Internationally, mutual funds have been around for a long time,

dating back to the early 19th century. The first modern American
mutual fund opened in 1924, yet it was only in the 1990's that
mutual funds became mainstream investments, as the number of
households owning them nearly tripled during that decade, with
recent surveys showing that over 88% of all investors in the US
participate in mutual funds.
Historical view
Pakistan was in the forefront amongst developing countries in
initiating Mutual Funds. The first open-end mutual fund was
introduced in 1962 and closed-end mutual funds from 1966.
These were state owned. In 1971, the rules were introduced to
allow private sector companies to launch closed-end mutual
funds. The first private sector closed-end fund was launched in
1983. Mutual Funds Association of Pakistan (MUFAP) was formed
in 1996 when a group of investment advisers managing eight
closed-end mutual funds got together to form an association that
would work to promote mutual funds in Pakistan. Around the
same time, the Asset Management Companies Rules, 1995 had
been notified which allowed private and foreign firms to launch
open-end mutual funds.

While the first one open-end mutual fund was launched in 1997, it
wasnt before 2002 that this area started to really pick up pace
when several other players entered the industry. The same period
also saw the stock markets performance scale new heights as a
result of positive government policies and incentives, registering
a growth of more than fifteen times in the net assets of the
mutual funds between the years 2003-2008. The financial crisis of
2008 curbed the growth pattern as the economy and the financial
markets drastically declined and subsequently the mutual funds
declined. A number of ad-hoc measures taken by the regulator
and the stock exchanges with the approval of the regulator,
further fueled the downfall and industry went through a rough
period. Post 2008, the industry has been slowly and gradually
trying to recover and regain its growth momentum. However lack
of understanding as to the dynamics and importance of the
mutual fund industry in the economy led to tax policies by the
Government which has severely affected the growth of the
industry. The steps taken in past few years have been detrimental
for the mutual fund industry. It had been very unfortunate that
the mutual fund industry has been plagued by various taxation
anomalies and issues that have been growing every year rather
than reaching any resolution. It is also unfortunate that the
petitions filed in the Honorable Courts have been pending for
years now with no outcome. These are adding to the cost of
management and affecting the return of the investor. The
Government instead of facilitating savings and investments in the
country has been hampering the same through taxation and other
anomalies. Despite these trying circumstances the industry has
been resilient in its survival and trying to bring in new innovative
products that meet the investors' requirements. The fact however
remains that mutual funds industry would have been much higher
if it had not faced the tax anomalies that it has over the years and
resources that were directed towards litigation could have been
utilized to promotion and investor education so that the public at
large would have been aware of what mutual funds are and
mutual funds would have been a household name and first choice
savings vehicle.

Mutual funds vs. direct investments:

Mutual funds are popular because they make investing in financial

markets easy. From an investors' viewpoint mutual funds have
several advantages such as:

Professional management and research to select quality

securities
 Spreading risk over a larger number of stocks whereas the
investor is limited to buy only a hand full of stocks. The
investor is therefore not putting all his eggs in one basket.

Ability to add funds at set amounts and smaller quantities

such as PKR 1,000/5,000 per month

Ability to take advantage of the stock market which has

generally outperformed other investments in the long run.

Ability to convert the Units into cash at any time and receive
the amount within 6 working days.

Economies of scale: Because a mutual fund buys and sells large

amounts of securities at a time, its transaction costs are lower
than what an individual would pay for securities transactions.

Types of Mutual Funds in Pakistan

The mutual funds industry has introduced many attractive products in the last
twelve years or so which are especially attractive for the small investors/ savers
and it is precisely this sector which is most important for mutual funds to target
and develop. Until the end of the 1990s the only categories of mutual funds in
Pakistan were equity and balanced funds in both classes of mutual funds i.e. closed
end and open end. Since then, the mutual fund industry introduced many new
products suited to meeting the investment needs and risk appetite of a very broad
cross section of the investing public such as Pension funds, Money Market Funds,
Fund of Funds, Income Funds, Capital Protected/Preservation Funds, Index
Tracker Funds, Commodities Funds and Income Funds for investment return to be
paid monthly, quarterly or annually. In addition, the mutual funds industry also
offers Shariah compliant funds under each of the categories mentioned above.
These categories of funds cater to the needs of all type of investors, those who
want to invest to supplement their current income and do not want to take risk and
those who want to invest for long term growth and to meet their retirement needs.

Therefore an investor has a range of mutual funds to choose from for investment
and investments should be made in a mix of funds keeping in consideration one's
objectives of savings/investments which includes: Return needs, Risk Tolerance,
Time horizon and Liquidity needs.

Way Forward

Early resolution of Court cases and removal of tax anomalies

It is important for the mutual fund industry's survival and growth
that the tax anomalies are removed and a conducive environment
is present for the industry to do its proper role in the economy as
it does internationally. Mutual Funds are the biggest savings
avenue worldwide which unfortunately has not been the case
over here in Pakistan. While on hand Government is offering high
returns on fixed rate Government instruments and schemes
making it difficult for market return instruments such as mutual
funds to compete, on the other hand it is also imposing double
taxation and levies on the mutual funds that are not present on
other investment avenues.

It is very clear that WWF is not applicable to mutual funds (also

supported by the relevant Ministry of Labour) and yet the matter
has been pending since June 2010. Similarly double taxation on
savings products like FED and the sales tax jurisdiction conflicts
between SRB & PRA has only resulted in resources to be diverted
to fight these in courts instead of being employed to expand and
grow the savings rate in the country. A level playing field between
mutual funds and other savings and investment avenues is must
for mutual funds and pension funds industry to grow and promote
savings and investments in the country which is currently at the
lowest in the region. MUFAP understands the significance of the
issue for investor and industry interest and is actively following up
its resolution through the Courts and Government of Pakistan.

Public Awareness and Education to expand the Retail Investor

Base
It is imperative for long term sustainable growth of the mutual
funds industry that the retail investor base increases. Asset
Management Industry vis-a-vis the Banking Sector presents a
bleak picture, not only in terms of assets under management, but
also with regard to participation and outreach to the general
public. Currently, asset management companies are offering a
diversified range of mutual and pension funds to meet the risk
appetite of investors, yet the awareness in the masses is lacking
of the options available to them. The industry's next focus must
be on conducting a comprehensive and sustained public
awareness campaigns to bring across to the attention of the
individual investors, the diverse investment features and benefits
that mutual funds and voluntary pension schemes offer to them.
The Government and SECP are also required to facilitate asset
managers to promote, educate and encourage investors to save.

By Dawn news

KARACHI: The size of the mutual funds industry stood at Rs482 billion on
March 31, 2015, down by Rs15bn, or 3 per cent, from Rs497bn the earlier month.

The amount was spread over three categories: Open-end mutual funds that claim the
biggest share of the pie amounting to Rs454bn; closed-end mutual funds at Rs17bn
and pension funds at Rs11bn. All that money is held by 22 asset management
companies in as many as 216 mutual funds. But for all that, the billions under
management by the mutual fund industry happen to be just 5.6pc of the total bank
deposits.

The mutual fund industry has yet to catch up with the current trend and shed the old
habit of deposits with banks that fetch pittance in returns or keeping cash at home,
even if the returns are none, says Ahmed Bilal, who manages a medium-sized open-
end fund.

He pointed out that in comparison to Pakistan, the size of the Indian mutual fund
industry stands at Rs12 trillion with every fourth household feeling safe to entrust
their savings to the funds.

Among the major players in the mutual funds sector, National Investment Trust (NIT)
continues to lead the pack with Rs79bn under management. It is closely followed by
Al Meezan Investment Management Limited with Rs68bn; UBL Fund Managers
Rs57bn; NBP Fullerton Asset Management Rs55bn; MCB-Arif Habib Savings and
Investment with Rs48bn.

In the open-end fund category, money market funds have under their belt Rs104bn
and income funds Rs110bn, which outpaces the equity market funds with Rs97bn in
that high-risk category. Islamic equity funds stood at Rs35bn; Islamic income funds
Rs31 and Islamic funds at Rs22bn on March 31, a report by brokerage firm Spectrum
Securities (Pvt) Limited shows.

For investors short of time, required skills and knowledge about the investment
avenues, mainly the stock market, experts and fund managers have continued to
suggest taking entry through the mutual funds that are managed by professionals
armed with necessary knowledge and expertise.

There have been some big inflows after small investors burnt their fingers in the
equity market meltdown in Feb-March this year, says a fund manager who tracks
both the stock and the money markets.

The recent steps taken by the regulators in extending strict regulations in the conduct
of affairs of the mutual fund industry also has all the trappings of giving the industry a
big push forward.

By business recorder
A key distinction between a developed and a developing economy lies in their
savings pattern. In an economically-matured country, people tend to save a higher
proportion of what they earn, as compared to a developing country where average
income is usually low and the marginal propensity to consume is high.
Our economy, plagued with high poverty, falls in the latter category. Saving is a
luxury that is only afforded by a small proportion of the population - middle class
(partly) and above. For an average Pakistani, saving (and investment) is still only
confined to bank deposits or government bonds - but this mindset might change
soon. Enter Mutual Funds.

A mutual fund allows many retail investors (big or small) to pool their money and
entrust a fund manager to make prudent investments on their behalf. These
investments are in accordance with the investor's guidelines pertaining to risk
tolerance, among other things and are confined mostly to equities, money market
instruments and bonds.

COMPARATIVE VIEW The global mutual fund industry is huge, worth $31.4 trillion
(at 2014-end) as measured by total net assets, with US accounting for a whopping
$15.9 trillion. Pakistan is relatively new to the game with most of its funds less than
a decade old. The collective assets under management (AuM) of all asset
management companies in Pakistan are little under Rs 500 billion.

For Pakistan, mutual funds AuM is still around 5 percent of total bank deposits. To
put things in perspective, the assets that Indian MFs manage are 13 percent of the
country's deposits, while Malaysia stands at 23 percent. Similarly, AuM as a
percentage of GDP is under 2 percent for Pakistan, while for India and Malaysia, it is
around 8 percent and 32 percent respectively.

The MF industry in Pakistan is still 'insignificant' relative to the regional economies,

mainly because of its nascence. With a promising stock market, and a growing
penetration of mutual funds, however, this gap is bound to shrink. From net assets
(open-ended funds) of Rs 153 billion at the end of 2009, the tally currently stands at
around Rs 425 billion - a compound annual growth rate(CAGR) of 19 percent.

The number of funds has kept increasing steadily over the years, with the number
of asset management companies not changing significantly. The global recession
was an inflection point for the mutual fund industry, as the AuM shrank 47 percent
in 2009. Since then, the industry has been strong, mainly on back of the bullish
stock market.

FUND CLASSIFICATIONS Mutual funds fall into three categories - open-ended,

pension funds and closed-ended schemes. The predominant type - open ended,
accounts for over 90 percent of total assets and due to its popularity, will be the
center of attention in this article.

Open-ended mutual funds have no restrictions in the number of shares (units) its
can issue, unlike a closed-ended fund. In the former type, investors can participate
in the pool any time by purchasing the fund's units. When they wish to cash out, the
open-ended fund will buy back these units. As of July-end, open-ended funds had
AuM totalling Rs 425.4 billion, pension funds had Rs 14.2 billion and closed-ended
funds, which have been declining in popularity, had Rs 16.6 billion worth of assets.

Within open-ended funds, there are four major categories that account for bulk of
the assets: equity, income, money market and balanced/asset allocation funds.
These categories can be further classified as normal (vanilla) or Islamic (Shariah-
compliant) funds.

Equity funds contain more assets than any other category. The reason is simple -
prospect of higher returns. The upbeat performance of KSE in the last four years has
attracted more investors to equity funds. That being said, not all is rosy for them;
these funds are characterized by high volatility and the investment horizon is longer
than some might like.

By the end of last year, 29% of the assets managed by the industry were placed in
equity funds (6 percent Islamic, 23 percent rest). Overall, Islamic equity funds
boasted a 28.7 percent return in 2014, while the vanilla ones offered an impressive
47.3 percent return.

Money market funds also account for a major chunk of the pie. They attract
investors who are not willing to take sizeable risk and their investment avenues
consist of banks and T-bills. In 2014, the returns for Islamic and vanilla Money
Market funds were 8.7 percent and 8.2 percent respectively.

Income funds are similar to money market ones, with the former also placing assets
in Term Finance Certificates (TFCs) and Sukuks. Hence, income funds have a bit
more volatility and the investment horizon is a bit longer as compared to money
market funds. Last year, Islamic and vanilla income funds returned 8.7 percent and
9.3 percent respectively. Still, income and money market funds are pretty liquid
investments that offer decent returns with low volatility. To compare, banks offer 5-6
percent on deposits.