MUTUAL FUNDS

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MUTUAL FUNDS

• By
• Uzair Ahmad (Relationship Manager)
• NBP Fullerton Asset Management Ltd.

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Qualification

• MBA (Finance)
• Mutual Funds Distributor Certification
• Stock Brokers Certification

• IMSciences (2011)
• Institute of Capital Markets, Karachi (2010)
• Institute of Capital Markets, Karachi (2011)

Professional Qualification
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Mutual Funds

• Mutual Funds are a pool of money invested by
  small, medium large Investors .
• Simply put, a mutual fund is a type of
  investment. You can think of it as a group of
  people with similar goals who, instead of
  investing on their own, pool their money.
• They hire a professional manager to invest that
  money in securities, such as stocks, bonds, and
  money market instruments.

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Mutual Funds
Introduction to Mutual Funds

• Mutual Funds
• Professional Fund Managers
• MBAs
• CAs
• CFAs

• Investments
• Stocks
• Money Markets
• TFCs
• Bank Deposits
• CFS

YOU The Investor
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History of Mutual Funds

• The mutual fund industry was born in the United
  States 87 years ago.
• The  first open-end mutual fund was founded on
  March 21, 1924 and after one year had 200
  shareholders and 392,000 in assets.
• By the end of the 1960s there were around 270
  funds with 48 billion in assets.
• Today, mutual funds assets in the United States
  are more than their bank deposits.
• Similar stories are being repeated in other
  countries.

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Mutual Funds around the Global Local Market

• Mutual funds are very popular today, known for
  ease-of-use, liquidity, and unique
  diversification capabilities.
• Mutual Fund around the Globe
• Country                       Assets  (US
  Billion)     No. of Funds
• USA                                    
  8,977           14,026
• Europe                                  
  5,561                   29,690
• Asia Pacific                      
  1,815                    11,620
• Africa                                   
  52                        570
• Hong Kong                          
  404                   1,040
• India                                      
  38                      415
• Japan                                    
  406 2,576
• Korea                                    
  189        6,568
• New Zealand                       
  10               554
• Philippines                          
  1                 28
• Pakistan                                
  3                         122
• Taiwan                                 
  71                       453

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Mutual Fund in Pakistan

• The mutual fund industry was introduced in
  Pakistan by the Government in the form of
  National Investment Trust (NIT) it was
  constituted under the trust deed dated 12th
  November 1962.
• Executed between the National Investment Trust
  Ltd (NITL) as the Management Company and the
  National Bank of Pakistan as the Trustee.
• Mutual Funds in Pakistan are running under the
  Non-Banking Finance Companies (NBFC) Act 2003 and
  regulated by Securities and Exchange Commission
  of Pakistan (SECP).

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Trustee

• A trustee is a party who is given the legal
  responsibility to hold and safeguard the fund
  property in the best interest of or for the
  benefit of investors.
• Asset Management Company only takes investment
  decisions. The trustee makes payments from the
  funds account for the securities purchased and
  the securities are then placed into the same
  account according to the trust deed.
• The trustee for Mutual Funds in Pakistan is
  Central Depository Company (CDC), which is
  running under Government of Pakistan.
• CDC is also the trustee for the entire stock
  market investors in the country (size Rs.
  2000 billion).
• 
  

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Who can invest in mutual funds?

• Individuals
• Companies
• Financial Institutions
• Banks
• Non-profit Organizations
• Provident Funds
• Pension Funds
• Gratuity Funds
• Foreign Nationals (fulfilling requirements of the
  government)

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Types of Mutual Funds

• There are two types of Mutual Funds.
• Close Ended FundOpen Ended Fund

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Close Ended Funds

• Closed End Funds have a predetermined and fixed
  number of shares outstanding.
• Closed-end funds behave more like stocks because
  they trade on an exchange and the price is
  determined by market demand after an initial
  public offering (IPO) process.
• Closed-end funds can be traded below their net
  asset value or above.

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Close Ended Funds

• The closed-end fund "company" still has its own
  stock, which is traded on an exchange and trades
  above or below its underlying value, or net asset
  value (NAV), in this case.
• They also trade according to market demands.
  Every seller must have a buyer.

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Open Ended Funds

• A type of mutual fund, where there are no
  restrictions on the amount of shares the fund
  will issue.
• If demand is high enough, the fund will continue
  to issue shares no matter how many investors
  there are.
• Open-end funds also buy back shares when
  investors wish to sell.
• It's important to understand that each mutual
  fund has different risks and rewards.

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Open Ended Funds

• In general, the higher the potential return, 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 the risk. This is
  a fact for all investments.

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Types of Open Ended Funds

• Equity / Stock Funds
• Money Market Funds
• Debt Funds
• Balanced Funds
• Islamic Funds
• Index Funds
• Global /International Funds

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Equity / Stock Funds

• These funds invest mainly in the shares of
  companies and undertake the risk of price
  movement at the stock exchange.
• Such funds are clearly expected to out-perform
  other types of funds in a rising market.
• Their strength is the expected dividends and
  windfall income through capital gains.

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Money Market Funds

• These funds primarily invest in assets which have
  maturity less than 1 years e.g.
• Treasury Bills
• Short term Bank Deposits (CD)
• Commercial Papers other securities.
• They are generally not affected by volatility at
  the debt market stock exchanges.
• The risk of Money Market funds is very low and so
  is the return.

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Debt Funds

• The objective of Income funds is to seek a high
  level of current income than Money Market funds.
• Investors seeking higher income are willing to
  accept moderate risk price fluctuations.
• Bond/Income funds usually invest money in
• Bank Deposits
• Term Finance Certificates (Corporate Bonds)
• Government Bonds

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Balanced Funds

• The 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 balanced fund might have a weighting of 60
  equity and 40 fixed income any other depending
  on the situation of capital market .

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Islamic Funds

• These funds mainly invest in Riba free
  securities.
• Islamic funds conduct all their activities
  according to the Islamic Shariah based on the
  guidelines provided by the Shariah Advisory Board
  appointed for the fund.
• A Shariah Advisory Board comprises of eminent
  Islamic and financial scholars, who have
  considerable experience in the field of Islamic
  studies.
• Islamic Funds can be equity, income or balanced
  fund as long as the policies meet the Shariah
  principles.

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Index Funds

• This type of mutual fund replicates the
  performance of a broad market index such as KSE
  100 Index.
• An investor in an index fund figures that most
  managers can't beat the market.
• The asset allocations of the index funds mostly
  the same as compare to their benchmark index.

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Global / International Funds

• An international fund (or foreign fund) invests
  only outside your home country. Global funds
  invest anywhere around the world, including your
  home country.
• It's tough to classify these funds as either
  riskier or safer than domestic investments.
• They do tend to be more volatile and have unique
  country and/or political risks.
• The world's economies are becoming more
  inter-related, it is likely that another economy
  somewhere is outperforming the economy of your
  home country.

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The Benefits of Mutual Funds

• Simple to invest
• Diversification
• A mutual fund is diversified because it invests
  in many different types of securities thus
  offering better risk management.
• Professional management
• Mutual funds are managed by Asset Management
  Companies through professional portfolio
  managers, who in coordination with the research
  department, identify the best securities for a
  fund and make timely and profitable short term
  long term investment decisions.

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The Benefits of Mutual Funds

• Low Cost
• Diversifier portfolio allocated to investor even
  on minimum investment.
• Transparency
• Most transparent form of investment. Prices
  can be monitored daily .
• Liquidity
• You can liquidate your investment anytime.
• Highly Regulated
• Mutual Funds are regulated by Securities
  Exchange Commission of Pakistan (SECP)

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The Benefits of Mutual Funds

• Life Cycle Planning
• Investor can link their investment plans to
  future individual family needs and make
  changes as the life cycle changes.
• Market Cycle Planning
• For investors who understand how to actively
  manage their portfolio, their investments can be
  moved as market conditions change.
• Taxation Benefits
• Investment in open end funds also enjoys a
  Tax-Rebate under section 62 of the Income Tax
  Ordinance 2001.

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Risk Associate with Mutual Funds

• Market Risk
• Credit Risk
• Liquidity Risk
• Interest Rate Risk

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Mutual Funds are diversified investments.

• Mutual Funds are, by definition diversified
  investments therefore they are lower-risk
  investments, especially when compared to
  individual stocks.
• Most investors use mutual funds in order to
  diversify their holdings and provide some
  stability to their portfolios.
• Mutual Funds are managed by Asset Management
  Companies through professional fund managers.
• Mutual Funds distribute 90 of their realized
  income to the investors.

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Investment opportunities in Pakistan

• Mode Returns Risk Liquidity
  Tax
• Banks Low Low High (with penalty)
  Yes
• National Savings Low Low High (with
  penalty) Yes
• TFC / Bonds Medium
  Medium Medium
  Yes
• Property Medium Medium
  Low Yes
• Stocks High High High
  No
• Mutual Funds High/Low High/Low High
  (without penalty) No
• 
  
  

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Tax benefits of investing in Mutual funds
Comparison of Income Funds with Bank Deposits
Subject to completion of 1 year when capital
gain tax is exempted.
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• Thank You.