquire the services of a team of professionals dedicated to the investment business at a very low cost. An investor normally invests small amount and cannot achieve an adequate level of diversification. An investor who wishes to invest small amount can do so by investing in mutual funds. Whereas such small investors are not entertained normally by the brokers.

Mutual funds invest in a variety of products, i.e. equities, debt instruments and money market instruments. Such a diversification on the one hand minimizes the probability of losses and on the other hand allows the investors to choose a fund of its own choice. At the same time allocating one's fund to several mutual funds, the investor can balance out the investments into a combination that suits his/her risk taking ability and preference for the intervals of receipts of returns.

Money invested in mutual funds can be redeemed either by selling the shares of a closed-end fund in the market or simply asking the fund manager for redemption in the case of an open-end fund. There are no penalties for early termination of an investment, which one may have to suffer in the case of term deposits with banks or other savings schemes.

Structure Of Mutual Funds:

A typical MF in Pakistan has a number of constituents.

Fund Sponsor:

A sponsor is any person who, acting alone or in combination with another corporate body, establishes a MF. It obtains the certificate of registration as a MF from Securities and Exchange Commission of Pakistan (SECP). The sponsor of a fund is similar to the promoter of a company. In accordance with SECP Regulations, the sponsor appoints a Trustee, and also generally appoints an Asset Management Company (AMC) as fund manager.

Mutual Fund: A MF is constituted in the form of a trust under Trusts Act, 1882. The instrument of trust i.e. Trust Deed is made between the AMC and Trustee and is registered under the NBFC Rules, 2003. The fund invites investors to contribute their money in the common pool, by subscribing to units issued by various schemes established by the trust. The trustee for the benefit of unit holders, who are the beneficiaries of the trust, holds the assets of the Trust. Under the Trusts Act, the trust or the fund has no independent legal capacity; it is the trustee(s) who have the legal capacity.

Trustees:

The trustee as per NBFC Rules means, a company appointed as a Trustee and includes a bank licensed under the Banking Companies Ordinance, 1962 or a trust company which is a subsidiary of such a bank or a banking institution incorporated outside Pakistan acceptable to the SECP or a Central Depository Company approved by the SECP or a NBFC carrying out investment finance services, provided it has been approved by SECP to act as trustee. The trustees being the primary guardians of the unit holders' funds and assets have to be persons of high repute and integrity. The Trustees, however, do not directly manage the portfolio of securities. The portfolio is managed by the AMC as per the defined objectives, in accordance with the trust deed and NBFC Regulations. Central Depository Company of Pakistan Limited is playing a major role in the Mutual Fund sector by providing trusteeship services to majority of mutual funds in Pakistan.

Asset Management Company: The Asset management Company (AMC), which is appointed by the sponsor or the Trustees and approved by SECP, acts as the investment manager of the Trust. As per the NBFC Rules, AMC provides services for management of open-ended schemes, which include offering of investment schemes under, trust deeds and issue of redeemable securities. It functions under the supervision of its Board of Directors, and also under the direction of the Trustees and SECP. In Pakistan, the major AMCs are NIT Management Company, Abamco and Arif Habib Investment Management Company.

Investment Advisor:

Investment advisor provides services for management of closed-end funds, which include the business of advising as to the value of securities for investing in, and purchasing or selling of securities for remunerations. Major investment advisors in Pakistan are Abamco, and PICIC.

Pools of Money

Mutual funds are pools of money provided by different investors and managed by an investment adviser or an asset management company.

Goal

Mutual Funds have a variety of goals

Some seek to generate income on a regular basis, while aiming to preserve the original investment/ principal.

Some seek to provide investors long-term capital appreciation, current income and at the same time attempt to preserve the original investment.

Some seek to make the investment grow over a period of time. The current income (dividend yield) may be low.

Regulation

Mutual funds are regulated by the Securities and Exchange Commission of Pakistan (SECP)

Transparency

All mutual funds are required to provide unit holders with quarterly, semi-annual and annual reportsRisks of Investing in Mutal Funds

All investments in mutual funds and securities are subject to market risks. Their target return/ dividend range cannot be guaranteed. Their price is neither guaranteed nor administered/ managed. It is based on the NAV, which may go up or down depending, to some extent, upon the factors and forces affecting the stock market. Past performance is not necessarily indicative of future results. The risk may vary depending upon the investment strategy of funds and whether they are balanced, fixed-income or equity funds.

Global Mutual Fund Industry

Mutual find or a Unit Trust, as it is called in some parts of the World, is a very old phenomenon. Mutual fund got their stat in the 19th century when shares in investment trust were first sold to the British investors. The first U.S. fund got off the ground in 1924 Massachusetts investors Trust. However, the bull market of late 90s gives new dimension to the mutual fund industry. The factor behind the phenomenal growth in the mutual find industry was strong economics and corporate profit growth low inflation technological innovation, exceptional stock returns and relatively low interest rates. If he has been a sweeping success n the investment world in recent years it is clearly the mutual funds industry .The mutual find is a proven investment vehicle the world over. IN the most developed global financial markets, mutual finds have almost taken over ban k deposits and the assets of insurance funds. N the U.S. alone, there are over 5000 ,mutual funds having a total asset worth approximately U.S. $6 trillion Mutual finds in the U.S. are popular with both novice and sophisticated investor alike, offering both a convenient and affordable way to invest.

However, Mutual funds industry is a market sensitive business; it has been so since its inception. In U.S the stock market took a plunge in 1973, again in 1987 we witnessed the Black Monday but thereafter the great bull market of nineties emerged. Instead of burning fingers all the time and fighting big guys battle, the Americans have devised mutual funds to avoid daily bumpy rides, if You have the money to invest mutual funds offer an easy way to assemble to portfolio of diversified investment that match you financial circumstances, and you can have it professionally managed at a low cost.

In south Asia Indias mutual find industry also performed very well over the years. 1964 first ever mutual funds, namely unit trust of India was launched in India in order to mobilize the household savings for capital market investment. Indian mutual Fund market went through different stages. IN the first stage (1964- 1987) there was only one fund with a total asset of Rs. 67 billion at the end of 1988. IN 1980s India introduce a number of economics liberalization reform polices which prompted a rapid growth in second stage (1987- 1993) there were 9 mutual finds and total assets under management grew to Rs. 610 billion. 1990s implementation of economic reforms and resulting prosperity enhanced both the number and size of mutual fund industry therefore, in the third stage (1993- 2001) private and foreign sectors entered the mutual find industry and number of mutual fund rose to 32 with a toal asset size of Rs. 1.13History of Mutual Funds In Pakistan

The Investment Corporation of Pakistan (ICP) established ICP Mutual fund as closed ended mutual funds under Investment Corporation of Pakistan Ordinance 1966 (herein after referred as Ordinance). These funds are governed under the Ordinance, ICP (General) Regulations, 1966 and prospectuses of individual funds. In terms of prospectuses, the investments of the ICP Mutual funds have been made in securities listed on the stock exchanges in Pakistan. The Mutual Funds are listed on the three stock exchanges in Pakistan.

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

Currently there exists One open end (NIT) mutual fund in public sector. Twelve open-ended and Eighteen closed-ended mutual funds under private sector management, and there are many more Funds in scenario.

The Mutual Funds has been around for a long time, dating back to the early nineteenth century. The first modern day mutual fund was opened in America in 1924, but the great depression of 1930s had stalled the growth of mutual funds like many other economic activities. Yet it was the 1990s that mutual funds became mainstream investments in the USA and the world. Pakistani market also took the initiative and we have witness sprouts of mutual funds. The industry moved from infancy to crawling age has now reached a walking age, and pretty soon by the grace of Almighty we would reach the exuberant age of running. Today we have twenty-four mutual funds altogether, and more in the conduit. Of them, ten are in Open-end class and fourteen are in Close-end class.

Mutual FundsA Brief History NIT/ ICP Establishment1962 & 1966

ICP Lunched Series of Funds1967 1995

SEMF 1980

Right Issues1997

Investment Advisers' Rules1971

Golden Arrow Selected Stock Fund Ltd.1983

Private Sector Funds(8) 1990 - 1994 (Over-subscribed)

Private Sector Funds(4) 1995 - 1996 (All Under-subscribed)

Asset Management Rules1995

MUFAP1996

UTP1997

Mutual FundsSome Basic Facts

Funds Under ManagementRs. 27 Bn

Mutual Funds ShareholdersBanks/ NBFIs/ PFs/ Individuals

Closed-End Paying Dividends18/ 39

Closed-End Funds SubscriptionRs. 4.76 Bn

Closed-End Funds NAVRs. 7.102 Bn

Closed-End Funds Market ValueRs. 3.61 Bn

Rules Govern Mutual Funds in Pakistan

There are two rules govern mutual funds in Pakistan,

which are:

Investment Companies and Investment Advisors' Rules, 1971. (govern closed-end mutual funds)

Asset Management Companies Rules, 1995. (govern open-ended mutual funds)

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, twenty six, is managed by the ICP. There are 11 closed-end mutual funds operating in private sector. Whereas NIT and ICP operates in public sector. The GoP intends to privatize both the entities. The total paid-up capital of 37 mutual funds listed at Karachi Stock Exchange is over Rs 4,751 million. However, a number of these are being quoted below face value.

According to some sector analysts the number of mutual funds, their paid-up capital and number of investors in mutual funds is too small. They attribute this to a number of factors, worst being the GoP policies. NIT in Pakistan and UTP in India were established around the same time. While the value of portfolio of UTP India exceeds US$ 44 million the portfolio of NIT is too small compared to that of its Indian counter part. The same is also true about the number of unit holders. Even if one keeps the population of India and Pakistan in mind, the ratio is still dismal.

They say that one of the major reasons for growth of mutual funds has been the GoP insistence on not allowing establishment of open-end funds in the private sector. At present only one such fund is operating in private sector in Pakistan, BSJS Balanced Fund. The apprehensions of the regulators were that private sector could not manage an open-end fund efficiently and prudently. This impression was mainly due to the poor performance of closed-end funds managed by the private sector.

Most of the private sector closed-end funds were established in early nineties, when there was a boom in equities market, prices of scrips were high and investment in equities only was possible corporate debt and money market instruments were not common at that time. Therefore, when equities market plunged most of the funds posted huge losses. Some analysts say, "While a lot of blame goes to sponsors and managers of private sector funds, the market conditions were also responsible for the fiasco."

However, some analysts say, "It is true that market sentiments led to huge losses, but the blame should also go to sponsors for managing funds in imprudent manner. Some of the funds were used for 'parking' of bad transactions. If one may recall, a number of mutual funds were sponsored by brokerage house or those who used the funds for trading of equities. Most of these sponsors indulged in speculative trading rather than taking long positions or making long-term investment. The concept of parking of bad transaction in mutual fund account was used to avoid immediate loss, in the hope of recovery.

The recent announcement of results by Arif Habib Securities, BSJS Balanced Fund and NIT indicate that all those funds which are managed prudently and efficiently have the potential to earn substantial profit. The year ending on June 30, 2002 was a difficult year but these funds managed to earn good profit. Some of the ICP managed funds have been posting good performance but are being traded below the NAV.

NIT has announced 12 per cent dividend for the year 2002. NIT was established in 1962 and has over 60 per cent share of market share of mutual funds sector. At present it has over 60,000 unit holders who collectively hold 1.6 billion NIT units. The total value of funds invested in the market by NIT is estimated around Rs 19.5 billion, at current market prices. This is approximately 5 per cent of the total market capitalization at Karachi Stock Exchange, making NIT the single largest investor at the exchange.

BSJS Balanced Fund has posted over Rs 56 million profits and announced 15 per cent dividend for the year 2002. During the year it also acquired Security Stock Fund. As a result of merger the paid-up capital of fund increased to Rs 340 million. To increase the capital, the fund intends to issue Redeemable Preference shares subject to the approval from the SECP. The fund is called a balance fund because of its investment in equities, debt instruments, money market and COT.

Arif Habib Securities, the main sponsors of Arif Habib Investment (AHI), has posted Rs 253.6 million profit for the year 2002 and announced 50 per cent dividend as well 20 per cent bonus shares. AHI manages Pakistan Stock Market Fund and Pakistan Income Fund.

These rules however only apply to private sector operated mutual funds and are not applicable to NIT and ICP mutual funds.

Public Sector:

National Investment Trust

Investment Corporation of Pakistan (SEMF)

Private Sector:

Open ended Mutual Funds

Pakistan income Fund

Pakistan Stock market Fund

Unit Trust of Pakistan

UTP Income Fund

UTP Islamic Fund

United Money Market Fund

Close-ended Mutual Funds:

Al-Meezan Mutual Fund

Asian Stocks Fund

BSJS Balanced Fund

Dominion Stock Fund

First Capital Mutual Fund

Golden Arrow Stock Fund

Investec Mutual Funds

8.1CP Lot A (12 Funds managed by ABAMCO Ltd) ICP Lot B (13 Funds managed by PICIC)

KASB Premier Fund

Prudential Stock Fund

Safe Way Mutual Fund

Try Star Fund

Mutual funds have become a popular way to invest. Investing in individual stocks and bonds or cash equivalents takes more time, money and expertise than many people have. For those reasons, many investors prefer mutual funds for the convenience and professional investment management they offer.

Advantages of Mutual Funds:

Mutual Funds substantially lower the investment risk of small investors through diversification in which funds are spread out into various sectors, companies, securities as well as entirely different markets. It is always the objectives of a fund manager to maximize a funds return for a given level of risk, however the dangers of "over-diversification" are always prevalent which would inevitably lead to a reduced return on the portfolio.

Mutual Funds mobilize the saving of small investors and channel them into lucrative investment opportunities. As a result, mutual funds add liquidity to the market. Moreover, given that the funds are long term investment vehicles, they reduce market volatility by offering support to scrip prices.

Mutual Funds are provide the small investor access to the whole market which individually, would be difficult to achieve.

The investors saves a great deal in transaction cost given that he has access to a large number of securities by purchasing a single share of mutual fund.

The investors can pick and choose a mutual fund to match his particular needs.

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

Economic and Business Conditions:

As the business and economic conditions do not remain constant, the mutual fund may face some difficulties in future. Specially if the manager does not shuffle the investment portfolio with the passage of time, or some other major unforeseen disaster/event changes the investment

Portfolio Managed by Managers: Portfolio of a mutual fund is managed by the portfolio managers due to which the investors has no say in the affairs of a mutual fund.

Benefits of Investing in Open-ended Mutual Funds:

Open-ended mutual funds offer investors many benefits that would be difficult for average investors to achieve individually.

Accessibility:

Mutual fund units are easy to buy.

Liquidity

Mutual fund unit holders can convert their units to cash on any working day. They will promptly receive the current value of their investment (which may be more or less than the original cost). Investors do not have to find a buyer; the fund must buy back (redeem) the units.

Diversification

By investing the pool of unit holders money across varying dozens of securities, a mutual fund diversifies its holdings. A diversified portfolio reduces the investors' risk in case some of the investments turn sour. It would be difficult for an average investor to buy enough of different securities to achieve the same level of diversification as a mutual fund.

Professional Management

Professional investment advisers manage the money invested in a mutual fund. They make their investment or disinvestment Janisions based on extensive research into the investments that are being considered. The investment adviser also takes into account general economic, political and market trends. The investment adviser opts for the investments that match the fund's objectives and investment policies. As economic or other conditions change, or as changes occur in the fundamental strength of the organization issuing the security, the investment adviser may adjust the mix of investments held in the portfolio.

Affordability

Mutual funds offer a way for small investors to receive the benefits of investment in corporate sector of the country and benefit from the growth in the economy. The performance of a mutual fund, to an extent, is linked with the performance of the economy and the return to investors may accordingly.

Sources of Profit Generation:

A mutual fund can generate profits from three different sources,

which are:

Dividend

Capital Gains

Appreciation of Share Price

Dividend:

Mutual fund generate income from dividends received from other joint stock companies whose shares the fund holds. A mutual fund uses this dividend income to distribute dividend to its own stock holders.

Capital Gains:

As discussed earlier the portfolio manager changes the portfolio of the fund with the passage of the time and also with the changes in economic and business conditions. So due to the sale and purchase of shares, the mutual fund generates capital from the sales/ purchase of stocks. The capital gain generated by the mutual fund is also used to pay dividends to the investors of the fund.

Appreciation of Share Price:

Mutual funds also increases the wealth/investment of their shareholder through appreciation's of share price of the mutual fund. For example if the subscription price of a mutual fund is Rs.11.00, and after a period of seven months the price goes upto Rs.18.00, thus the investor gets a profit of Rs.7.00 if he sell the mutual fund's shares in the market

How Mutual Funds Generate their Income

Income

Depending on the investment policy of the mutual funds, the main sources of income are:Dividends from equity investments.

Return from term finance certificate or corporate paper.

Profit from Government securities.

Return on deposits/ COIs with banks/ financial institutions.

Profit from carry-over trades.

Profit from money market transactions.

Profit from PLS accounts with banks.

Capital gains or losses on sale of equity securities, term finance certificates and Government securities.

Any appreciation in the value of investment, but not realized, is not taken as income, but recognized for calculating the NAV.

Expenses

Cost of borrowing.

Remuneration of investment adviser/ asset management company.

Remuneration of trustee/ custodian.

Transaction cost.

Audit/ legal/ rating fees.

The diminution in market value of investment.

Transaction cost.

Audit/ legal/ rating fees.

The diminution in market value of investment.

Income Tax on Mutual Funds/ Investors

The impact of taxation on investor, investing directly or through mutual funds is neutral. Mutual funds distributing ninety percent of income as dividend are exempt from payment of income tax. The unit/ shareholders are subject to tax/ zakat on dividend distribution by mutual funds at the applicable tax ratesPakistan Islamic touch of Mutual Funds

Another encouraging sign is that the number of Sharia compliant funds is on the increase. Meezan Islamic Fund was floated recently and Arif Habib Investment has also signed an MoU with The Bank of Khyber to float another Sharia compliant fund. A Sharia compliant fund is a fund that does not invest in shares of companies drawing bulk of their income from Riba-based operations and/or undertake activities prohibited by Sharia.

It may look a little strange that commercial banks are providing the largest percentage of seed-money and/or actively and substantially participating in the Pre-IPOs of Sharia compliant funds. It is true that there are very few opportunities available to commercial banks for investing in Sharia compliant instruments. Therefore, the deliberate strategy to move away from Riba-based activity is a positive move towards elimination of Riba from the economy.

It is expected that further privatization, trickle down impact of macroecomic stability and revitalization of micro economy would lead too surge in conversion of SMEs into large corporations leading to higher market capitalization and the same would be reflected in the mutual funds sector size as well.

Growth of mutual funds sector, like any other sector of economy is the result of demand and supply. In general, the same factors that influence the demand for mutual funds also shape their supply. Other factors affecting the growth of mutual funds are status of tax laws and regulatory set up.

Meezan Investment Management Limited will put its units on the sale

"By introducing a Sharia-compliant fund, the management has provided an opportunity to the general public to invest in Islamic (financial) instruments, "

To start-up the Meezan Islamic Fund, the company has raised 520 million rupees (around nine million dollars) from banks and other financial institutions.

The fund is aimed at meeting the rising demand of investors who want investments based on Islamic laws, the minister said.

Central State Bank of Pakistan monitors Islamic investments to ensure they comply with religious law. Under Islamic law, lenders are not allowed to earn interest and they have to share profit or loss borne by the creditors.

Mutual funds account for a mere two percent of the country's 1.7 trillion rupees of bank deposits.

Islamic funds, which also avoid investments in alcohol, betting and tobacco, are worth about 250 billion dollars worldwide, according to estimates by Bahrain-based Islamic financial house BNP Paribas SA.

Role of MUFAP (Mutual Funds Association OF Pakistan):

Self Regulatory

Training of Fund Manager - Collaboration With Business Schools

Promotion of Mutual Funds

Promote and enhance the concepts and marketability of investments thru Mutual Funds whilst seeking changes and protection from regulatory authorities.

This is what we aspire to achieve from the platform of Mutual Funds Association of Pakistan MUFAP. Our association plays an important role in the development of capital markets in Pakistan by promoting and developing open-end and close-end funds, as well as investment advisors, and asset management companies. We help members in regulatory affairs with Securities and Exchange Commission of Pakistan - SECP as well as other authorities. We are actively involved in promoting and enhancing the concepts of investments thru mutual funds by developing ideas to promote the concept and awareness of mutual funds to investors. This in turn supports and promotes stock market as a whole; thus, affecting all financial markets.

Mutual funds have been around for a long time, dating back to the early nineteenth century. The first modern American mutual fund opened in 1924, yet it was 1990s that mutual funds became mainstream investments. In Pakistan, over a decade ago there were only two mutual funds, a series of close-end funds from Investment Corporation of Pakistan - ICP and National Investment Trust - NIT were in the market, and both were public sector organizations. Toady we have twenty-two mutual funds, whereas eight are open-end funds, and fourteen are close-end funds.

Mutual funds are generally low risk investments, especially when compared to individual stocks. This is due to the reason that mutual funds are by definition diversified investments. When you purchase a share in a mutual fund, you are actually purchasing a very small amount of ownership in many securities that the fund holds. In case, if one of the securities in the fund happens to perform poorly, there is always the chance that other securities in the funds holdings will be able to offset any losses. The opposite, of course, is true as well; when you hold a single security that realizes a large gain, you receive all of the gain, but when you hold a mutual fund, any large gains in one security might be offset by losses in another. Most investors use mutual funds in order to diversify their holdings and provide some stability to their investment portfolios.

Furthermore, it would be cumbersome for an investor to keep track of all the scrips all the time. When an investor holds a mutual fund, he/she would not worry of tracking the dozens of different securities in which the fund invest; rather, all the investor needs to do is to keep track of the funds performance. Mutual funds provide diversification to investor by reducing the overall investment risk by spreading the risk across many different assets. With mutual funds, investor can diversify holdings both across companies and across asset classes. When some assets are falling in price, others are likely to be rising, so diversification results in less risk than holding position in one or two investments.

To safeguard the investors risk and return, it is imperative that fund is managed by the professionals. In Pakistan, it is reflective on the results that people involved in the mutual funds sector are knowledgeable of the market. The Pakistan mutual fund sector has shown a steady growth. The Paid-Up Capital of close end fund as of August 20th stands at Rs 5,548 million, while Paid-Up Capital of open-end funds is at Rs 37,710 million, whereas the total market cap of Karachi Stock Exchange is at Rs 950 billion.

It is heartening to note that private sector has come forward to play an important role in the market. This time around National Investment Trust - NIT has emerged as a leader, and out performed the KSE 100 Index on total return. The total return on funds for NIT is at 105 per cent while KSE 100 Index result in over 90 per cent. Keeping the basis as the beginning of the year NAV Net Asset Value, NIT has achieved year on year appreciation of 89 per cent in its per unit NAV, on top of 16 per cent dividend yield for the year, and has provided the best returns for its unit holders as compared to other mutual funds. Thus 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 105 per cent as compared to per unit NAV of Rs 10.89 as at June 30, 2002. Dividend Income earned by the Trust was up by 25 per cent, realized Capital Gains were up 79 per cent, and net profit for the year jumped by an appreciable 55 per cent. These results have been the best in eight years. The other important facet to NIT is the investor base, which reflects 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. Not to forget the amazing Bull Run of the Karachi stock market is reflective of consumer confidence in the governments economic policy. It bodes well of sound fiscal and monetary policies for the past three years.

Finally, It would be of note that the web site, www.mufap.com, has been in operation for some time now and has an excellent record of visits locally as well as internationally. This site caters to the need of investors. It provides technical data with respect to the markets, as well as socio-economic and socio-political news to help investors make informed decisions. MUFAP strives to provide confidence and educate the investors that mutual funds are safe and reliable mode of investment. We encourage and enhance our members to introduce diversified products to satisfy various levels of investors risk and return profile.

Mutual Fund Managers asked to Develop Specialized Products:

It has been observed that for further development of the mutual fund industry in the country, fund managers should develop specialised products aimed at niche markets.

Securities and Exchange Commission of Pakistan (SECP) since March 2002 has authorised nine new open-ended mutual funds. With this there are now 11 open-end mutual funds besides 16 closed-ended mutual funds. Four more funds are in the pipeline.

It was encouraging to see the transformation of government economic policies and vision into realities. The growth in mutual fund industry is a manifestation of this fact.

Aggregate NAV at Rs 100 billion: Aggregate net asset value of countrys mutual funds has increased from less than Rs 25 billion a year-and- a- half ago to more than Rs 100 billion at present. The listed capital at Karachi Stock Exchange (KSE) has registered an increase of 65 percent, that is, from Rs 221 billion to Rs 365 billion as on April 12 this year. Similarly, market capitalisation over this period has increased from Rs 338 billion to Rs 1.45 trillion showing an increase of 329 percent. The index has also registered an increase of 340 percent rising from 1,257 points as on October 12, 1999 to over 5,520 on April 15, 2004.

Although the stock market in Pakistan has shown an impressive performance in previous years, it has a long way to go in terms of growth and expansion.

In developed countries the market capitalisation to GDP ration ranges from 137 percent in the United States to 152 percent in the United Kingdom whereas in Pakistan it has hovered around only 15 percent in past few years, which indicates the growth potential in the stock market in the country.

This means that there is a strong need to widen and deepen the Pakistan stock market by making it more accessible to general public through educating them about the benefits and better returns as compared to return on bank deposits, he opined.

Economic performance:

The foreign exchange reserves have increased to a level of $12.5 billion and per capita income is expected to reach $600 this year. Internally, the confidence of public in government policies and their continuity has increased manifold. The foreign investors have also reposed their confidence in economy by participating in the countrys privatisation programme.

All major economic indicators at present show a positive outlook of the countrys economy and further enhancement of confidence of local and foreign investors in the economy.

The mutual fund industry plays a vital role in the operations of stock market and consequently contributes significantly to the economy of a country. The mutual fund industry has finally received an impetus. It is receiving a recognition as a credible investment vehicle for pension funds, provident funds and other such schemes of employers terminal benefits. Prudent economic policies of the government, positive steps taken by the Central Board of Revenue, State Bank of Pakistan and the pro-active role of SECP have contributed to creating an investment conducive- environment in the economy. Investors confidence rises: Reduction in interest rates in the recent past and increased flow of foreign remittances into the country have enhanced investors confidence in economy. Corporate earnings and payouts are showing appreciable growth.

Equity markets are providing superior returns as compared to all other alternatives, even on a risk-adjusted basis. What is needed now for further development of mutual funds industry in Pakistan is for the fund managers to develop specialised products aimed at niche markets.

Products that cater to the requirements of different types of investors ranging from ultra conservative to the risk seekers, added responsibility of the mutual funds sector to introduce schemes for retirement planning, pension funds and provide market based effective returns to this class of savers. Mutual funds sector in Pakistan has added some new products to their basket and was of the view that much more innovation was needed so that a variety of products is available in the basket of mutual funds sectors to cater to the specific needs of different types of investors.

The mutual funds industry to look at the possibility of designing products to meet the needs of retiring people by offering the retirement benefits schemes. The government had recently fielded a mission to visit Kazakhstan to study their pension fund system. The mission is back and the SECP is finalizing a pension scheme for the private sector. The government is keen to develop the pension schemes and to encourage the participants of the mutual funds industry to play an active role in such developments.

JCR-VIS Mutual Funds Rating System

JCR-VIS has adopted the practice of assigning two ratings for a mutual fund, namely, the

management quality rating and the fund performance rating.

The mutual fund rating methodology incorporates evaluation of the performance of the mutual fund and the quality of the fund manager (investment adviser in case of a closed-end

fund, and asset management company for an open-end fund).

JCR-VIS's fund performance rating is a measure of the degree of a fund's return stability and variability of risk factors. A fund's risk is the function of its investment objectives, asset class

allocation and security selection.

For instance, funds investing in fixed income securities are considered less risky as they tend

to deliver stable income and safety of principal.

Within this category, ratings would be influenced by the quality of underlying assets in the portfolio.

Similarly, funds investing in money market securities are also less risky on account of short-

term and liquid nature of such investments.

JCR-VIS in a report said: "As we move further in the risk continuum, ratings becomes more and more constrained. Although, the riskier nature of investments made by a fund may translate into higher return, it also increases the risk of capital erosion and return volatility.

In this regard, funds investing exclusively in equity markets present higher probability of

return variation with changing economic conditions, hence higher risk."

JCR-VIS would also evaluate how the organisation structure facilitates decision-making and

timely response to events.

The ratings are not just based on the investment performance but mainly depend on the

fund manager's ability to achieve consistent results under different market scenario.

A thorough review of internal and external information systems is also carried out to

evaluate manager's ability to efficiently conduct day-to-day trading activities.

JCR-VIS places a significant emphasis of the qualitative processes used to manage the primary areas of risk in the fund, including the level of conservatism used in the portfolio section.

JCR-VIS looks favourably on strategies that help to diversify the fund's investment portfolio

across investment asset classes, industries and geographic regions.

The degree of exposure allowed in a single company and other investment limits set by the fund manager are examined in detail. Balanced strategy, which involves investment in assets offering a flow of dividends, capital gains, and interest results in a more stable performance

than investing exclusively in equities.

Funds claim to follow a particular strategy but may drift from their investment styles. To evaluate fund's risk profile, JCR-VIS also examines changes in funds investment style over time.

Indian Mutual Funds listing on KSE

The Mutual Fund Association of Pakistan (MUFAP) and the Association of Mutual Funds in India (AMFI) have discussed the possibility of listing of Indian mutual funds on Karachi and Lahore stock exchanges.

Pakistani stock market's current price-to-earning (PE) ratio is at around 10, while the PE ratio of Indian stock market is around 17. Thereby Pakistan's market, being under-valued, seems to be more attractive for Indian investors. It was proposed that initially such investments might be made through the mutual funds of each country to minimize sedimentation.

The MUFAP had also discussed with the AMFI to cooperate and collaborate in education and training to the people involved in the mutual funds industry. Indian mutual funds were allowed to invest off-shore of up to 20 per cent of the portfolio or $50 million per fund.

A six-member delegation of MUFAP had attended the 9th Asia Oceania Regional Meeting in New Delhi held from March 3-7, 2004 on the invitation of the AMFI.

The meeting was attended by delegations from Australia, Bangladesh, China, Hong Kong, India, Japan, Korea, Malaysia, Pakistan, Philippines, Singapore, and Taiwan. Pakistani delegates held meeting with delegates from those countries to explore cooperation in the mutual funds sector.

Fund Managers in Pakistan were exploring possibilities of technical cooperation with their counterparts in India. The neighboring country had already developed expertise in training and education as well as funds distribution network.

Such possibility of technical collaboration may cover off-shore fund, pension and annuity funds, real estate and infrastructure fund, and capital guarantee fund.

Pakistan delegation also held meetings with Indian asset management as well as distribution companies, which included Birla Group, Bajaj Capital, and MJ Capital, to explore technical cooperation between the two countries' mutual fund industry.

While MUFAP is relatively a fresh member of the Asia Oceania Group, an investment funds association, it has been honored to host the 11th Asia Oceania regional meeting to be held in the year 2006.

MUFAP is proposing to the government to gradually convert the National Savings Organization (NSO) into a distribution centre for various financial products in the country.

Over a period of time a wide network of post offices in the country could also serve as an effective distribution network. The target for MUFAP is to enhance the concept of investment in mutual funds and, thus taking Pakistan's funds industry to the higher level.

MUFAP programme would not only substantially enhance saving and investment potential in the country, but would also create employment to the dynamic youths who were properly qualified and, thus created discipline in distribution industry for various financial products.

MUFAP expects that the mutual fund industry will witness an unprecedented growth in 2004 and 2005. While currently in Pakistan the mutual funds sector size is four per cent of the bank deposits, whereas in India it is around 10pc, reflecting a tremendous potential of growth.

Pakistan's mutual fund industry is now receiving global recognition as it has invitations from the Luxembourg Funds Management Association for an active dialogue at its next conference, he added. The MUFAP has also been invited by the Investment Company Institute of the US during May this year to be held in Washington D.C.

The MUFAP was also looking to organize an international seminar for financial products in near future. Also present on the occasion were Pakistani delegates to New Delhi, which included: Tariq Iqbal Khan, managing director, NIT and vice-chairman MUFAP; Nasim Beg, chief executive, Arif Habib Investment Management Ltd; Mohammad Shoaib, CFA, chief executive, Al Meezan Investment Management Ltd; Najam Ali, chief executive officer, ABAMCO Ltd; and Farid Alam, executive vice-president, PICIC Ltd

Offshore fund for overseas Pakistanis

Mutual Funds Association of Pakistan (MUFAP) is planning to launch an offshore fund for overseas Pakistan.

Countrys policy makers should allow Pakistani mutual funds to invest 20 per cent of their portfolio in overseas funds.

Presently, Indian mutual funds can invest up to US $100 million in their specific overseas funds.

A delegation of MUFAP recently visited India to solicit Indian investment and technical cooperation for Pakistani mutual fund industry. Bajjaj Capital Limited of India has officially requested the association for its help in listing of its shares on the Pakistani capital markets.

During its visit to India, the Pakistani delegation also discussed the "possibility of Indian mutual funds being listed on Karachi and Lahore Stock Exchanges".

It was disclosed that, "presently, there is no restriction on listing of Indian mutual funds on the Pakistani capital markets. However, Indian mutual funds have to get an additional war risk cover from international underwriters besides obtaining political risk cover".

It was further explained that in case of a war between the two countries, they would forfeit the assets of each other by declaring "those assets as enemy property".

The Indian mutual fund industry has agreed to provide technical collaboration and training to MUFAP.

Presently Indian investors are investing in Pakistani capital markets through Dubai based banking system.

Pak Kuwait Investment Company plans to set up a distribution company in collaboration with leading banks, Asset Management Companies and insurance companies.

Mutual Fund Investment in Emerging Markets:

International mutual funds are key contributors to the globalization of financial markets and one of the main sources of capital flows to emerging economies. Despite their importance in emerging markets, little is known about their investment allocation and strategies. First, their relative size, asset allocation, and country allocation. Second, focus on funds behavior during emerging markets crises in the 1990s, analyzing data at both the fund manager and fund-investor levels. Due to large redemptions and injections, funds flows are not stable. Withdrawals from emerging markets during recent crises were large, which is consistent with existing evidence of financial contagion.

The Association of Mutual Funds of India, the trade body representing the over Rs 135,000 crore (Rs 1,350 billion) industry, has offered Pakistan its help for developing and strengthening the capital market in that country.

The move comes close on the heels of the two sides meeting at the recently held Asia Oceania Regional Meeting of the Global Investment Fund Associations, in New Delhi.

Though the meeting became a platform, further nitty-gritties will have to be sorted out and on the areas in which cooperation was required and in this regard, a Pakistan delegation is expected to visit India soon.

A delegation from Pakistan by May-June and only after that meeting, any concrete steps could be spelt out.

Indications are that AMFI would help Pakistan's Mutual Fund Association in strengthening their practices including disclosures and evolving a syllabus for starting registration of brokers in that country.

The Indian mutual fund industry is well-regulated and India had the capabilities in terms of standards set by the sector, which was on par with international norms.

Moreover, AMFI has put in place a mandatory training and registration for those wishing to pursue a career as brokers in the mutual fund segment.

Whenever a developing country wanted to bring in measures either to regulate or streamline its mutual fund industry, the trend has been to follow the developed markets like the United States and United Kingdom and this need not fit well with the respective domestic situation, AMFI sources.

Of late India has figured prominently on the world map due to far-reaching recommendations made by AMFI, especially on 100 per cent disclosure on monthly basis and creating a benchmark for the non-equity schemes to assess performance, India could play a big advisory role at a globally competitive price.

The move by the AMFI comes in the backdrop of improving bilateral trade relations between the two countries and India had already offered its help Pakistan in coming up with a social security scheme for the unorganised sector workers in that countryMUTUAL FUNDS GROWING SECTOR OF FINANCIAL MARKET

In Pakistan, an average investor may not be well versed of the capital market. Either he does not have access to adequate information to invest successfully or simply may not have the time to acquire information and analyze it. The concept of Mutual Funds has emerged, which allow the investors to benefit from the collective efforts of their professional expertise.

A Mutual Fund (MF) is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. The MF has a fund manager who is responsible for investing the pooled money into specific securities usually stocks or fixed income bonds/securities. When one invests in a MF, he/she buys shares or units of the MF and become a shareholder/unitholder of the fund. MFs are one of the best investments ever created because as these are cost efficient and easy to invest in, where one does not have to explore which stocks or bonds to buy. MFs are considered a good route to invest and earn returns with reasonable safety.

Small as well as big investors have both invested in instruments that have suited their needs and benefited in terms of reduced risk and higher returns arising from professional expertise of fund managers employed by such investment vehicle. This has been the original appeal of MFs that offer a path to stock market far simpler and safer than the traditional call a broker and buy securities route. Therefore, the MFs may be called an ideal vehicle for investment by retail investors in the stock market for many reasons. By pooling money together in a MF, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it at their own. The biggest advantage of MFs is diversification. It pools the investments of small investors together, increasing thereby the participation in the stock market. Secondly, MFs can diversify the portfolio in a better way as compared to individual investors due to the expertise and availability of funds.

Mutual fund investment: regulatory framework advised

Indian mutual funds were allowed to invest 20 per cent of their funds outside the country and added that for the cross-border investment of funds, a regulatory framework had to be in place that might provide the enabling environment.

Mutual fund industry in Pakistan had come a long way and according to some reports, new mutual funds valuing Rs15 billion were in the pipeline. "Now except for a few ICP Mutual Funds, all are trading at a premium to their net asset values (NAVs)," a couple of years ago, opposite was the case. The government should create pension funds, so that with the passage of time, its burden on the budget on that account diminishes. Successful investment was a product of knowledge and added that efficient markets, which were by definition fair and transparent, could not even be imagined without widespread availability and dispersal of knowledge.

TV channels were broadcasting (relating to stock market) what was to be expected the day following. Experts were being summoned to forecast what was essentially not capable of being forecasted.

The astounding growth of market in the last decade and a half had compelled attention to be focused on trading, settlement and development of physical infrastructure. As a result now a fairly sound risk management structure and efficient trading based on electronic technology.

NVA Calculation Method:

The net asset value, or NAV, of a mutual fund is simply its assets minus its liabilities. In other words, NAV equals the fund's worth. If a fund has assets of $50 million and liabilities of $10 million, it would have a NAV of $40 million.

This number is important to investors, because it is from NAV that the price per unit of a fund is calculated. By dividing the NAV of a fund by the number of outstanding units, you are left with the price per unit. In our example, if the fund had 4,000,000 shares outstanding, the price-per-share value would be $40 million divided by 4,000,000, which equals $10.

The NAVs of funds are constantly changing and, as such, so are their price per shares. Funds usually wait until the end of each trading day to recalculate their NAV and individual share prices.

We should note that simply analyzing the NAV is not a good measure of the funds growth. Funds are constantly paying out distributions of both capital gains and dividends, which reduces the NAV of the fund and does not reflect any appreciation in the price per unit. Say a fund's price per unit increased from $10 to $15, but the fund also distributed $5 per share to all unit holders. The fund hasnt simply appreciated by 50% ($10*1.5 = $15), as the per-unit cost would suggest; it has actually appreciated 100% ($10*2 = $20). So do not mistake a fund's per-share price based on NAV for the actual earnings of the fund.

Mutual funds net asset value up

The total net asset value (NAV) of mutual funds has been estimated at $1.5 billion as of March 31, 2004. 18 asset management companies (AMCs) were operating 12 open-end and 15 close-end mutual funds in Pakistan.

The number of asset management companies were growing as more AMCs and funds were in the pipeline.

The segregated divesture of ICP funds had placed a pivotal role in the growth of mutual funds industry in Pakistan.

Giving comparison with other countries, he said the size of mutual funds in the US was estimated at $7.4 trillion, Japan $349 billion, South Korea $120.8 billion, India $30.75 billion and China $20.52 billion.

Citing reasons for slow growth of mutual funds in Pakistan, lack of awareness, controlled public sector, high interest rates, low literacy and low savings were the major causes.

Mutual Funds Are generally Low Risk Investments

Mutual funds are generally low risk investments especially when compared to individual stocks, because mutual funds are by definition, diversified investments. For a novice investor, it would be cumbersome for an investor to keep track of all the scrips all the time. When an investor holds a mutual fund, he or she would not worry of tracking the dozens of different securities in which the fund invest; rather, all the investor needs to do is to keep track of the funds performance. Mutual funds provide diversification to investor by reducing the overall investment risk by spreading the risk across many different assets. But, with mutual funds investor can diversify holdings both across companies and across asset classes. When some assets are falling in price, others are likely to be rising, so diversification results in less risk than holding in one or two investments. And this bodes well of the FUND MANAGER.

To safe guard the investors risk and return, it is imperative that fund is managed by the professionals. National Investment Trust 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 2003.

The total return on funds for NIT is at 105 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 105% as compared to per unit NAV of Rs 10.89 as at June 30th, 2002

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.

Mutual FundsMain Issues

Closed EndOpen EndedCommon to Both

Value to Investors

NAV>investment

MV

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