Potential of Mutual Fund Industries in Pakistan

INSTITUTE OF BUSINESS AND TECHNOLOGY

Potential of Mutual Fund Industries in Pakistan

Prepared By

Murad SulaimanBM/25175

Course Code : MKT-606

MBA (Banking and Finance)

FACULTY OFMANAGEMENT AND SOCIAL SCIENCES

FALL- 2010


TABLE OF CONTENTS

ACKNOWLEDGEMENT 5

ABSTRACT 6

CHAPTER NO.1 INTRODUCTION

1.1 Introduction 8

1.2 Purporse of Study 8

1.3 Research Objectives 8

1.4 Research Methodology 9

CHAPTER NO. 2 LITERATURE REVIEW 10

CHAPTER NO.3 MUTUAL FUNDS

3.1 Introduction 13

3.2 Concept of Mutual Funds 13

3.3 Origin of Mutual Fund 14

3.4 Mutual Fund Organization 15

3.5 How a Fund is Created15

3.6 Structure of Mutual Funds 16

3.7 Types of Mutual Funds 16

3.8 Difference between Open & Close End Mutual Funds 21

3.9 Advantages and Disadvantages of Mutual Funds 21

CHAPTER NO.4 MUTUAL FUNDS IN PAKISTAN

4.1 Growth 25

4.2 Government Role in Mutual Funds 26

Institute of Business and Technology Page 2


4.3 Causes of Slow Growth of Mutual Funds 27

4.4 Reasons for Failure 29

4.5 Present Scenario 31

4.6 Past and Present 31

CHAPTER NO.5 PERFORMANCE OF MUTUAL FUNDS

5.1 An Overview 33

5.2 Growth in Asset Management Companies 34

5.3 Mutual Funds - A Comparison with other Investment Avenues 34

5.4 Future Prospects 35

CHAPTER NO.6 KEY PLAYERS IN THE MARKET

6.1 Key Players 36

6.2 Comparison of NIT with other Funds 40

6.3 Results Analysis 52

6.4 Government Policy 52

CHAPTER NO.7 COMPARISON WITH OTHER MARKETS

7.1 Worldwide Market – An Overview 54

7.2 Mutual Funds in South Asia 56

7.3 Mutual Funds in India & Pakistan – A Comparison 58

CHAPTER NO.8 PRESENT AND FUTURE CHALLENGES

8.1 Present 63

8.2 Future Challenges 64



CHAPTER NO.9 CONCLUSION & RECOMMENDATIONS

9.1 Conclusion 66

9.2 Recommendations 68

BIBLIOGRAPHY 73



ACKNOWLEDGEMENT

All praises for Almighty Allah whose uniqueness, Oneness and wholeness is

not challengeable. All respect for his Holy Prophet Hazrat Muhammad

(P.B.U.H) who enabled us to recognize our creator.

I am grateful and deeply indebted to Dr. Noor Ahmed Memon my teacher,

mentor and project advisor for his helpful insights, cooperation, support and

continuous encouragement throughout this project. Without his guidance I will not

be able to do this. He really is a person from whom I learnt a lot and who knows

how to motivate other person.

I would like to thank Atta Muhammad Ujjan Area Manager NAFA FUNDS for his

helpful insights and for sparing his precious time to help and guide me.

Many people have contributed in the completion of this project and I would like to

thank my fellow students Fahad Abbasi, Asad Mazhar, Mairaj Muhammad,

Noshad and Noor-U-Saba, whose support and guidance help me to complete

this project in time.

Last but not least I would like to thank my parents for always being there for me

when I need them.

Murad Sulaiman



INSTITUTE OF BUSINESS AND

TECHNOLOGY

ABSTRACT SUBMITTED BY: Murad Sulaiman

DISCIPLINE: MBA (Banking & Finance)

TITLE OF PROJECT REPORT: Potential of Mutual Fund Industries in

Pakistan

MONTH OF SUBMISSION: November 2010

NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon

ABSTRACT

This research work analyzes the developments of mutual fund industry in

Pakistan since its inception in 1962. It also covers the comparative study of the

public and private sector mutual funds, key players in this sector and their

performance. This research analyzed the growth of mutual funds in USA, South

Asian region and in India in comparison with Pakistan. The relevant policies that

are applicable to Pakistan and those that proved to be successful over time were

studied and finally recommended to Pakistan.

The existing market of mutual funds in Pakistan is not fully structured and at the

same time it lacks due attention to be given by common investor. It covers the

problems mutual fund industry faced since its inception in the country,

performance of existing Asset Management Companies, Barriers in the



development of this industry since its inception and the challenges and

opportunities this industry is facing.

The research also covers that the growth of Mutual Fund industry in Pakistan is

faster than anticipated, due to injection of new equity funds and the re-direction

of Provident funds and gratuity funds from banks and NSS to the higher yielding

mutual funds. A wind of change is blowing across the mutual fund industry. The

future of the industry appears to be promising and is poised for growth. Mutual

Fund industry can thrive on a sustainable basis only if new innovative products

are continuously introduced in the industry.

Thus, to conclude, there are many opportunities for this sector in Pakistan. Some

steps have been taken but the pace of work is slow. More can be accomplished

through realizing its importance.



1. INTRODUCTION

1.1 Introduction

Mutual fund is a mechanism of pooling together the savings of large number of investors

with an objective of attractive yield and appreciation in their value. In Pakistan mutual

funds have many barriers for its development towards capital market. The lack of official

rules and regulation and no proper check and balance upon them discourage many

investors to invest in mutual funds in Pakistan.

Over a period of time, Mutual Funds managers have developed a variety of investment

products but still in our country this sector is unable to categorize different customized

products that can cover investor’s needs accordingly.

The research has tried to identify the distinguishing features of open and closed ended

mutual funds. The analysis focuses on the market capitalization of mutual funds along

with their comparison with other sectors. The barriers to mutual funds in the Pakistani

funds market and its future outlook scenarios are also discussed in this research thesis.

1.2 Purpose of Study

The objective of the thesis is to study Mutual Fund market in Pakistan. It also

encompasses the new rules and regulations issued by SECP and its implementation in

Mutual Fund industry, so as to further analyze the post reforms scenario. Thesis analyze s

the market leaders NIT, Arif Habib and Jehangir Siddiqui Mutual Funds and other Asset

management companies in Pakistan. The research also covers:

Problems Mutual Fund industry faced since its inception in the country

Performance of existing Asset Management companies

Barriers in the development of Mutual Fund industry

Scope and Prospects of this industry in Pakistan



1.3 Research Objectives

Scope of this research includes Mutual Fund market of Pakistan. It covers a comparative

study of the public sector Mutual Funds and private sector mutual funds by making brief

review of SECP rules and regulations. The research also discusses the barriers in the

development of Mutual Funds in Pakistan and makes recommendations for Mutual Funds

development in Pakistan.

1.4 Research Methodology

In order to conduct the research work a number of research methods are used which

includes intensive web search, interviews, and visits of mutual fund companies like

ABAMCO, Arif Habib Investments, United Asset Management Company etc. The

research also includes the critical issues hindering the growth of Mutual Fund Industry in

Pakistan.

For this purpose the following research methodologies are followed:

Primary data

o Questionnaires, Interviews

Secondary data

o Libraries, Articles, Research material, Internet, Financial Magazines



2. LITERATURE REVIEW

Mutual Funds have attracted a lot of attention and kindled the interest of both

academic and practitioner communities. Compared to developed Market, very

few studies of Mutual Funds are done in Pakistan. The literature review reveals

the investor behavior studies. The researches on Mutual Fund have been

extremely skewed in term of geographical coverage, most focused to develop

countries like us.

Mary Rowland had written “The New Common sense Guide to Mutual

Funds”. It includes the guideline while investing in Mutual Fund. How should one

invest in Mutual Fund and what step should be taken in a situation by investor.

Mr. Talat Afza mentioned in his book Performance Evaluation of Pakistan

Mutual Funds that Extensive research has evaluated mutual fund performance

in different financial markets which led to mixed results, however, limited work

has been done to evaluate Pakistani mutual funds. The purpose to provide

guidelines to the managers of open-ended Pakistani mutual funds and benefit

small investors by pointing out the significant variables influencing the fund

performance. An effort has been made to measure the fund performance by

using Sharpe ratio with the help of pooled time-series and cross-sectional data

and focusing on different fund attributes such as fund size, expenses, age,

turnover, loads and liquidity.

Dr. Amjad Waheed, CEO, NBP Asset Management Company Limited in his

article Significant Impact On Fund Performance in The Lahore Journal of

Economics (Vol 2, No 2) mentioned that Pakistan experienced the reverberations

starting in 1988 of the changes that swept the Asian emerging markets. To

create an investment friendly environment the GoP adopted liberal economic

policies of deregulation, privatisation, opening of capital markets to foreigners,

liberalization of foreign exchange regulations and dismantling of investment



control - policies that lead to a significant increase in direct and indirect foreign

investment in the country.

These changes resulted in a drastic increase in the financial assets of Pakistan

with stock market capitalization rising from Rs.l88 bn in 1991 to Rs.547 bn at

present, daily trading volume improving from 2 mn shares in 1991 to 50 mn

shares at present and number of listed companies rising from 542 in 1991 to 788

at present.

Despite the global trend of a significant increase in financial assets and the surge

in domestic market capitalisation, an average Pakistani investor is still skeptical

about entering the market. The reasons for this skepticism are:

Lack of information about capital markets.

Inherent risk involved in investing in stocks.

Therefore, it is crucial for an ordinary investor to understand the way in which to

overcome these drawbacks. An efficient and a risk adverse mode of doing this

are by investing in a mutual fund. A mutual fund is simply a group of stocks and

other financial assets managed by trained investment professionals. Such a fund

offers its shares to the public who in turn, become its owners. Typically, the fund

advisor uses investors' money to acquire stocks .and bonds within the legal

framework of the Corporate Law Authority.

Greg N. Gregoriou in his book Diversification and Portfolio Management of

Mutual Funds (Finance and Capital Markets Series) addresses the important

issue of diversification in an age where it is vital to reduce volatility on

investments. Properly applied portfolio management can lead to greater gains.

The expert authors guide investors through international portfolio diversification,

make clear how to help improve the efficiency of their investments, and explain

how international diversification reduces the risk of an investment portfolio. This

key book educates investors about how international mutual finds enhance the

performance of their portfolio. The authors analyze which factors are most

essential to investors, and find that both financial factors and behavioral



arguments must be considered. This book is a crucial tool for any investor

looking to improve the profit gain from their investment.



3. MUTUAL FUNDS

3.1 Introduction

A Mutual Fund is an institution established with the intention of investing a pool of

funds in various types of Securities for the benefit of investors. A small investor is

unable to diversify his portfolio of funds simply because of high investment

required for diversification, so a Mutual Fund provides a means of diversification

of investment to small investors. Mutual Fund normally collects the funds from

small investors, and when sufficient funds are gathered then they are invested

into the Securities of different types thus diversifying the portfolio.

A management company manages Mutual Fund. The management company is a

bank of human resources, considered to be professionally qualified personnel. A

“Portfolio Manager”, whose responsibility is to invest in, and satisfies the desire

of the investors, manages the portfolio of mutual fund. While selecting the

securities for investment, these managers analyze economic conditions, industry

trends, Government regulations and their impact on the stocks, and forecasts for

the specific stocks to the project the future outcome generated by the companies.

As we all know that economic and business condition do not remain constant, so

these managers also revise their portfolio with the passage of time, as the

circumstances demand.

3.2 Concept of Mutual Funds

A Mutual Fund is a type of Investment Company that gathers assets from

investors and collectively invests those assets in stocks, bonds, or money market

instruments1.

Individuals and institutions invest in a Mutual Fund by purchasing shares issued

by the fund. It is through these sales of shares that a Mutual Fund raises the

cash used to invest in its portfolio of stocks, bonds, and other securities.

Through the collective investments of the Mutual Fund, each investor shares in

the returns from the fund’s portfolio while benefiting from professional investment

management, diversification, liquidity, and other benefits and services.

1 www.investopedia.com



The concept of Mutual Fund is very simple, small investors invest their money

into a common pool or fund and hand over the investment decision to fund

manager/ portfolio manager. This is expected to have several advantages for the

small investors: no more searching for good buys or relying on the

neighborhood sub-broker for advice or even waiting anxiously for the allotment.

All this is taken care of by the cumulative bargaining power of the fund, which

has trained professionals managing it.

Every day, the fund manager/ portfolio manager counts up the value of all fund's

holding, figures out how many shares have been purchased by shareholders,

and then calculates Net Asset Value (NAV) of Mutual Fund, price of a single

share of the fund on that day. If investor wants to buy shares, he just has to send

the manager money, and they will issue new shares for him at the most recent

price.

3.3 Origin of Mutual Fund

Mutual Fund industry traces its roots to England in the mid-1800s. The

enactment of two British laws, the Joint Stock Companies Acts of 1862 and 1867,

permitted investors, for the first time, to share in the profits of an investment

enterprise, and limited investor liability to the amount of investment capital

devoted to the enterprise. Shortly thereafter, in 1868, the Foreign and Colonial

Government Trust formed in London. This trust resembled a mutual fund in basic

structure, providing “the investor of moderate means the same advantages as

the large capitalists ... by spreading the investment over a number of different

stocks2.”

This concept of offering the investment potential of financial markets to all

individuals spawned additional “investment companies” in Britain and Scotland

and, among other things, helped finance the development of the post-Civil War

U.S. economy. Most of the early British investment companies or trusts

resembled today’s closed-end funds by issuing a fixed number of shares to

groups of investors whose “pooled” assets were invested in various companies.

2 Mutual fund Fact book 2009, 44th Edition http://www.ici.org/stats/mf/2009_factbook.pdf



The Scottish American Investment Trust, formed on February 1, 1873 by fund

pioneer Robert Fleming, was significant because it invested in the economic

potential of the United States, chiefly through American railroad bonds. Many

other trusts followed that not only targeted investment in America, but more

importantly, led to the introduction of the investment fund concept on U.S. shores

in the late 1800s and early 1900s.

3.4 Mutual Fund Organization

A Mutual Fund is organized either as a corporation or a business trust that sells

its shares to investors. Mutual Funds have officers and directors or trustees. In

this way, Mutual Funds are like any other type of company, such as IBM or

General Motors.

Unlike other companies, however, a Mutual Fund is typically externally managed:

it is not an operating company with employees in the traditional sense. Instead, a

fund relies upon third parties or service providers, either affiliated organizations

or independent contractors, to invest fund assets and carry out other business

activities.

3.5 How a Fund is created

Setting up a Mutual Fund is a complicated process performed by the fund’s

sponsor, typically the fund investment adviser, administrator, or principal

underwriter (also known as the distributor).

The fund sponsor has a variety of responsibilities. For example, it must assemble

the group of third parties needed to launch the fund, including the personnel

managing and operating the fund. The sponsor provides officers and affiliated

directors to oversee the fund, and recruits unaffiliated persons to serve as

independent directors. It must also register the fund under state law as either a

business trust or corporation.



3.6 Structure of Mutual Funds

A mutual fund is usually either a corporation or a business trust (which is like a

corporation). Like any corporation, a mutual fund is owned by its shareholders.

The figure below shows the business structure of a typical Mutual Fund.

Figure 1: Structure of Mutual Funds

3.7 Types of Mutual Funds

There are two types of mutual funds, which are:



Open-end mutual funds

Closed-end mutual funds

Open-End Mutual Fund

Open-end mutual funds are those where subscription and redemption of shares

are allowed on a continuous basis. Price at which the shares of open-end funds

offered for subscription and redemption is determined by NAV after adjusting for

any sales load or redemption fee. In Pakistan there exists Fourteen Open ended

mutual funds.

Public Sector: 01

Private Sector: 13

Closed-End Mutual Fund

Closed-end mutual funds are those where shares are initially offered to the public

and are then traded in the secondary market. The trading usually occurs at a

slight discount to the NAV. In Pakistan there exist Nineteen Close-end mutual

funds.

Mutual fund has different risks and rewards. In general, the higher the potential

returns, the higher the risk of loss. Although some funds are less risky than

others, all funds have some level of risk--it's never possible to diversify away all

risk. This is a fact for all investments.

Each fund has a predetermined investment objective that tailors the fund's

assets, regions of investments, and investment strategies. At the fundamental

level, there are three varieties of mutual funds:

1) Equity funds (stocks)

2) Fixed-income funds (bonds)

3) Money market funds

All mutual funds are variations of these three asset classes. For example, while

equity funds that invest in fast-growing companies are known as growth funds,

equity funds that invest only in companies of the same sector or region are

known as specialty funds.


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Figure 2: Risk and Reward potential for Types of Funds

Different types of mutual funds from the safest to more risky are explained in a

sequence.

Money Market Funds

Money Market consists of short-term debt instruments, mostly T-bills. This is a

safe place to park money. Investor won't get great returns, but at the same time

he won’t have to worry about losing your principal. A typical return is twice the

amount one would earn in a regular checking/savings account and a little less

than the average certificate of deposit (CD).

Bond/Income Funds

Income Funds are named appropriately: their purpose is to provide current

income on a steady basis. When referring to Mutual Funds, the terms "fixed-

income," "bond," and "income" are synonymous. These terms denote funds that

invest primarily in Government and corporate debt. While fund holdings may

appreciate in value, primary objective of these funds is to provide a steady cash


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flow to investors. As such, audience for these funds consists of conservative

investors and retirees.

Bond funds are likely to pay higher returns than certificates of deposit and money

market investments, but bond funds aren't without risk. Because there are many

different types of bonds, bond funds can vary dramatically depending on where

they invest. For example, a fund specializing in high-yield junk bonds is much

more risky than a fund that invests in government securities; also, nearly all bond

funds are subject to interest rate risk, which means that if rates go up the value of

fund goes down.

Balanced Funds

Objective of these funds is to provide a "balanced" mixture of safety, income, and

capital appreciation. The strategy of balanced funds is to invest in a combination

of fixed-income and equities. A typical balanced fund might have a weighting of

60% equity and 40% fixed-income. The weighting might also be restricted to a

specified maximum or minimum for each asset class.

Asset Allocation Fund

A similar type of fund is known as an asset allocation fund. Objectives are similar

to those of a balanced fund, but these kinds of funds typically do not have to hold

a specified percentage of any asset class. The portfolio manager is therefore

given freedom to switch the ratio of asset classes as economy moves through

the business cycle.

Stock/Equity Funds

Funds that invest in stock represent the largest category of Mutual Funds.

Generally, investment objective of this class of funds is long-term capital growth

with some income. There are, however, many different types of equity funds

because there are many different types of equities.

The idea is to classify funds based on both the size of the companies invested in

and the investment style of the manager. The term "value" refers to a style of

investing that looks for high quality companies that are out of favor with the


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market. These companies are characterized by low P/E ratios, price-to-book

ratios, and high dividend yields, etc. The opposite of value is growth, which refers

to companies that have had (and are expected to continue to have) strong

growth in earnings, sales, and cash flow, etc. A compromise between value and

growth is "blend," which simply refers to companies that are neither value nor

growth stocks and so are classified as being somewhere in the middle.

Global/International Funds

An international fund (or foreign fund) invests only outside the home country.

Global funds invest anywhere around the world, including the home country.

It's tough to classify these funds as either riskier or safer. On the one hand they

tend to be more volatile and have unique country and/or political risks. But, on

the flip side, they can, as part of a well-balanced portfolio, actually reduce risk by

increasing diversification. Although the world's economies are becoming more

inter-related, it is likely that another economy somewhere is outperforming the

economy of your home country.

Specialty Funds

This classification of mutual funds is more of an all-encompassing "etc. category"

that consists of funds that have proven to be popular but don't necessarily belong

to the categories we've described so far. This type of mutual fund forgoes broad

diversification to concentrate on a certain segment of the economy.

Sector funds are targeted at specific sectors of the economy such as financial,

technology, health, etc. Sector funds are extremely volatile. There is a greater

possibility of big gains, but you have to accept that your sector may tank.

Regional funds make it easier to focus on a specific area of the world. This may

mean focusing on a region (say Latin America) or an individual country (for

example, only Brazil). An advantage of these funds is that they make it easier to

buy stock in foreign countries, which is otherwise difficult and expensive. Just like

for sector funds, you have to accept the high risk of loss, which occurs if the

region goes into a bad recession.

Socially responsible funds (or ethical funds) invest only in companies that meet


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the criteria of certain guidelines or beliefs. Most socially responsible funds don't

invest in industries such as tobacco, alcoholic beverages, weapons, or nuclear

power. The idea is to get a competitive performance while still maintaining a

healthy conscience.

Index Funds

This type of mutual fund replicates the performance of a broad market index such

as the S&P 500 or KSE 100 index. An investor in an index fund figures that most

managers can't beat the market. An index fund merely replicates the market

return and benefits investors in the form of low fees.

3.8 Difference between Open & Close End Mutual Funds

S.No Description Open-end Close-end

1 Size of Capital No upper limit Fixed

2 Unit Prices Based on NAV Based on Market Value

3 Can be purchased from

Its own branches /

authorized distribution

channels

Stock Market

4Redemption

responsibility

Its management is

legally bound to

repurchase its units

from customer

Its management has no

responsibility to repurchase

its units from customer

5Listing at stock

exchangeMay or may not be Compulsory

3.9 Advantages and Disadvantages of Mutual Funds

I. Advantages of Mutual Funds

Mutual Funds make saving and investing simple, accessible, and affordable. The

advantages of Mutual Funds include professional management, diversification,


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variety, liquidity, affordability, convenience, and ease of recordkeeping—as well

as strict government regulation and full disclosure.

II. Professional Management Even under the best of market conditions, it takes an astute, experienced

investor to choose investments correctly, and a further commitment of time to

continually monitor those investments.

With Mutual Funds, experienced professionals manage a portfolio of securities

for you full-time, and decide which securities to buy and sell based on extensive

research. A fund is usually managed by an individual or a team choosing

investments that best match the fund’s objectives. As economic conditions

change, the managers often adjust the mix of the fund’s investments to ensure it

continues to meet the fund’s objectives.

a. Diversification

Successful investors know that diversifying their investments can help

reduce the adverse impact of a single investment. Mutual funds introduce

diversification to investment portfolio automatically by holding a wide

variety of securities. Moreover, since investors pool their assets with those

of other investors, a mutual fund allows them to obtain a more diversified

portfolio than investors would probably be able to comfortably manage on

their own—and at a fraction of the cost. Mutual Funds substantially lower

the investment risk of small investors through diversification in which funds

are spread out into various sectors, companies, securities as well as

entirely different markets. It is always the objectives of a fund manager to

maximize a funds return for a given level of risk; however the dangers of

"over-diversification" are always prevalent which would inevitably lead to a

reduced return on the portfolio.

b. Variety

Within the broad categories of stock, bond, and money market funds,

investors can choose among a variety of investment approaches. Mutual



Funds are providing small investor access to the whole market, which

individually, would be difficult to achieve.

c. Low Costs

Mutual Funds usually hold dozens or even hundreds of securities like

stocks and bonds. The primary way you pay for this service is through a

fee that is based on the total value of your account. Because fund industry

consists of hundreds of competing firms and thousands of funds, the

actual level of fees can vary. But for most investors, mutual funds provide

professional management and diversification at a fraction of the cost of

making such investments independently.

d. Liquidity

Liquidity is the ability to readily access investor’s money in an investment.

Mutual fund shares are liquid investments that can be sold on any

business day. Mutual funds are required by law to buy, or redeem, shares

each business day.

Mutual Funds mobilize the saving of small investors and channel them into

lucrative investment opportunities. As a result, mutual funds add liquidity

to the market. The price per share at which you can redeem shares is

known as the fund’s Net Asset Value (NAV). NAV is the current market

value of all the fund’s assets, minus liabilities, divided by the total number

of outstanding shares.

e. Convenience

Investors can purchase or sell fund shares directly from a fund or through

a broker, financial planner, bank or insurance agent, by mail, over the

telephone, and increasingly by personal computer. Investor’s can also

arrange for automatic reinvestment or periodic distribution of the dividends

and capital gains paid by the fund. Funds may offer a wide variety of other

services, including monthly or quarterly account statements, tax



information, and 24-hour phone and computer access to fund and account

information.

f. Protecting Investors

Not only are mutual funds subject to exacting internal standards, they are

also highly regulated by the Federal government through the Securities

and Exchange Commission (SEC) of the country. The investors save a

great deal in transaction cost given that he has access to a large number

of securities by purchasing a single share of mutual fund. Investors can

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

III. Disadvantages of Mutual Funds

As such there is no major disadvantage attached to the Mutual Funds. However,

the possible disadvantages could be:

a. Economic and Business Conditions:

As the business and economic conditions do not remain constant, Mutual

Fund may face some difficulties in future.

Especially if the manager does not shuffle the investment portfolio with the

passage of time, or some other major unforeseen disaster/event changes

the investment scenario.

b. Portfolio Managed by Managers:

Portfolio of a mutual fund is managed by portfolio managers due to which,

the investors have no say in the affairs of a mutual fund.



4. MUTUAL FUNDS IN PAKISTAN

4.1 Growth

Mutual Funds were introduced in Pakistan in 1962, with the public offering of

National Investment (Unit) Trust (NIT) which is an open-end mutual fund in the

public sector. This was followed by the establishment of the Investment

Corporation of Pakistan (ICP) in 1966, which subsequently offered a series of

Closed-End Mutual Funds.

a. 1960’s Public Sector Funds Launched

Mutual funds were introduced in Pakistan in 1962, with the public offering of

National Investment Trust (NIT) that is an open-ended mutual fund in the public

sector. NIT remained the only open-ended mutual fund in the country for over 30

years. The Government kept it a virtual monopoly for decades. To guarantee

growth in its portfolio, offer of 25% of every public limited company to NIT was

made mandatory (withdrawn in 1995).

This was followed by the establishment of the Investment Corporation of

Pakistan (ICP) in February 1966, again in public sector, with the additional

mandate to manage closed-end funds. ICP floated 26 funds.

b. 1970-80’s Private Sector Allowed Entry

In 1971, the government cleared the way for entry of private sector in the closed-

end segment but denied the right to float open-ended funds due to the

apprehensions of the regulators that the private sector will not be able to manage

prudently.



c. 1990’s The Industry Takes Off

Private sector participation in the mutual funds started in early 1990s with setting

up of the first open-ended fund by ABAMCO Limited. However, due to the

prolonged recession of later 1990s, the private sector was also unable to make

any major contribution to the overall performance of the fund industry.

Eleven more closed-end funds were launched during 1994-1996, which was

considered as the bullish period of nineties. The KSE100 Index was at 2,600 in

March 1994, a time during which the market had opened itself to foreign portfolio

investors and capital controls had been relaxed. There was a massive inflow of

foreign liquidity.

The first private sector open-ended fund was launched in 1996. Private sector

fund managers formed the Mutual Funds Association of Pakistan (MUFAP),

which was formed for self regulatory purposes.

4.2 Government Role of Mutual Fund

Until very recently, Mutual Funds were regulated by:

1. Investment Companies and Investment Advisors' Rules, 1971.

(govern closed-end mutual funds)

2. Asset Management Companies Rules, 1994. (govern open-ended

mutual funds)

These rules however were only for private sector operated mutual funds and

were not applicable to NIT and ICP mutual funds.

Now these funds will be governed by The Non Banking Finance Companies

(NBFC) Rules, 2007.



Investment advisors (in case of closed end fund) / Asset Management Company

(for open end schemes) will be regulated by the Securities and Exchange

Commission of Pakistan (SECP).

Investment Advisor of a closed end scheme will have to hold a minimum of 10%

shares of the closed end fund (up to a maximum of 20%). The Investment

Advisor can charge a maximum of 3% p.a. of NAV as management fee in the first

five years of the fund’s existence. Thereafter, a fee of 2% of NAV can be charged

for managing the funds.

4.3 Causes of Slow Growth of Mutual Funds

Mutual funds have not, until recently, received adequate attention from the

government.

Citing reasons for slow growth of mutual funds in Pakistan were:

Poor Govt. policies

Lack of awareness

Controlled public sector

High interest rates

Low literacy and low savings

Absence of proper marketing

For most part in the past, private sector mutual funds did bad, due to their poor

entry points. They accumulated expensive portfolios just at the end of the stock

boom of 1993. Moreover, in most of the private sector mutual funds, professional

expertise in equity research and portfolio management was generally lacking,

resulting in low quality portfolio compositions. These funds were known to have

taken huge stakes in such laggards as the textile, spinning and modaraba

sectors.



Another reason is that people of Pakistan are not quite aware of the concept of

mutual fund except for the people living in metropolitan cities like Karachi,

Lahore, Islamabad and others but the rest of the country is not much aware of

the functions and availability of mutual funds.

Mutual fund industry was prevented from playing a full role in the capital market

by constraints such as tax anomalies, a predominance of the public sector and

regulatory weaknesses3.

Inadequate surveillance by SECP, and weak implementation of policy reforms

also hinder the growth of mutual fund industry since its inception.

One of the biggest reasons for the slow growth of Mutual Funds in Pakistan is on

the part of asset management companies to work out the best way of distribution.

Most of the bigger fund management companies hooked up with banks to sell

their products but were unable to make much headway since banker’s feared

attrition in their own deposits.

The other reason is that non-existent marketing made these funds a failure as

Mutual Funds don’t have any brand recognition nationwide. The management of

Mutual Funds failed to recognize that to increase the sales of these Funds in

Pakistan what needed the most is marketing not the performance alone.

Despite plans to step up on marketing, funds also faced a problem of severely

limited supply of investment professionals.

Then, fund managers also faced constraint of limited investment options. The

Fund managers said that collecting money is easy but then where to invest it is

very difficult in Pakistani market as Real estate is not allowed, commodities are

not allowed and there are no rules for private equity funds.

3 ADP loans to Pakistan to Reform Capital markethttp://www.adp.org/Documents/News/1997/nr1997116.asp



Although the government is working on new laws and permissions but fund

managers say that the pace of the work is slow.

Another reason because of which individual investors are reluctant to put their

money in Mutual Funds is the frauds that different cooperative societies did in the

past. Like in the early 1990s the Alliance Motors and other sponsors of phony

finance companies which received very large funds from the people promising to

multiply them and then vanished.

Even the Taj Book Company, printers of the Holy Quran and other religious

books, joined in this race and received very large funds. People who placed their

money at its disposal thought the printers of holy books would not cheat them.

But the management of the Taj Book Company indulged in excessive

speculation.

In the Punjab it was the cooperative societies alone which went for such

speculation and swindling of funds.

These fraudulent activities by some of the private sector companies make the

individual investors reluctant to put their money in private sector companies thus

preferred government savings schemes.

4.4 Reasons for Failure

The Annual Report 2008 of the Securities and Exchange Commission of

Pakistan (SECP) noted that the mutual funds industry, in its initial years had

failed to take off in the initial years due to4

Frequent changes in the economic policies

High rates on alternative investments such as NSS

Limited Investment Options

Profusion of risk free Government Securities

Lack of awareness of collective investment schemes

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



Low savings rate, profusion of risk-free investment options in the

government securities

4.5 Present Scenario

An interesting observation about Mutual funds in Pakistan is that in both bull and

the bear market, these tend to run ahead of other stocks. Like in the recent stock

market crash in March 2009 when there was a 33% drop in the stock market one

of the leading Mutual Funds i.e. of Arif Habib dropped by only 14%.

In the last two years, the Mutual Funds sector has more than tripled in size to

Rs112 billion in assets under management (as of December 31, 2009) and the

number of funds operating has jumped from just a handful to 33 with many more

in the pipeline.

The bulk of this growth has come from weighty investments made by a few giant

financial institutions, not a smattering of savings from thousands of doctors,

shop-keepers and barbers that is actually the stuff of mutual funds. Performance

of mutual funds industry during financial year 2008 had shown significant

improvement over the previous years.

In Pakistan, even the biggest private-sector funds have not been able to entice

more than 5,000 individuals, less than 0.003 per cent of the population so this

couldn’t be called a great success. In fact it is only in the last two years that

mutual funds have wrested control of a place of honor in the financial sector of

Pakistan.

The past three years have seen the revival of the mutual fund industry in

Pakistan. The net assets of the industry have improved from Rs.25 billion in 2001

to Rs.124 billion as of March 31, 2010

According to the April 2010 market report by the stock brokerage firm, Taurus

Securities, the mutual funds listed on the Karachi Stock Exchange were trading

on price-to-earnings ratio of attractive 3 times, which was the lowest among the



34 sectors on the KSE. This was in spite of the fact that mutual funds produced

return on equity (ROE) of 51.85 per cent, which was the highest except for the

food & personal care sector's ROE at 64.92 per cent. The listed capital of all

closed-end funds combined stood at Rs12, 376 million with the aggregate market

capitalization at Rs18 billion.

Besides the equity investment, in recent years, several kinds of funds have

sprouted, such as income funds, growth funds; Islamic funds and money market

funds. All these funds offer the small saver variety of choice to invest according

to his inclination.

4.6 Present and Past

In Pakistan, even the biggest private-sector funds have not been able to entice

more than 5,000 individuals, less than 0.003 per cent of the population. In fact it

is only in the last two years that mutual funds have wrested control of a place of

honor in the financial sector.

Until the nineties, the sector was made up of just two state-run asset

management companies, NIT and ICP. At the time, a series of closed-end funds

were established but most languished below par value, a result of poor

management and a slack stock market. It was only in 1996 that the sector began

to creep back to life with the establishment of ABAMCO, an asset management

company in the private sector. Since then, NIT also underwent extensive reform

by bringing on investment professionals and switching to a system of market-

based quotations.

The mutual fund industry in Pakistan has taken off at a dramatically rapid pace

and the growth potential is enormous.

The MD of Flow stated that the growth of mutual fund industry in Pakistan was

faster than anticipated, due to injection of new equity and the re-direction of



Provident Funds and gratuity funds from banks and NSS to the higher yielding

mutual funds.

A foundation for the setting up of Institute of Corporate Governance was laid,

when regulators and representatives of major bodies of the private sector agreed

on establishment of such an institute. The proposed institute would be named,

"The Pakistan Institute of Corporate Governance (PICG)5.

5 A statement released by the Securities and Exchange Corporation of Pakistan (SECP)



5. PERFORMANCE OF MUTUAL FUNDS

5.1 An Overview

Mutual fund industry in our country is still in its growing stages, with only $1.9bn

funds under management. This is only 2 per cent of FY10E GDP. Several mutual

funds were launched last year, and many are still planning to come online.

Various opportunities for investors with a variety of appetites are being made

available. Specific industry risk mutual funds and fixed income mutual funds are

also coming up in the market, providing a set of alternatives to choose from.

Investment in TFCs have also been exempted withholding tax up to the amount

Rs150, 000 which will help attract a little interest towards the TFC market in our

country.

Mutual Funds have registered a remarkable growth in FY09 and their share in

total assets has increased to 22.6 percent, as compared to 14.1 percent in FY07.

This was primarily due to the low interest rates and exceptional performance of

the capital markets in the country. It is quite evident from their performance that

mutual funds are gaining ground as a lucrative investment option by investors.

Performance of NIT- An Example

At one time, the NIT unit price had gone down as low as 6 rupees whereas

presently it’s about 42 rupees and during this period, NIT has declared very

handsome dividends as well. So, during this period the equity investor has

benefited substantially well and that has encouraged the individuals and

institutions to put their money into equity.

The raising of financial resources through equity is very important for the

industrial progress of the country. Pakistan requires more and more investment

in the fund industry for making rapid progress which is the only solution to many

of its problems.



5.2 Growth in Asset Management Companies

A positive trend as the number of asset management companies has grown from

6 in the year 1994 to 18 in the year 2009 thus showing a 200% increase.

5.3 Mutual Funds - A Comparison with other Investment Avenues

Mutual funds have been able to attract growing number of investors. Compared

to other investment avenues, such as in currency, bank deposits and the slipping

returns on national saving schemes (NSS), small investors have been tempted to

dabble in stocks. Growing number of investors appear to be putting their trust

and money in mutual funds. An indicator that suggests the increasing interest of

investors in the sector is the average daily turnover of closed-end mutual fund,

which had reached 3.1 million shares in 2008, from 1.8 million shares in 2006.

The choice for investors in mutual funds is now widening. There are closed-end

mutual funds, open-ended mutual funds, as well as money market and Islamic

funds. The entry of Crosby Dragon Fund-the first multinational-managed foreign

fund in Pakistan's financial markets early this year has provided new dimensions

to the industry. Chairman Securities and Exchange Commission of Pakistan

Tariq Hassan says that the entry of Crosby Dragon Fund has marked a new

beginning in the development of mutual fund industry in Pakistan.

In both bull and the bear market, mutual funds in Pakistan tend to run ahead of

other stocks. That happened post the 12 per cent drop in the KSE-100 index,

after it had peaked to 4,604 points on September 12, last year. Between

February and September 2008, the market capitalization of the KSE rose by 89

per cent, but that of the mutual fund sector, paced ahead by surging 118 per

cent. And after touching the magical figure of trillion rupees in market

capitalization, when it slipped back by 22 per cent till November 22, the market

capitalization of mutual funds took to their heals faster to the south and lost 42



per cent6! It is difficult to conclude whether that reflects good or bad upon the

management's of mutual funds in the country.

5.4 Future Prospects

Over the course of next five years it is believed that further privatization, trickle

down impact of macroeconomic stability and revitalization of micro economy

would lead to surge in conversion of efficient SMEs into large corporations

leading to higher market capitalization and the same would be reflected in the

mutual funds sector size as well. In view of the expected GDP growth we expect

further price improvement in the listed stocks from their existing levels. Moreover,

global trend of reliance on mutual funds as an active investment option is also

emerging in the country and that will also add to the expected growth in this

sector. It is believed that over the next five years the total size of Pakistan mutual

funds sector would reach at least PKR 250 billion

6 Dilawar Hussain, Mutual funds getting popular, DAWN/Business, 02 February, 2010 http://www.dawn.com/business


http://www.dawn.com/business


6. KEY PLAYERS IN THE MARKET

6.1 Key Players

At present a number of closed-end as well as open-end mutual funds are

operating in Pakistan. Among the oldest are NIT and the various funds managed

by Investment Corporation of Pakistan (ICP). The largest number of listed mutual

funds is managed by the ICP. There are some closed-end mutual funds

operating in private sector whereas NIT and ICP operate in public sector. As of

March 31, 2009 there are 35 mutual funds in Pakistan, fourteen open-ended and

21 closed-ended.

Out of these the leading Asset Management Companies includes Arif Habib,

Jahangir Siddiqui's ABAMCO, Dawood's PVCL, Crosby Dragon of Hong Kong

and also the government-sponsored NIT.

a. National Investment Trust

NITL was incorporated as an unquoted public limited company in 1962. The

principal activity of the company is to manage NIT, an open end mutual fund. The

fund is the largest open end mutual fund in Pakistan, with investments in

approximately 435 of the 659 listed Pakistani Companies as at March 31, 2008.

NIT's portfolio has over 96% percent correlation with the Karachi Stock Exchange

All Share Index and is as such the nearest proxy to an Index Fund in Pakistan.

Value of net funds under management is approximately Rs.67 billion (MAR 09).

Gross assets under management are Rs.70 billion approx. The fund has a 97%

weighting in equities and 3% weighting in fixed income securities. NITL’s

objective is to provide its Unit-holders with a balance between their regular

income needs and long term capital appreciation7.

NITL has approximately 53,000 unit holders and 19 branches across Pakistan.

Distribution channels include NBP, SCB, HBL and AEIB (U.A.E) branches.

7 http://www.nit.com.pk



NIT is Pakistan’s oldest and largest open-ended mutual fund with over 58 per

cent market share of the mutual fund industry with investments in about 500 out

of total 659 Pakistani companies listed in KSE. By Feb 15, 2009 Presently NIT

has over 53,500 unit holders, who collectively hold 1.54 billion NIT units.

Performance of NIT

NIT has emerged as a leader, and out performed the KSE 100 Index on total

return, which is reflected by the financials at the end of June 20098.

The total return on funds for NIT is at 109 per cent while KSE 100 Index

result in over 90 per cent

NIT has achieved year on year appreciation of 89% in its per unit NAV, on

top of 16% dividend yield for the year

The year-end per unit NAV of Rs 20.58 plus per unit dividend of Rs 1.75

paid by the Trust, translates into a total return of 109% as compared to per

unit NAV of Rs 9.89 as at June 30th, 2008

These results have been the best in eight years. The other important facet of

NIT is the investor base, which reflects the participation from all social strata of

the society. This performance has been made possible by a team of dedicated

professionals and prudent portfolio management policies.

NIT is Pakistan’s oldest and largest open-ended mutual fund with over 58

percent market share of Mutual Fund industry with Investments in about 500 out

of total 659 Pakistani companies listed in KSE. The value of the Fund invested in

the Market by NIT at current price is Rs 65 billion that makes it single largest

institutional investor in KSE. Presently NIT has over 53,500 unit holders, who

collectively hold 1.54 billion NIT units.

NIT, for the financial year ending June 30, 2009 has declared the highest

dividend of Rs 3.30 per unit9, which would require a payout of Rs. 4.2 billion to

unit holders. The highest sales of Rs 11 billion, huge redemption of Rs 9 billion

without any delay and hassle and disbursement of over 97 percent of its profits

against the requirement of 90 percent under law, reflected effectiveness of 8 http://www.jang.com.pk/thenews/feb2009-daily/04-02-2009/business/b2.htm9 Pakistan Observer - Newspaper online edition - July 03, 2008.htm



management and boards of directors. Such impressive results from a public

sector fund are of a great significance.

b. Arif Habib Investments

Arif Habib Investment Management Limited is an asset management and

investment advisory company. It started its business in March 2007, with a

launch of two open end mutual funds (unit trusts), namely the Pakistan Stock

Market Fund (PSM) and the Pakistan Income Fund (PIF), having a core capital of

Rs. 250 million each. A third open end fund was added in November 2007, when

the company formed a strategic alliance with Metropolitan Bank to launch the

Metro Bank – Pakistan Sovereign Fund (MSF), with a core capital of Rs. 250

million. After the successful launch of three open end funds, Arif Habib

Investments acquired the management rights for the closed end KASB Premier

fund, renamed as Pakistan Premier fund, in December 2006. The year 2008

proved to be a phenomenal growth year for the funds under its management,

with record performance in terms of asset growth and yields. Arif Habib

investments started the year 2009 with a launch of a new closed end fund, the

Pakistan Capital Fund (PCM) worth Rs1, 500 million. Overall, the company is

presently managing funds in excess of Rs. 6.7 billion10 in three open-end and two

closed end mutual funds.

Performance of Arif Habib Investments

Pakistan Income Fund (PIF) of the Arif Habib Investments (AHI) has yielded a

total return of 13.71% in one year11. The funds have a strong correlation with

KSE 100 Index however out performing it for the most part.

10 Annual Report June 200911 http://[email protected]> Arif Habib Investments yields 13.7% return



Figure 10: Performance of PSM vs. KSE 100 Index

c. ABAMCO LIMITED

ABAMCO Limited is the first and the largest asset management company in

Pakistan’s private sector. The Company was formed in 1995 as a joint venture

between the International Finance Corporation (a member of the World Bank

Group), AMVESCAP, the largest fund manager in Europe, and Jahangir Siddiqui

& Co. It currently manages approximately Rs 17 billion in investments on behalf

of hundreds of institutions and thousands of individuals12.

ABAMCO has a proven history of pioneering in the investment industry. In 1997,

ABAMCO's flagship fund, UTP, was the first private sector open end mutual fund

to be launched in Pakistan. Since inception, UTP has had an average annualized

return of approximately 25 percent. Launched in 2007, UTP-Islamic Fund was

the first Shariah-compliant mutual fund in the country and has posted returns of

approximately 23 percent annually since inception13.

12 http://www.js.com.pk13 http://www.js.com.pk



Performance of ABAMCO

ABAMCO Composite Fund was a unique fund in Pakistan's closed end fund

history. Launched in May, 2009, it had the largest ever paid up capital of Rs 3

billion and received the largest amount of foreign institutional investment, $5

million from IFC. Based on its market value, this fund has declared an interim

dividend in excess of 18 percent on annualized basis in February 2008.

ABAMCO Limited announced a staggering sum of Rs1.02 billion in cash

dividends for certificate holders in its closed-end mutual funds. This is the highest

dividend pay out by any private sector mutual funds in Pakistan14.

6.2 Comparison of NIT with other Funds

The Graph shows investment comparison on total return basis among various

funds i.e. UTP, NIT, PSM, PIF, KSE 100 Index and T-Bills. The best performer

among all is NIT, which also shows a correlation with KSE 100 Index and PSM.

Although funds like PSM claim that they outperformed KSE 100 index but actual

data shows a different picture. The performance of PIF is a bit similar to that of T-

Bills rate. The UTP fund, which is oldest in private sector, is showing a poor

performance.

The performance of these funds can only become up to the mark if fair value of

financial instruments is properly calculated, all risks like market risk, interest rate

risk, credit risk, liquidity risk etc. should be identified, monitored and properly

managed. Professional fund management staff and proper checks and balances

by SECP are required.

14 Stated by ABAMCO chairman, Air Cdr.(Rtd) Munawar Siddiqui, 15th February, 2009, www.dailytimes.com.pk



% Change since 11/03/02 Balanced Funds: % Change since

11/03/2007

Annualized Returns

31 Aug, 2009

PSM 385.49 %

NIT 362.61 % Balanced Portfolio 185.91 % PIF 11.41 %

KSE 315.34 % UTP 128.14 % T-Bills 2.47 %



Change since July 2008 to 31 Aug 2009 Annualized Return since July 2008 to 31

Aug 2009

PSM 164.93 % PSM 75.47 %

NIT 122.69 % NIT 55.54 %

UTP 45.73 % UTP 21.51 %

KSE - 100 126.14 % KSE -100 57.60 %



The above graph15 gives a very clear picture of investment comparison between

NIT and KSE 100 Index and it is very clear that NIT has out performed KSE 100

index since 2008 and has maintained its best performance against all other fund

managed companies. Some other funds also claim to out perform KSE 100 Index

because of their proactive measures but the real picture is not that. Some asset

management companies take undue advantage of customer less knowledge and

unawareness about the performance of stock market so the need is to make

people fully aware about their investment decision and strict monitoring of the

actual performance of their funds.

15 Graph provided by Zahirrudin khan, Area Supervisor, Arif Habib Investment Management Limited.



Analysis of Funds through Ratio’s

In order to analyze how different Mutual Funds are performing in Pakistan as

compared to the market index a thorough study of their performance is required.

For this purpose different calculations are done for the funds that are trading at

the discount to their NAVs and are rated “safe investment16” by SC Securities.

Total Return for a period of 8 months 22.859

Standard deviation of KSE 100 Index 8.244

CLOSE END MUTUAL FUNDS

Pakistan Premier Fund

Total Return for a period of 8 months (TRp) 14.172

Standard deviation of Pakistan Premier fund (SDp) 5.330

Beta of Portfolio (βp) 0.3193

Correlation 0.533

Risk Free Rate of Return (RF) 8%

RVAR (Sharpe's Measure) (TRp-RF)/SDp 1.133

RVOL (Treynor Measure) (TRp-RF)/βp 22.457

Jenesen's Alpha α (Rp-RF)-[βp(Rm-RF)] 2.432

16 http://www.scsecurities.net


http://www.scsecurities.net/


PPF KSE 100 Index

Monthly Returns Monthly Returns

3.7445 7.4938

5.2718 20.2640

-9.1639 -6.5432

-2.9197 -5.4792

3.8872 0.3885

5.4516 5.1334

7.0808 -3.8270

-2.18074.4286

Figure 11: Correlation between KSE 100 Index & PPF



Pakistan Capital Market Fund

PAKISTAN CAPITAL MARKET FUNDMonths Opening Closing % Return

Jan 3/1/2009 9.2 31/01/09 9.8 4.882

Feb 1/2/2009 9.8 28/02/09 11.95 9.648

Mar 1/3/2009 11.95 31/03/09 8.85 -16.573

Apr 1/4/2009 8.85 29/04/09 11.40 14.736

May 2/5/2009 11.40 31/09/09 11.00 -3.509

Jun 1/6/2009 11.00 30/06/09 11.95 7.636

Jul 1/7/2009 11.95 29/07/09 12.70 5.276

Aug 1/8/2009 12.70 26/08/09 13.10 3.150

Total Return 28.247

Standard deviation of PCM fund 9.238

Beta of Portfolio 0.3766

Correlation 0.389

Risk Free Rate of Return RF 8%




PCM KSE 100 INDEX

Monthly Returns Monthly Returns4.882 7.494

9.648 20.264

-16.573 -6.543

14.736 -5.479

-3.509 0.389

7.636 5.133

5.276 -3.827

3.150 4.429

Figure 12: Correlation between PCM & KSE 100 Index



OPEN END MUTUAL FUNDS

Pakistan Stock Market Fund

KSE 100 INDEX

Months Opening Closing % Return

Jul-03 1/7/2008 3432.55 31/07/2008 3,933.37 13.590

Aug-03 1/8/2008 4,018.61 29/08/2008 4,461.47 9.993

Sep-03 1/9/2008 4,523.52 30/09/2008 4,026.34 -9.969

Oct-03 1/10/2008 4,066.82 31/10/2008 3,781.03 -6.090

Nov-03 3/11/2008 3,793.82 25/11/2008 4,067.29 6.235

Dec-03 2/12/2008 4,308.45 31/12/2008 4,473.85 3.911

Jan-04 1/1/2009 4,473.57 30/01/2009 4,841.59 7.227

Feb-04 6/2/2009 4,887.68 27/02/2009 4,838.59 -1.004

Mar-04 3/3/2009 4,852.46 31/03/2009 5,105.87 4.243

Apr-04 1/4/2009 5,141.03 30/04/2009 5,430.72 4.635

May-04 4/5/2009 5,524.54 31/09/2009 5,497.49 -0.490

Jun-08 1/6/2009 5,453.74 30/06/2009 5,280.96 -3.168

Total Return of KSE 100 Index for 1 year 33.152



MonthsMonthly Returns

of PSM

Jul-08 15.4

Aug-08 13.68

Sep-08 -3.33

Oct-08 -4.45

Nov-08 6.39

Dec-08 7.89

Jan-09 5.46

Feb-09 -1.95

Mar-09 5

Apr-09 4.99

May-09 1.18

Jun-09 -2.25

Total Returns (yearly including dividend) 62.26

Standard deviation of PSM 6.097


Correlation 0.945







Correalation Between PSM & KSE 100 INDEX

-20

-10

0

10

20

30

40

1 2 3 4 5 6 7 8 9 10 11 12

Months

Mon

thly

Ret

urns KSE 100 INDEX

Monthly ReturnsPSM MonthlyReturns


PSM KSE 100 INDEXMonthly Returns Monthly Returns

15.4 13.590

13.68 9.993

-3.33 -9.969

-4.45 -6.090

6.39 6.235

7.89 3.911

5.46 7.227

-1.95 -1.004

5 4.243

4.99 4.635

1.18 -0.490

-2.25 -3.168


ABAMCO Stock Fund

KSE 100 INDEXMonths Opening Closing % Return

Jan 3/1/2009 6220.28 31/01/09 6747.62 7.494Feb 1/2/2009 6868.29 28/02/09 8261.28 20.264Mar 1/3/2009 8403.49 31/03/09 7,770.52 -6.543Apr 1/4/2009 7,595.87 29/04/09 7,103.65 -5.479May 2/5/2009 6,833.60 31/09/09 6,860.15 0.389Jun 1/6/2009 7,020.37 30/06/09 7,450.96 5.133Jul 1/7/2009 7,463.60 29/07/09 7,177.93 -3.827Aug 1/8/2009 7,194.10 26/08/09 7,584.69 4.429

Total Return 22.859

Standard deviation of KSE 100 Index 8.244

ABAMCO STOCK FUND

Months Opening Closing % Return

Jan 3/1/2009 11.8 31/01/09 12 1.695

Feb 1/2/2009 12 28/02/09 13.2 9.000

Mar 1/3/2009 13.2 31/03/09 11.50 -12.879

Apr 1/4/2009 11.50 29/04/09 8.50 -16.391

May 2/5/2009 8.50 31/09/09 8.75 2.632

Jun 1/6/2009 8.75 30/06/09 8.95 2.091

Jul 1/7/2009 8.95 29/07/09 11.25 13.065

Aug 1/8/2009 11.25 26/08/09 9.40 -6.556

Total Return -7.383

Standard deviation of ABAMCO stock fund 9.699


Correlation 0.5393




RVAR (Sharpe's Measure) (TRp-RF)/SDp -1.531

RVOL (Treynor Measure) (TRp-RF)/βp -28.996

Jenesen's Alpha α ((Rp-RF)-(βp(Rm-RF))) -23.498

ABAMCO Stock Fund KSE 100 Index

Monthly Returns Monthly Returns

1.6949 7.4938

9.0000 20.2640

-12.8788 -6.5432

-16.3913 -5.4792

2.6316 0.3885

2.0913 5.1334

13.0653 -3.8270

-6.5556 4.4286

Correlation Betw een KSE 100 Index & ABAMCO Stock Fund

-30.0000-20.0000-10.0000

0.000010.000020.000030.000040.0000

1 2 3 4 5 6 7 8

Months from Jan-05 to Aug-05

Mon

thly

Ret

urns

KSE 100 IndexMonthly Returns

ABAMCO StockFund MonthlyReturns



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

Mutual FundStd.

DeviationBeta RVAR RVOL

Jensen’s

Alpha

ABAMCO Stock Fund 9.699 0.5462 -1.531 -28.996 -23.498

Pakistan Premier Fund 5.330 0.3193 1.133 22.457 2.432

Pakistan Capital Market

Fund9.238 0.3766 2.075 55.421 14.65

Pakistan Stock Market

Fund6.097 0.8199 6.646 65.180 33.368

6.3 Results Analysis

As we know that Beta is a relative measure of systematic risk. Here betas are

calculated using monthly returns of stocks. Thus beta shows how risky the stock

is as compared to market. All the above four funds are taking less risk than the

market as their beta comes out less than one.

Sharpe’s Measure (RVAR) is calculated to measure the excess return per unit of

standard deviation. The higher the RVAR and RVOL, the better the portfolio

performance is. Therefore in this case Pakistan Stock Market Fund is best

performing stock among all as its RVAR is 6.646 and Treynor Measure (RVOL) is

65.18 which are much higher than the rest. ABAMCO Stock Fund is the worst

performing stock for this time period.

Also the Jensen’s Alpha of Pakistan Stock Market Fund is significantly positive;

this is evidence of its superior performance as compared to ABAMCO Stock

Fund which is significantly negative.

6.4 Government Policy

From this we can conclude that in Pakistan the Mutual Funds are not taking more

risk. These funds only take risk less than the market risk thus obviously they will

show less returns. This means these funds are not following the theory of more



risk, more returns. As these funds provide only limited amount of returns to their

investors thus these are not gaining success in the eyes of millions of individual

investors in the country.

The need is to start a wide range of funds for different kinds of investors with

different kind of investment objectives. This way full benefit out of professional

management can be taken. The asset management companies should introduce

funds that are for risk taker investor and thus the management should take more

calculated risk than the market and try to outperform the market returns by its

professional and forecasted expertise.



7. COMPARISON WITH OTHER MARKETS

7.1 Worldwide Market – An Overview

Over the past few decades, there has been explosion of the mutual fund industry

both in the U.S. and elsewhere. This industry is considered as the most

successful financial innovations in the past decade.

The Mutual fund industry in aggregate holds assets worth $11.7 trillion or 13.8%

of primary securities globally. In some countries, the industry is over a century

old, but in others, it is a more recent innovation.

The fund industries in Luxembourg and Ireland are at the top by holding assets

that are 484% and 82% of their country’s primary assets

At the end of 2008, the worldwide mutual fund industry held $13.0 trillion in

assets. This includes $ 6.4 trillion in the US fund market, and 5.5 trillion in 38

other reporting nations. The countries with the largest fraction of the industry

were the U.S. (60 percent), Luxembourg (5.5 percent), France (5.1 percent), Italy

(3.1 percent) and Japan (2.9 percent).

Figure 15: Worldwide share of mutual fund industry

Share of MF Industry Worldwide

US60%France

6%

Italy3%

J apan3%

Luxembourg7%

Other Countries21%

The mutual fund industry shows signs of continued growth. Over the period from

1996 to 2008, the ratio of fund industry size to GDP increased by 6.9 percentage



points on average (median = 4.1 percentage points). Not all countries’ fund

industries have grown at the same rate, with the slowest growth over this period

being -0.9 percentage points (Japan) and the fastest being 25.6 percentage

points (South Korea).

57 percent of worldwide mutual fund assets, or $7.0 trillion, are held in nations in

the Americas, with U.S. assets composing 93 percent of the total for the region.

Approximately $555 billion are held by mutual fund markets in Argentina, Brazil,

Canada, Chile, Costa Rica, and Mexico. Europe, if considered as one unified

market, would represent $3.6 trillion, or 33 percent of the total worldwide mutual

fund assets as of year-end 2007. France and Luxembourg, with fund assets of

$1.1 trillion each, constituted the second and third largest mutual fund markets in

the world and the largest in Europe. Investors in the Asia/Pacific and Africa

regions held 10 percent of worldwide mutual fund assets. Australia and Japan,

with fund assets of $518 billion and $349 billion, respectively, were the largest

Asia/Pacific and Africa mutual fund markets and among the top 10 markets

worldwide.

Figure 16: Composition of world wide mutual fund assets



7.2 Mutual Funds in South Asia

As far as growth of mutual funds in South Asia is concerned there are only two

countries in the region which contribute almost more than 80% of the economic

activity of the region. Over the last five years Indian mutual funds sector has

grown by more than 5% which lead to its current size of USD 22 bn. Out of these

assets 59% were contributed by open-end bond funds, 19% by open-end money

market funds the rest is constituted by equity funds, balanced funds and

government securities.

Mutual Fund Industry in India

The last decade witnessed the maturity of India's financial markets. Since 1991,

every governments of India took major steps in reforming financial sector of the

country.

Assets under management by mutual funds in India have increased from Rs. 250

million to approx. Rs. 1,531 Billion.

Future of Mutual Fund Industry in India

The corpus of Indian mutual fund industry had reached Rs1,50,537 crore in

December 2009, it still had a long way to go as it is still behind the bank deposit

figure of Rs16,22,579 crore. American mutual fund industry’s corpus stood at

three times that of bank deposits and therefore the Indian mutual fund industry

had a long way to go.

The total assets of all scheduled commercial banks by end-DEC 2010 is

estimated at Rs 40,90,000 crore. Banks assets are expected to grow at an

annual composite rate of growth of 13.4% during rest of the decade. In short

term, mutual fund assets could fluctuate but over the period we could see big

jump in industry assets.



Mutual fund assets have grown with an annual growth rate of 9% over the last 5

years. Going by current annual growth rate, mutual fund assets would be

doubled by year 2010 but considering the growing appetite of retail investors for

investments & booming Indian economy, Indian industry could see bigger jump in

mutual fund assets.

Lessons Learnt from Indian Mf Industry

Indian Mutual Fund industry is developing at a fast pace because of the good

practices and applications of rules and regulations along with the strict imposition

of code of corporate governance. Thus Pakistan MF industry should also look

into the actions, which Indian industry has taken to make the industry grow in

Pakistan. Following are few segments on which India is paying special focus:

India is paying special focus on the participation of retail segment in the

MF industry. They are trying to make mutual fund a part of asset allocation

of common man, so as to achieve the true sense and purpose of mutual

funds.

To channelize the savings from household sector, Indian market is

concentrating on the ‘B’ and ‘C’ class cities, which are growing at a rapid

pace. Today most of the mutual funds are concentrating on ‘A’ class cities

since the cost involved in acquisition of big investors is small. But they

should realize that stability in the fund would come with the presence of

small retail investors.

Mutual funds are trying to penetrate into rural population by taking the

clues from the Indian insurance industry whereby they have separate set

of products for the urban as well as rural sector. The products in the rural

sector are simple and less in number, which are easy for them to

understand.

Now a days number of bank-sponsored mutual funds are established in

India as such funds can enjoy the established faith by the people and thus

it does not have brand equity to build. Further, it gets a readymade



clientele base of the bank to pitch the sales .It can also get the leads from

the existing clients.

Indian Mutual Funds are trying to remove special advantages, which a

foreign multinational mutual fund has over any other Indian mutual fund

through expertise, proven track record, faith and a global perspective.

SEBI is making special rules and regulations to implement these in their

true sense. It is also focusing on formal research and proper marketing of

innovative products.

Asset management companies have been pressing the market regulator

to allow them to invest in commodity futures, where volumes are picking

up. The industry is also looking forward to invest in equity and debt with

appropriate internal regulations and risk management measures in place.

7.3 Mutual Funds in India & Pakistan – A Comparison

The first mutual fund UTI was set up by the Government of India in 1964, under

the Unit Trust of India Act 1963 where as they were introduced in Pakistan in

1962, almost two years before they were introduced in India, with the public

offering of National Investment Trust (NIT) so Pakistan was ahead of India at that

time but because of lack of proper planning and absence of capital market

reforms it has left far behind Indian industry.

In India UTI mutual funds schemes were the only choices available to investors

until 1987 when public sector banks and insurance companies were permitted to

set up mutual funds. Though the 1988 year saw some new mutual fund

companies, but UTI remained in a monopoly position. Also in Pakistan NIT

remained the only open-ended mutual fund in the country for over 30 years.

The performance of mutual funds in India in the initial phase was not even closer

to satisfactory level. People rarely understood, and of course investing was out of

question. But yes, some 24 million shareholders were accustomed with

guaranteed high returns by the beginning of liberalization of the industry in 1992.



This good record of UTI became marketing tool for new entrants. The

expectations of investors touched the sky in profitability factor.

In India the 1993 regulations set the stage for the entry of private sector mutual

funds, many of which were set up in collaboration with foreign partners,

contributing to more competition, improvements in product varieties and investor

services, and substantial growth of the industry over the past decade. Total

assets under management by mutual funds increased at an annualized rate of

12% from Rs360.5 billion in April 1992 to Rs1.08 trillion in August 2006.

Figure 21: Assets under management by Mutual Funds in India

360,500

1,080,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Rs.

in M

illio

n

1992 2002

Years

Assets under management by Mutual Funds in India

In 1993, the Securities and Exchange Board of India (SEBI), the capital market

regulator, formulated the Mutual Funds Regulations, which for the first time

established a comprehensive regulatory framework to govern all mutual funds

except UTI. The regulations required the separation of the sponsor, trustee, and

asset management company (AMC) in a mutual fund, to bring about an arm’s

length relationship for proper checks and balances; introduced disclosure and

reporting requirements; standardized offer documents; and formulated

investment and other rules to govern mutual funds operations.

Private sector participation in the mutual funds started in early 1990s with setting

up of the first open-ended fund by ABAMCO Limited. However, due to the

prolonged recession of later 1990s, the private sector was also unable to make



any major contribution to the overall performance of the fund industry. The

performance of the mutual fund industry has shown a significant improvement in

the last four years. The net assets went up by approximately 300% from Rs. 25

billion in FY2007 to Rs. 100 billion in FY2008.

Figure 22: Assets under management by Mutual Funds in Pakistan

Assets under management by Mutual Funds in Pakistan

25

10

0

0 20 40 60 80 100 120

2002

2004

Ye

ars

Rs. in Billion

Assets under management by Mutual Funds in Pakistan

The mutual fund industry in Pakistan started picking up steam only within the last

decade despite its 42 year old history. Out of many reasons behind its slow

growth is a lack of planning which has played a negative role since mutual funds

cannot flourish when capital market reforms have not taken place. But Indian

Government has made reforms for the development of capital market and also

implemented these successfully thus show a great rise in this industry.



Figure 23: Total Assets under Management in India & Pakistan

2,500

1,080,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Rs

in M

illion

Pakistan India

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

Pakistan

India

This graph shows how small the Pakistani mutual fund industry is as compared

to India although mutual funds were started almost at the same time in both

countries.

Although in FY 2009 net assets under management by mutual funds went up to

120 billion but these are still far behind against India’s Rs. 1.08 Trillion assets. A

total of 31 mutual funds boost of record net assets of $1.66 billion in Pakistan,

which is equal to 1.7 per cent of the GDP. But India's 33 mutual funds, offer more

than 400 schemes and their net assets totals $33 billion (4.9 per cent of the

GDP). A private sector local mutual fund market has developed rapidly but is still

dominated by an efficiently-run state-owned National Investment Trust.

REASONS BEHIND THE GROWTH OF MUTUAL FUNDS IN INDIA

Primary drivers behind this growth paradigm witnessed in India are:

Improvement in tax regulation

Establishment and rebalancing of regulatory procedures

Board reforms and lifting of government controls



In India mutual funds have grown in number and size mainly due to the

keen interest of individual investors— who have realized the advantage on

investing in mutual funds.

Furthermore, capitalizing upon the advantages with reference to IT sector growth

also reflected in deepening and broadening of the financial markets.



8. PRESENT AND FUTURE CHALLANGES

8.1 Present

Pakistan’s Mutual Fund industry holds a promising future because:

Low interest rate scenario prevailing in the country, investors are greatly

attracted towards equities especially current low returns on National Saving

Schemes (NSS) created an opportunity For Mutual Fund Industry to grow by

attracting more and more investors through better returns.

Mutual Fund industry got an opportunity for growth after Central Bank last

year barred banks to establish separate asset management subsidiaries and

allow them to invest more than 20 % of their equity directly in the Stock

Market.

Mutual funds are popular only in few big cities of the country and huge market

in smaller cities of the country is still untapped. So these funds have an

opportunity to attract those markets.

As recently SBP has given permission to mutual funds to invest abroad this

decision brings in new opportunities for growth of this sector now mutual

funds could initially look towards such countries as Sri Lanka, Bangladesh,

Thailand and Malaysia for making foreign investment there. Later on they can

even move in Chinese, Middle East and North African markets selectively17.

Thus can diversify the risk for their portfolio and can earn better returns. Now

these funds will not solely dependent upon performance of Pakistani market

and stock exchange but also on other foreign markets.

By investing abroad fund managers will be able to bring back returns earned

on it, to home thus paying taxes to the Government.

17 Stated by Nasim Beg, CEO of Arif Habib Investments



Another opportunity for the mutual fund industry is to establish real estate

investment trusts (REITs). The benefit of REITs will be that property will

become earning assets and small investors would also be able to gain from

the real estate boom. Another benefit of REITs would be that a comparison

will be available between the performance of those mutual funds investing in

stock market and those investing in real estate (REITs). This way the boom in

real estate sector will provide benefit to the individual investors as well.

More recently, mutual funds were allowed exposure in new types of financial

instruments including derivatives and foreign securities, and expand their

activities into such businesses as pension funds, provident funds, and venture

capital funds management.

8.2 Future Challenges

Pakistan’s Mutual Fund industry is facing many challenges to reach on the

successful and prosperous position in the economy:

Since mutual funds are now allowed to make investment abroad a risk of

misuse of the facility that can have a drain on Pakistan’s foreign exchange

reserves, thus SBP has to put safeguards in place. For this purpose a proper

regulatory frame work needs to be developed to safeguard the vested

interests of the investor.

As mutual funds were allowed exposure in new types of financial instruments

thus, regulations and operating standards related to disclosure, valuation,

performance measurement as well as internal control, governance, and risk

management systems need to be expanded to take into account these new

activities. Further, the enforcement and investigative capabilities of the

regulator require strengthening to cope with the increasingly complex financial

transactions and expansion in the scope of mutual funds operations.



There is a dire need for the reformation of regulatory framework. This will also

ensure more growth in investment. The Mutual fund reforms are essential for

the development of capital market. These should be brought under the

regulation of SECP18.

There is a need to strengthen the legal and judicial structure of the Securities

and Exchange Commission of Pakistan (SECP) aimed at restoring the

investors’ confidence in the capital market.

The challenge is to expand the accessibility to funds and timely monitoring of

these funds is necessary as well.

The level of corporate governance at the listed companies is required to

improve by SECP and it should be fully implemented and followed.

Regulations also need to be properly imposed to gain the confidence of

investors.

18 Habib ur Rehman, chairman and chief Executive ABAMCO



9. CONCLUSION & RECOMMENDATIONS

9.1 Conclusion

The market is an ever-changing place – new concepts and products are being

introduced continuously. Some products are common in other markets but not as

yet in Pakistan. I have attempted to address the hurdles arises time to time in

mutual fund industry of Pakistan.

The number of mutual funds, their paid-up capital and number of investors in

mutual funds is too small in Pakistan as compared to other countries. This can be

attributed to a number of factors, worst being the GOP policies. NIT in Pakistan

and UTP in India were established around the same time. But the value of

portfolio of UTP India exceeds Rs. 44 million. The portfolio of NIT is too small

compared to that of its Indian counterpart. In Pakistan, even the biggest private-

sector funds have not been able to entice more than 5,000 individuals, less than

0.003 per cent of the population Even if one keeps the population of India and

Pakistan in Mind, the ratio is still dismal.

For Pakistan to attain and sustain economic growth similar to that of the newly

industrialized countries (NICs) and its ASEAN neighbors, it must it must improve

its ability to mobilize investment funds. This means that savings mobilization

should be enhanced.

Mutual funds, however, did not flourish in Pakistan the way it did in other

countries. The development of this industry was stunted because of the absence

of a proper legislative framework.

But the recent years have not only seen the revival of the mutual funds industry

in Pakistan but also the activity has shifted from the public sector to the private

sector with open-ended mutual funds having more attractiveness as compared to

closed end mutual funds.

Now the government and private sector has started giving attention to the

development of the industry. Foremost, the government is now developing a

legislative framework that allows an environment of prudent regulation, balanced



with adequate flexibility, in order to encourage participants in the industry as well

as promote stability and security.

To bring in growth in the mutual fund industry the present government is paying

attention to the following factors19:

An effective monitoring and regulatory regime

Capital Market Reforms

Higher Corporate earnings

Reduction in interest rates

Entry of more players

A buoyant stock market

The government should also update the amount of minimum paid-up capital

required of investment companies. To encourage management companies to

offer different types of funds that would cater to various kinds of investors and

permitting them to switch from one fund to another at minimal cost, the bill should

allow lower capitalization requirements for subsequent funds managed by

existing management companies, which had already compiled with the minimum

paid-up capital.

In recent past, these funds have launched a number of new products such as

Balanced Funds, Equity Funds, Money Market Funds, and Islamic Funds. Other

innovative products are in the pipeline, which include Annuity Funds, Pension

Funds, Infrastructure Funds, Real Estate Funds, Capital Guarantee Funds,

Offshore Funds, etc.

Furthermore, mutual funds or open ended investment companies should be

allowed to increase their authorized capital stock without requiring them to

subscribe to the increase in authorized capital stock. This is because the whole

idea of mutual funds is to be able to sell the shares to many small investors.

19 10th Asia Oceania Regional Meeting, Manila Philippines, March 7-11,2009



The present Government is giving full support to the Mutual Fund industry,

particularly the management of funds for the pensioners.

Real key to success for the mutual funds in Pakistan will be that how effectively

these funds market and distribute/sale itself to individual customers because this

is what lacks in the industry from the very beginning.

Moreover, global trend of reliance on mutual funds as an active investment

option is also emerging in the country and that will also add to the expected

growth in this sector. It is believed that over the next five years the total size of

Pakistan mutual funds sector would reach at least PKR 250 billion.

Development of a vibrant mutual funds industry is essential for a country like

Pakistan, where the savings rate and the number of equity investors is low as

compared to other countries in the region. Thus present situation and

Government policies are very favorable for the growth of this industry. If

Government will take more steps to improve this industry it will soon become a

lucrative market for investors. All the indicators are very positive and hopeful.

9.2 Recommendations

After analyzing the existing situation of mutual funds market in Pakistan I want to

present recommendations on Internal Factors as well as on External factors.

Internal Factors

1) Scrutiny of Fund managers

Credentials of fund managers need to be scrutinized to ensure smooth and

transparent flow and process of investment.

2) Reforms in Regulatory framework

There is a dire need for the reformation of regulatory framework. This will

also ensure more growth in investment. The Mutual fund reforms are



essential for the development of capital market. These should be brought

under the regulation of SECP20.

3) Proper Marketing

The exposure of individuals to mutual funds should increase to other smaller

cities of Pakistan. Thus there is a need to have a trained manpower to do

the marketing for the Mutual Funds. To make the distribution network of

funds more broad the asset management companies can use third party

distributor to sell the funds.

4) Innovative Products

Mutual fund industry should come up with new innovative products to attract

the investors. The industry should also bring in the concept of specialized

funds and it should focus on the development, mobilization of income,

commodity, real estate, provident, pension and prudential funds. The mutual

fund companies should make different personalized products for investors

with different risk appetites and investment objectives. For Example if we

look globally we can see that very specialized funds can meet the specific

investor needs such as education, marriage, house mortgage funds etc.

5) Strengthen the structure of SECP

The Government of Pakistan should strengthen the legal and judicial

structure of the Securities and Exchange Commission of Pakistan (SECP)

aimed at restoring the investors’ confidence in the capital market.

6) Accountability of Directors

Directors of closed end funds made accountable. Effective monitoring of

these funds must be initiated. Analyzing the monthly statements of Profit

and Loss, investments in listed and unlisted securities and brokerage

commissions could be a good monitoring tool. Also auditors must be made

20 Habib ur Rehman, chairman and chief Executive ABAMCO



separate for the fund and its manager. The will result in more transparent

function of the fund.

External Factors

1) Government policies

Government of Pakistan should allow establishment of more and more

open-end funds to ensure greater liquidity for the capital market. As it is

seen that companies now are prefer to mobilize funds through debt

instruments rather than borrowing from financial institutions.

2) Corporate Governance

SECP should improve the level of corporate governance at the listed

companies and should make sure that all these are fully implemented and

are followed. Regulations should be properly imposed. This step will help to

boost investor’s confidence in equities market and make this market more

efficient and attractive.

3) Breaking the monopoly

To encourage investments from the general public government’s national

savings schemes should be discouraged and banking sector monopoly of

deposit should go out. The private sector can replace the said instruments

by developing mutual funds.

4) Elimination of systematic Risk

Government must rationalize rate of interest and systematic risk must also

be eliminated from the stock market by virtue of reforms introduced by

SECP.

5) Education and Information

There must be proper arrangement for the education of investors. There

must be no hurdles in information flow. More access to information with

accuracy will ensure more success to investors.



6) Accessibility and Timely monitoring

There must be expansion in accessibility to funds and timely monitoring of

these funds is necessary as well.

7) Teaming of Mutual funds and SECP

The problem is Mutual Funds and institutions have all teamed in a way that

they come together for buying of shares and leave market together, which

increases speculative activity in the market. Investors follow them and in the

process get affected. They sell in forms of groups. The Securities and

Exchange Commission should look into these factors.

8) Credit Rating

There must be proper credit rating of funds on the mandatory basis, as this

will make the funds perform much better as competition to get a good rating

will rise.

9) Strengthening the Role of Trustees and Fund Managers

Role of trustees and custodians must be strengthened. Qualified

professionals with proven track record must be allowed to function, as Fund

Managers. This will encourage more investment growth in Mutual Fund

industry.

10) General Public Awareness

General public needs to be made aware of the fact that investments in

mutual funds could be really lucrative as compared to normal bank accounts

and they need to broaden their horizons. A normal bank account in days of

extreme interest rates could pay maximum of around 10 percent but a

mutual fund like ABAMCO paid 30% in the year 2008. Hence the difference

is huge and people are missing out on handsome profits by just being afraid

of investments in the managed funds.

11) Banks could form Mutual Funds



Many international banks like Citibank have their own mutual funds. In this

way banks could benefit in a huge way. Also people will trust it more

because of its established repute and brand name in the market. This way

banks can attract most of their customers to pool their money in their funds

and get handsome amount of money. Thus Government should encourage

credible banks to open their own asset management companies, as this will

increase investments from general public because of their confidence in the

bank.

12) Investing abroad

It should be ascertained that only those allowed, who have out-performed

the KSE index consistently for the last three years should be ensured that

only those should be allowed who have distributed all of their income

earned. That investment should be permitted in only shares not in options

and futures where the element of risk is higher. Investment should be

restricted to listed securities which have not suffered a loss for last three

years and investments can be made only in debt instruments which are of

investment grade i.e. BB rating.

Given the prevailing economic opportunities and investment scenario in Pakistan,

there is no reason why mutual funds cannot show improved performance and

stimulate this key sector of Pakistan’s economy.



BIBLIOGRAPHY

BOOKS

A Guide to Understanding Mutual Funds published by investment

company institute (ICI) .How mutual fund works by Albert J. Fedman.

Russwilles, Chapter 2 page 34

ICP annual report 2009-2010

Investor Wonders Why He should Buy Mutual Funds by General News

Publication October 26 2008

Mutual Funds Management and Working by Indian author Lalit K

Bansal.

NIT annual report 2008

Research Publication by ICI (Investment Company Institute) Under

Section Research by Publication: “Mutual Fund Book 2008”

SECP Annual Report 2009

Source data provided by SECP, Interview with Mr Channa of

Specialized Company Division

The Morning Star Approach to Investing Wiring into Mutual Fund

Revolution by Andrew Leckey page 35.

ARTICLES

10th Asia Oceania regional meeting Makati Shangri-la hotel, Manila,

Philippines march 7 - 11, 2009

An interview with Furqan Ahmed, Associate, ABAMCO Limited, A

Jahangir Siddiqui Group Company

An interview with Mr. Ahmed Hassan, Area Supervisor, NAFAF

FUNDS Investments Management limited

Article by Azhar Mahmood, SECP drafts rules for real estate trusts:

The News- Jang Group; August 06, 2009

Article by Dilawar Hussain, Mutual funds getting popular: DAWN-

Business; 02 February, 2009



Article by Dilawar Hussain, Small investors route to equity investment:

Mutual Funds-DAWN-Business;22 August,2009

Article by Mohiuddin Aazim, Mutual Funds can invest abroad: DAWN-

Business; August 14, 2009

Article by Naween A. Mangi, Real estate investment trusts on the

cards: DAWN-Business; June 6, 2009

Article published in DAWN: Mutual funds net asset value up: DAWN-

Business; 25 April,2009

Dilawar Hussain, Mutual funds getting popular, DAWN/Business, 02

February, 2009 http://www.dawn.com/business

http://www.jang.com.pk/thenews/dec2009-daily/16-12-2009/business/

b18.htm

Mutual Fund Association of Pakistan (MUFAP) address to press – THE

DAWN 2008 issue – The investors guide.

News article published in dawn on 24th august 2009,”mutual fund

industry assured of tax benefits.”

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http://www.jang.com.pk/thenews/dec2004-daily/16-12-2004/business/b19.htm

http://www.dawn.com/business

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