History

Mutual funds really captured the public's attention in the 1980s and '90s when mutual fund investment hit record highs and investors saw incredible returns. However, the idea of pooling assets for investment purposes has been around for a long time. Here we look at the evolution of this investment vehicle, from its beginnings in the Netherlands in the 18th century to its present status as a growing, international industry with fund holdings accounting for trillions of dollars in the United States alone. Historians are uncertain of the origins of investment funds; some cite the closedend investment companies launched in the Netherlands in 1822 by King William I as the first mutual funds, while others point to a Dutch merchant named Adriaan van Ketwich whose investment trust created in 1774 may have given the king the idea. Ketwich probably theorized that diversification would increase the appeal of investments to smaller investors with minimal capital. The name of Ketwich's fund, Eendragt Maakt Magt, translates to "unity creates strength". The next wave of near-mutual funds included an investment trust launched in Switzerland in 1849, followed by similar vehicles created in Scotland in the 1880s. The idea of pooling resources and spreading risk using closed-end investments soon took root in Great Britain and France, making its way to the United States in the 1890s. The Boston Personal Property Trust, formed in 1893, was the first closed-end fund in the U.S. The creation of the Alexander Fund in Philadelphia in 1907 was an important step in the evolution toward what we know as the modern mutual fund. The Alexander Fund featured semi-annual issues and allowed investors to make withdrawals on demand. The Arrival of the Modern Fund The creation of the Massachusetts Investors' Trust in Boston, Massachusetts, heralded the arrival of the modern mutual fund in 1924. The fund went public in 1928, eventually spawning the mutual fund firm known today as MFS Investment Management. State Street Investors' Trust was the custodian of the Massachusetts Investors' Trust. Later, State Street Investors started its own fund in 1924 with
1

Richard Paine, Richard Saltonstall and Paul Cabot at the helm. Saltonstall was also affiliated with Scudder, Stevens and Clark, an outfit that would launch the first noload fund in 1928. A momentous year in the history of the mutual fund, 1928 also saw the launch of the Wellington Fund, which was the first mutual fund to include stocks and bonds, as opposed to direct merchant bank style of investments in business and trade. Regulation and Expansion By 1929, there were 19 open-ended mutual funds competing with nearly 700 closed-end funds. With the stock market crash of 1929, the dynamic began to change as highly-leveraged closed-end funds were wiped out and small open-end funds managed to survive. Government regulators also began to take notice of the fledgling mutual fund industry. The creation of the Securities and Exchange Commission (SEC), the passage of the Securities Act of 1933 and the enactment of the Securities Exchange Act of 1934 put in place safeguards to protect investors: mutual funds were required to register with the SEC and to provide disclosure in the form of a prospectus. The Investment Company Act of 1940 put in place additional regulations that required more disclosures and sought to minimize conflicts of interest. The mutual fund industry continued to expand. At the beginning of the 1950s, the number of open-end funds topped 100. In 1954, the financial markets overcame their 1929 peak, and the mutual fund industry began to grow in earnest, adding some 50 new funds over the course of the decade. The 1960s saw the rise of aggressive growth funds, with more than 100 new funds established and billions of dollars in new asset inflows. Hundreds of new funds were launched throughout the 1960s until the bear market of 1969 cooled the public appetite for mutual funds. Money flowed out of mutual funds as quickly as investors could redeem their shares, but the industry's growth later resumed. Recent Developments In 1971, William Fouse and John McQuown of Wells Fargo Bank established the first index fund, a concept that John Bogle would use as a foundation on which to build The Vanguard Group, a mutual fund powerhouse renowned for low-cost index funds. The 1970s also saw the rise of the no-load fund. This new way of
2

doing business had an enormous impact on the way mutual funds were sold and would make a major contribution to the industry's success. With the 1980s and '90s came bull market mania and previously obscure fund managers became superstars; Max Heine, Michael Price and Peter Lynch, the mutual fund industry's top gunslingers, became household names and money poured into the retail investment industry at a stunning pace. More recently, the burst of the tech bubble and a spate of scandals involving big names in the industry took much of the shine off of the industry's reputation. Shady dealings at major fund companies demonstrated that mutual funds aren't always benign investments managed by folks who have their shareholders' best interests in mind.

Definition
The savings to GDP ratio is already low in Pakistan. With the reduction in purchasing power and declining rates of return on bank deposits and national savings schemes, analysts fear further decline in savings rate. Therefore, it is of prime importance for the people to know about the various available investment options to maximize return on their savings. At present equities offer very attractive dividend yields. However, an average person neither has the expertise nor the required information to take the best advantage of the available opportunities. While building a high yielding portfolio is very difficult, one can maximize his or her return by investing in mutual funds. Mutual funds are an investment that allows a group of investors to pool their money and hire a portfolio manager. The manager invests this money (the funds assets) in stocks, bonds or other investment securities (or a combination of stocks, bonds and securities). The fund manager then continues to buy and sell stocks and securities according to the style dictated by the funds prospectus. If there is a profit or gain on investments, it belongs to the investors. In case there is a loss, it is also borne by the investors.

Fees of Mutual Funds

All mutual funds charge fees to operate and manage the fund. Management fees pay the fund companies (or managers) to manage the funds. Some funds also charge investors an upfront sales charge/load when he/she first purchases shares
3

in the fund, while other funds charge a back-end load (contingent deferred sales charge) upon sale of fund shares. There are also funds that have no sales charge and these are known as no-load funds. 12b-1 fees are imposed by some funds to cover marketing and distribution costs. There are also various share classes of funds that differ in fee structure according to class (Class A, Class B, Class C, etc.)

Structure of Mutual Funds

Technically, mutual funds are open-end funds -- one of four basic types of an investment company. Closed-end funds, exchange-traded funds and unit investment trusts are three other types. As investment companies, mutual funds are regulated under the Investment Company Act of 1940.

Diversification of Mutual Funds

The beauty of mutual funds is that you can invest a few thousand dollars in one fund and obtain instant access to a diversified portfolio. Otherwise, in order to diversify your portfolio, you might have to buy individual securities, which exposes you to more risk and difficulty. Another reason to invest in mutual funds is their adherence to a basic principal of investing: Dont put all your eggs in one basket. In other words, many different types of investments in one portfolio decrease your risk of loss from any one of those investments. For example, if you put all of your money into the stock of one company and that company files for bankruptcy, you lose all of your money. On the other hand, if you invest in a mutual fund that owns many different stocks, it is more likely that you will grow your money over time. At the very least, one companys bankruptcy will not mean that you lose your entire investment.

Professional Money Management

Many investors dont have the resources or the time to buy individual securities such as stocks and bonds. In order to profit from investing in individual securities, an investor not only needs resources and time, but a considerable amount of expertise. In the context of mutual funds, professional money management is the management of assets by a mutual fund manager. The fund manager will research,

purchase and sell securities -- as outlined in the prospectus -- in order to benefit the mutual funds shareholders Advantage of Professional Money Management ; Expertise of the Manager ; Resources of the Manager ; Saves Time for the Mutual Fund Investor

Variety of Mutual Funds

There are many types and styles of mutual funds. There are stock funds, bond funds, sector funds, money market funds and balanced funds. Mutual funds allow you to invest in the market whether you believe in active portfolio management (actively managed funds) or you prefer to buy a segment of the market with no interference from a manager (passive funds and index funds). The availability of different types of funds allows you to build a diversified portfolio at low cost and without much difficulty. While you have a plethora of investment options (individual stocks, ETFs, and closed-end funds, to name a few) mutual funds offer a simple, efficient way to invest for retirement, education or other financial goals

The Pros and Cons of Mutual Funds

Advantages 1) Mutual Funds Offer Diversification The beauty of a mutual fund is that you can buy a mutual fund and obtain instant access to a hundreds of individual stocks or bonds. Otherwise, in order to diversify your portfolio, you might have to buy individual securities, which exposes you to more potential volatility. 2) Mutual Funds are professionally Managed Many investors dont have the resources or the time to buy individual stocks. Investing in individual securities, such as stocks, not only takes resources, but a considerable amount of time. By contrast, mutual fund managers and analysts
5

wake up each morning dedicating their professional lives to researching and analyzing current and potential holdings for their mutual fund. 3) Mutual Funds Come in Many Varieties A mutual fund comes in many types and styles. There are stock funds, bond funds, sector funds, target-date mutual funds, money market mutual funds and balanced funds. Mutual funds allow you to invest in the market whether you believe in active portfolio management (actively managed funds) or you prefer to buy a segment of the market with no interference from a manager (passive funds and index mutual funds). The availability of different types of mutual funds allows you to build a diversified portfolio at low cost and without much difficulty. 4) Mutual Funds Have Low Minimums Many mutual fund companies allow investors to get started in a mutual fund with as little as $1,000. Schwabs mutual fund family has a minimum of $100 for many of their mutual funds. 5) Systematic Investing and Withdrawals with Mutual Fund It is simple to invest regularly in a mutual fund. Many mutual fund companies allow investors to invest as little as $50 per month directly into a mutual fund. Money can be pulled directly from a bank account and invested directly in the mutual fund. On the other hand, money can be regularly withdrawn from a mutual fund and be deposited into a bank account. There are generally no fees for this service. 6) Mutual Funds Offer Automatic Reinvestment An investor can easily and automatically have capital gains and dividends reinvested into their mutual fund without a sales load or extra fees. 7) Mutual Funds Offer Transparency Mutual fund holdings are publicly available (with some delays in reporting), which ensures that investors are getting what they pay for. 8) Mutual Funds Are Liquid

If you want to sell your mutual fund, the proceeds from the sale are available the day after you sell the mutual fund. 9) Mutual Funds Have Audited Track Records A mutual fund company must maintain performance track records for each mutual fund and have them audited for accuracy, which ensures that investors can trust the mutual funds stated returns. 10) Safety of Investing in Mutual Funds

If a mutual fund company goes out of business, mutual fund shareholders receive an amount of cash that equals their portion of ownership in the mutual fund. Alternatively, the mutual funds Board of Directors might elect a new investment advisor to manage the mutual fund. While there are a plethora of investment options (individual stocks, ETFs, and closed-end funds, to name a few) a mutual fund can offer a simple, efficient way to invest for retirement, education or other financial goals Disadvantages 1) Mutual Funds Have Hidden Fees If fees were hidden, those hidden fees would certainly be on the list of disadvantages of mutual funds. The hidden fees that are lamented are properly referred to as 12b-1 fees. While these 12b-1 fees are no fun to pay, they are not hidden. The fee is disclosed in the mutual fund prospectus and can be found on the mutual funds web sites. Many mutual funds do not charge a 12b-1 fee. If you find the 12b-1 fee onerous, invest in a mutual fund that does not charge the fee. Hidden fees cannot make the list of disadvantages of mutual funds because they are not hidden and there are thousands of mutual funds that do not charge 12b-1 fees. 2) Mutual Funds Lack Liquidity How fast can you get your money if you sell a mutual fund as compared to ETFs, stocks and closed-end funds? If you sell a mutual fund, you have access to your cash the day after the sale. ETFs, stocks and closed-end funds require you to wait three days after you sell the investment. I would call the lack of liquidity
7

disadvantage of mutual funds a myth. You can only find more liquidity if you invest in your mattress.

3) Mutual Funds Have High Sales Charges

Should a sales charge be included in the disadvantages of mutual funds list? Its difficult to justify paying a sales charge when you have a plethora of no-load mutual funds. But, then again, its difficult to say that a sales charge is a disadvantage of mutual funds when you have thousands of mutual fund options that do not have sales charges. Sales charges are too broad to be included on my list of disadvantages of mutual funds. 4) Mutual Funds and Poor Trade Execution If you buy or sell a mutual fund, the transaction will take place at the close of the market regardless of the time you entered the order to buy or sell the mutual fund. 5) All Mutual Funds Have High Capital Gains Distributions If all mutual funds sell holdings and pass the capital gains on to investors as a taxable event, then we have a found a winner for the list of disadvantages of mutual funds list. Oh well, not all mutual funds make annual capital gains distributions. Index mutual funds and tax-efficient mutual funds do not make these distributions every year. Yes, if they have the gains, they must distribute the gains to shareholders. However, many mutual funds (including index mutual funds and tax-efficient mutual funds) are low-turnover funds and do not make capital gains distributions on an annual basis. In addition, retirement plans are not impacted by capital gains distributions. There are also strategies to avoid the capital gains distributions including tax-loss harvesting and selling a mutual fund prior to the distribution.

Pitfalls of Mutual Funds

1) There Is a Tax Drag on Mutual Funds Mutual fund shareholders face the possibility of receiving capital gains distributions from their mutual funds. These capital gains distributions are the result of a mutual fund selling securities owned by the fund (such as a large cap
8

mutual fund selling shares of GE above the cost of purchase). This mutual fund tax liability is known as tax drag. What do you do about this tax drag? For starters, if you own mutual funds in a taxdeferred retirement plan (401k, 403b, IRA, etc.), you will not be taxed on the distribution. If you have a taxable account, you may want to focus on low-turnover funds, which include index funds and tax-efficient mutual funds (even some actively managed funds have low turnover). Otherwise, you should consider visiting your fund companys website beginning in October of each year to determine if and when there will be capital gains distributions. If the distributions are anticipated to be large, you should weigh the advantages and disadvantages of owning the fund. Indeed, you may want to sell the fund in order to avoid the distribution. If you sell the fund to avoid the distribution, be aware that if you buy the fund back within 30 days (either in your taxable account or in your IRA), you will run afoul of IRS wash sales rules. 2) Past Performance of Mutual Funds Is Unreliable The disclosure, Past performance is not indicative of future performance, is a common theme that appears throughout mutual fund prospectuses and advertisements. The disclosure resonates with many mutual fund investors that buy last years top performing funds hoping for a repeat year. Srikant Dash, Index Strategist at Standard & Poors, says, Very few funds repeat a top-quartile performance. Furthermore, Standard & Poors research shows that a healthy percentage, and in most cases a majority, of top-quartile funds in the future will most likely come from the ranks of prior period second and third quartiles. The unreliable nature of the past performance of mutual funds is indeed a pitfall of mutual funds. Unfortunately, the past performance matter is an issue that most investments (ETFs, closed-end funds, UITs) share. So, what can you do about this pitfall of mutual funds? Setting realistic expectations, educating oneself on the markets, and diversifying amongst various investments will help overcome this pitfall. If you are choosing mutual funds for your 401(k), IRA or taxable account, there are many online resources to help you avoid this pitfall of mutual funds and not fall into the performance chasing trap.
9

3) Mutual Funds Are Expensive There is no doubt that mutual funds are loaded with fees. Some mutual funds have sales charges, management fees, 12b-1 fees, and more. These expenses can be a pitfall of mutual funds. The key is to research the expense of each mutual fund prior to buying. Are you buying a mutual fund with a front-end, or even back-end, sales load? Are you buying a fund with a 12b-1 fee? Are you buying a fund with a high expense ratio? Finally, ask yourself if you are getting what you pay for or if you can buy a similar fund with fewer charges and a lower expense ratio. The fees are disclosed in the mutual fund prospectus and can be found on the mutual funds websites. There are many mutual funds that do not have sales charges, that do not have 12b-1 fees, and that have reasonable expense ratios. The competition within the mutual fund industry makes this pitfall of mutual funds the easiest to avoid

How do mutual funds work?

The basic idea of how mutual funds work is straightforward. Investors pool their money and hire a portfolio manager to invest in a variety of investment securities. When an investor buys a mutual fund, their investment dollars are used to purchase new shares of the mutual fund. In other words, shares of the mutual fund are created for the new investor, these new shares are issued to the new investor, and the new investors dollars are combined with dollars of the other mutual fund holders. The manager of the fund, called the portfolio manager, then buys investments according to the objective of the fund. The funds prospectus will inform investors of the funds objectives. The result is that investors are able invest a potentially small amount of money, but have access to a professionally managed and diversified portfolio.

10

Operational efficiency of mutual funds

The broad parameters used for judging the operational efficiency of mutual funds are described below

Net Return;
The operational efficiency of mutual funds is best judged as its ability to earn the investors better and safe returns. Returns take the form of appreciation in value of investment made in mutual funds and the dividend or interest received on such investment. there are some expenses that are always incurred while earning such returns. the expenses are incurred as part of the efforts made at protecting the interest of investors compliance with the regulatory framework of SEBI etc. the expenses include trusteeship fee management fee administrative expenses fund accounting fee custodian fee initial charges etc.net return is computed by taking into consideration the gross return and the expenses. Besides laying down limits on certain expenses SEBI has fixed an overall limit on expenses. All these details are found in the SEBI regulation on mutual funds.

Net Asset Value (NAV)

NAV is another parameter used to measure the operational efficiency of mutual funds. The intrinsic value of a unit under a particular scheme is referred to as the NAV of the scheme. The value gives an idea of the amount that may be obtained by the unit holder on its sale to the mutual fund company.NAV of a unit is calculated as follows NAV per unit=[TMV- CL] \ SU TMV = total market value of investment portfolio +the written down value of fixed assets +the cost value of other current assets CL = current liabilities
SU= number of outstanding units in that scheme

11

For the purpose of determining the NAV the scheme of accounting practices as prescribed by the SEBI regulations of 1996 should be followed

Load
The initial expenses that are incurred by a mutual fund in relation to a scheme operated by it, is referred to as load of the scheme. According to the SEBI guideline a certain percentage of loads may be borne by the respective scheme. In such a case the load borne by the scheme will reduce the amount available for investment by the fund manager. Obviously where the AMC, instead of the respective scheme bears the load the entire amount of the unit obtained from the savers is available for investment. On account of the perceived advantages of the load schemes they are gaining popularity

Disclosures
A highly transparent nature of a mutual fund is said to operate to the benefit of the mutual fund itself, in addition to serving the needs of investors. Mutual funds are supposed to follow certain norms to ensure adequate and ample disclosure of their operations. Operations efficiency of mutual funds is disclosed through half yearly results and annual reports where all statistical information relating to all the schemes in operation is disclosed. Accordingly facts regarding gross income per unit, per unit ratio of expenses to average net asset by percentage etc are to be disclosed as desired by SEBI Further mutual funds are duty bound to supply a copy of the annual reports if asked by the investors. The disclosures must be adequate Voting right to investors; As part of ensuring greater operational efficiency mutual funds are obligated to obtain the prior permission of the investor of the scheme whenever the fund managers intend bringing about changes in the basic features of the schemes. Investors are granted voting rights when such matters are put up in a meeting of unit holders by the ACM.

Investors protection
The fund managers who protect the interest of investors should follow certain safeguards. Towards this end a greater order of transparency is adopted by the fund
12

managers. Units certificates are to be issued to investors within six weeks from the date of closure of subscription list. Units submitted for transfer should be executed within 30 days. Dividend warrants against the scheme are to be dispatched within 42 days of the declaration of the dividend. SEBI also desires that within 10 working days from date of redemption repurchase proceeds should be dispatched. In addition SEBI takes all possible safeguards such as conducting inspections of mutual funds to ensure that their operating policies are not against the interest of investors. Moreover defaulting AMCs are prohibited from issuing any further new schemes.

Evaluating mutual funds

In order that mutual fund managers act in judicious manners so as to bring about ultimate beneficial consequences to the investing community, it is essential that the performance of such fund is evaluated. Such an appraisal would help the fund compare themselves with other funds, besides being a potential source of information to the present and prospective investors, especially the small investors. From simple evaluation tools to sophisticated models, which take into consideration, the risks and uncertainty associated with the returns are available for evaluating the performance of mutual funds. Some of these tools are explained below: Perhaps you've noticed all those mutual fund ads that quote their amazingly high one-year rates of return. Your first thought is "wow, that mutual fund did great!" Well, yes it did great last year, but then you look at the three-year performance, which is lower, and the five year, which is yet even lower. What's the underlying story here? Let's look at a real example from a large mutual fund's performance:

1 year 3 year 5 year 53% 20% 11%

Conti.
13

Treynor model
Jack treynor evolved this model, which can be used to calculate the return per unit of risk. This is done by assuming that all investors averse to risk would like to maximize this value. The performance measure is calculated as follow:

PM= [ARi ARf] Bt Where, ARi = Average rate of return for portfolio i during a period. ARf = Average rate of return on a risk- free investment during the period. Bt = Slop of portfolio i characteristic line which represent the
portfolio relative volatility and its systematic risk.

PM = the treynor portfolio measure for the period.

A positive measure shows a superior, risk adjusted performance of a fund.

Sharpe model
William f. Sharpe developed this model in 1966. It measures the total risk, not merely systematic risk (as the Treynor model). The relevant performance measure is computed as follow:

PM =ARi -ARf Nt

where, Nt = Standard deviation of rate of return for the portfolio for the period.
The positive performance measure value is indicative of good performance.

Mutual Fund Holders Account

There are three types of accounts that are offered by most mutual funds, as described below:
14

1) Regular Account
Under this plan, an investor is permitted to purchase any number of units of the mutual fund at any time. The investor will be paid a share of the income accrued from funds investment periodically. This income can be reinvested in acquiring additional stock by the investors without receiving cash.

2) Accumulation Account
Under this plan, an investor is allowed to begin an account with a very small initial investment and continue adding to the fund periodically. Accumulation account may be voluntary or contractual. In voluntary accumulation plan, an investor has the flexibility to make periodic investment at will. But in a contractual plan, the investor has to make a predetermined amount of investment in the fund at regular intervals for a predetermined period of time, which may range as long as 10 to 15 years.

3) Withdrawal Account
Under this plan, an individual investor can withdraw a certain amount of funds on a regular basis. This suits old age persons who can supplement social security and pension benefits. Over a period of time, the investors can exhaust the assets of the account.

Regulations of mutual
Regulation of mutual funds, compared to other pooled investment options (think: hedge funds) is extensive. Mutual funds must comply with a strict set of rules that are monitored by the Securities and Exchange Commission. The SEC monitors the funds compliance with the Investment Company Act of 1940, as well as its adherence to other federal rules and regulations. Since their development, the regulation of mutual funds has provided investors with confidence in terms of the investment structure and offered a number of benefits, such as: Transparency: The holdings of mutual funds are publicly available (with some delays in reporting), which ensures that investors are getting what they pay for.

15

Liquidity: Shares of mutual funds are redeemed by the fund company on the trade date, which assures daily liquidity for investors. Audited Track Records: Funds must maintain their performance track records and have them audited for accuracy, which ensures that investors can trust the funds stated returns. Safety: If a mutual fund company goes out of business, fund shareholders receive an amount of cash that equals their portion of ownership in the fund. Alternatively, the funds Board of Directors might elect a new investment advisor to manage the funds. The Acts and Regulations of Mutual Funds The rules and regulations of mutual funds are extensive. The key regulations of mutual funds are: The Investment Company Act of 1940 -- The Act regulates mutual funds (as well as other companies). The Act focuses on disclosures and information about investment objectives, investment company structure and operations. The Securities Act of 1933 -- The Act has the objective of requiring that investors receive certain significant information pertaining to securities being offered for sale in the public markets. The Act also prohibits fraud and misrepresentations in the sale of securities. The Securities Act of 1934 -- The Act created the SEC and empowers the SEC with authority over the securities industry.

Mutual fund prospectus A mutual fund prospectus is to a mutual fund what an owners manual is to a car. If you want to learn more about whats under the hood of your mutual fund, check out the prospectus. If you purchase a mutual fund, youre assured to receive a prospectus. The SEC requires the fund company to provide you with a prospectus upon purchase of the fund. This prospectus can be quite daunting as it is full of legalese, numbers and

16

jargon. But dont be so fast to toss it out. The mutual fund prospectus is a valuable tool that contains important information. Key Information in the Prospectus Investment Objectives -- The goal of the fund is defined in the prospectus. Each mutual fund has a different goal. One fund may have a goal of income with preservation of capital while another funds goal might be long-term capital appreciation. Investment Strategy -- The prospectus details the strategy of the mutual fund. Does the fund invest in stocks and/or bonds? The strategy section will describe if the fund is focused on US investments or international investments or a combination of the two, known as global investments. Shareholder Information -- The prospectus provides information relating to the purchase and redemption of fund shares. Minimum account balances and tax consequences of buying, selling, holding, or exchanging shares of the fund are listed in this section of the prospectus. Risks -- The prospectus describes the risks associated with investing in the fund. If the fund invest in equities, for example, prospectus will discuss risks of investing in the stock market. The prospectus will also list risks of investing in the particular strategy of the fund. For example, the prospectus for the US large cap fund Vanguard 500 Index reads: Large-cap stocks tend to go through cycles of doing better -- or worse -- than the stock market in general. These periods have, in the past, lasted for as long as several years. You should read about, and understand, the risks of the fund prior to investing. Performance Information You will find performance information sliced in many ways in the prospectus. The total return for various time periods since inception including: calendar year returns, trailing period returns (1 year, 3 year and 5 year, for instance), and both before tax and after tax returns. The performance data is based on formulas set forth by the SEC which allows you to compare performance from one fund to the next with confidence that you are comparing apples to apples. There is probably no
17

reason for me to mention that past performance doesnt guarantee future performance (but we can hardly discuss performance without the caveat). Fees and Expenses The prospectus lists the shareholder fees and the annual operating expenses of the fund. The shareholder fees consist of sales charges and redemption fees. The operating expenses -- also known as the expense ratio -- include management fees and 12b-1 fees. The prospectus also includes a hypothetical investment and the impact these fees and expenses would have on the hypothetical investment over time. The hypothetical example will allow you to compare the costs of investing in one fund covered by the prospectus versus costs of investing in other mutual funds. Financial Highlights The financial highlights section of the prospectus includes audited data that is derived from the funds financial statements. The data is listed in a table and includes a reconciliation of the beginning period net asset value and ending period net asset value (for five calendar years). In other words, what was the fund worth at the beginning of the year, how much did it earn, what were the charges, and how much was the fund worth at the end of the year.

Types of mutual funds with respect to structure

Traditionally, there are two types of mutual funds: 1) Closed-end fund 2) Open-end fund. Closed End Fund A closed-end fund has a fixed pool of money, which is collected when the fund is set up. The fund is set up as an investment company with a certain amount of capital. The Fund Manager invests the money in capital markets. An investor wishing to participate in this type of mutual fund buys shares of the investment company at the time of its initial public offer. An investor may also buy shares subsequently from the stock market at the prevailing market price. If the investor wishes to disinvest he/she has to sell the shares of investment company through
18

stock exchange at the then prevailing price. The price of the shares of Investment Company in the stock market is determined by the supply and demand for such shares. Open end fund An open-end fund does not have a fixed pool of money. The fund manager continuously allows investors to join or leave the fund. The fund is set up as a trust, with an independent trustee, who has custody over the assets of the trust. Each share of the trust is called a unit and the fund itself is called a unit trust. The portfolio of investments of the unit trust is evaluated (normally) daily by the fund manager on the basis of prevailing market prices of the securities in the portfolio and the net asset value (NAV) per unit is determined. An investor can join or leave the fund on the basis of the NAV of the unit. However, the fund manager may have a small charge called 'load' added to the selling price or deducted from the redemption price to cover distribution costs.

Varieties of mutual funds

It's important to understand that each mutual fund has different risks and rewards. 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 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. Let's go over the many different flavors of funds. We'll start with the safest and then work through to the more risky. Money Market Funds
19

The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to park your money. You won't get great returns, but you won't have to worry about losing your principal. A typical return is twice the amount you 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, the primary objective of these funds is to provide a steady cashflow to investors. As such, the 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. Furthermore, nearly all bond funds are subject to interest rate risk, which means that if rates go up the value of the fund goes down. 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 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. 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 the economy moves through the business cycle.
20

Equity Funds Funds that invest in stocks represent the largest category of mutual funds. Generally, the 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. A great way to understand the universe of equity funds is to use a style box, an example of which is below.

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 market. These companies are characterized by low P/E and price-to-book ratios and high dividend yields. 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. A compromise between value and growth is blend, which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle. For example, a mutual fund that invests in large-cap companies that are in strong financial shape but have recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and value). The opposite of this would be a fund that invests in startup technology companies with excellent growth prospects. Such a mutual fund would reside in the bottom right quadrant (small and growth).

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.
21

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. 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 category that consists of funds that have proved 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 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 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 Socially responsible funds (or ethical funds) invest only in companies that meet 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
22

The last but certainly not the least important are index funds. This type of mutual fund replicates the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). 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.

Islamic mutual funds

In case of Islamic Funds, the investment made in different instruments is to be in line with the Islamic Shairah Rules. The Fund is generally to be governed by an Islamic Shariah Board. And then there is a purification process that needs to be followed, as some of the money lying in reserve may gain interest, which is not desirable in case of Islamic investments

Mutual funds in Pakistan

At present a number of closed-end as well as open-end mutual funds are operating in Pakistan. Among the oldest are NIT and the various funds managed by Investment Corporation of Pakistan (ICP). The largest number of listed mutual funds, twenty six, is managed by the ICP. There are 11 closed-end mutual funds operating in private sector. Whereas NIT and ICP operates in public sector. The GoP intends to privatize both the entities. The total paid-up capital of 37 mutual funds listed at Karachi Stock Exchange is over Rs 4,751 million. However, a number of these are being quoted below face value. According to some sector analysts the number of mutual funds, their paid-up capital and number of investors in mutual funds is too small. They attribute this to a number of factors, worst being the GoP policies. NIT in Pakistan and UTP in India were established around the same time. While the value of portfolio of UTP India exceeds US$ 44 million the portfolio of NIT is too small compared to that of its Indian counterpart. The same is also true about the number of unit holders. Even if one keeps the population of India and Pakistan in mind, the ratio is still dismal. They say that one of the major reasons for growth of mutual funds has been the GoP insistence on not allowing establishment of open-end funds in the private sector. At present only one such fund is operating in private sector in Pakistan, BSJS Balanced Fund. The apprehensions of the regulators were that private sector could not manage an open-end fund efficiently and prudently. This impression was mainly due to the poor performance of closed-end funds managed by the private sector.

23

Most of the private sector closed-end funds were established in early nineties, when there was a boom in equities market, prices of scrips were high and investment in equities only was possible corporate debt and money market instruments were not common at that time. Therefore, when equities market plunged most of the funds posted huge losses. Some analysts say, "While a lot of blame goes to sponsors and managers of private sector funds, the market conditions were also responsible for the fiasco." However, some analysts say, "It is true that market sentiments led to huge losses, but the blame should also go to sponsors for managing funds in imprudent manner. Some of the funds were used for 'parking' of bad transactions. If one may recall, a number of mutual funds were sponsored by brokerage house or those who used the funds for trading of equities. Most of these sponsors indulged in speculative trading rather than taking long positions or making long-term investment. The concept of parking of bad transaction in mutual fund account was used to avoid immediate loss, in the hope of recovery. The recent announcement of results by Arif Habib Securities, BSJS Balanced Fund and NIT indicate that all those funds which are managed prudently and efficiently have the potential to earn substantial profit. The year ending on June 30, 2002 was a difficult year but these funds managed to earn good profit. Some of the ICP managed funds have been posting good performance but are being traded below the NAV. NIT has announced 12 per cent dividend for the year 2002. NIT was established in 1962 and has over 60 per cent share of market share of mutual funds sector. At present it has over 60,000 unit holders who collectively hold 1.6 billion NIT units. The total value of funds invested in the market by NIT is estimated around Rs 19.5 billion, at current market prices. This is approximately 5 per cent of the total market capitalization at Karachi Stock Exchange, making NIT the single largest investor at the exchange. BSJS Balanced Fund has posted over Rs 56 million profit and announced 15 per cent dividend for the year 2002. During the year it also acquired Security Stock Fund. As a result of merger the paid-up capital of fund increased to Rs 340 million. To increase the capital, the fund intends to issue Redeemable Preference shares subject to the approval from the SECP. The fund is called a balance fund because of its investment in equities, debt instruments, money market and COT. Arif Habib Securities, the main sponsors of Arif Habib Investment (AHI), has posted Rs 253.6 million profit for the year 2002 and announced 50 per cent dividend as well 20 per cent bonus shares. AHI manages Pakistan Stock Market Fund and Pakistan Income Fund.

24

Mutual Fund Companies in Pakistan                            ABAMCO LIMITED AKD INVESTMENT MANAGEMENT LTD. AL FALAH GHP INVESTMENT MANAGEMENT AL-MEEZAN INVESTMENT MANAGEMENT LIMITED AMZ ASSET MANAGEMENT LTD. ARIF HABIB INVESTMENT MANAGEMENT LTD. ASIAN CAPITAL MANAGEMENT (PVT.) LTD ASKARI ASSET MANAGEMENT LTD. ATLAS ASSET MANAGEMENT LTD. BMA ASSET MANAGEMENT LTD. CROSBY ASSET MANAGEMENT LTD. DAWOOD CAPITAL MANAGEMENT LTD. FAYSAL ASSET MANAGEMENT LIMITED FIRST CAPITAL INVESTMENTS LTD. HABIB ASSETS MANAGEMENT LTD. HBL ASSET MANAGEMENT LTD KASB FUND LIMITED NATIONAL ASSET MANAGEMENT COMPANY LIMITE NATIONAL FULLERTON ASSET MANAGEMENT LIMITED - NAFA NATIONAL IINVESTMENT TRUST LTD. NBP CAPITAL LIMITED NOMAN ABID INVESTMENT MANAGEMENT LIMITED PICIC ASSET MANAGEMENT COMPANY LTD. PRUDENTIAL FUND MANAGEMENT LTD SAFEWAY MANAGEMENT LTD. UBL FUND MANAGERS LTD. WE INVESTMENT MANAGEMENT LIMITED

Pakistans largest mutual fund providers Following is the list of Pakistan's largest mutual fund providers. They offer to public to invest in these mutual funds. In these providers include the companies of banking sector, non-banking sector, insurance sector and finance sectors. There are
25

10 Top companies who are the providers of mutual funds. 1st Al-Meezan Mutual Fund Al Meezan Mutual Fund Limited (AMMF) was the first fund launched by Al Meezan Investments and is one of the oldest mutual funds in the private sector. It is a closed end equity fund that invests in Shariah compliant equity instruments to provide investors with Pure Profit. During its long and illustrious journey of 12 year AMMF has been paying regular dividends to its investors. Maintaining that tradition, AMMF announced 10% cash dividend i.e., Re. 1 per share for its shareholders for the year ended June 30, 2008. 2nd Asian Stocks Fund Asian Stocks Fund Limited is a public limited company incorporated in June 1994 under the Companies Ordinance, 1984 and has been registered with the Securities and Exchange Commission of Pakistan (SECP) as an Investment Company under the Investment Companies and Investment Advisers Rules, 1971 to carry on the business of a closed end investment company. The company is also registered under rule 38 of the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (NBFC Rules). 3rd Atlas Fund of Funds Atlas Fund of Funds (ATFF) is a closed-end fund established by a Trust Deed dated May 29, 2004 between Atlas Asset Management Limited (AAML), as the investment adviser and Central Depository Company of Pakistan Limited (CDC), as the Trustee. 4th Dominion Stock Fund These DOMINION STOCK FUND company profiles provided detailed financial data and key credit information. DOMINION STOCK FUND predominantly operates in the Investment Offices sector. Investment Company under the Investment Companies and Investment Advisers Rules. 1971 to carry out the
26

business of a closed end investment company. 5th First Capital Investment ltd Mutual Fund First Capital Investments Limited (FCIL), a subsidiary of First Capital Securities Corporation, is a Non-Banking Finance Company licensed to carry out Investment Advisory Services as under the NBFC Rules 2003 and is regulated by the Securities and Exchange Commission of Pakistan (SECP). 6th First Dawood Fund The Fund has been established through a trust deed (Trust Deed or Deed) under the Trusts Act, 1882, executed between Dawood Capital Management Limited (DCM), 1500-A Saima Trade Towers, I. I. Chundrigar Road, Karachi-74000, which has been licensed to undertake investment advisory services by the Securities & Exchange Commission of Pakistan (SECP), vide its letter No. NBFC-17/IA/02/2004 dated May 26, 2004 under Non-Banking Finance Companies (Establishment & Regulations) Rules, 2003 (the Rules) and Central Depository Company of Pakistan Limited (CDC) Karachi, duly approved by the SECP to act as the Trustee, vide its letter No. NBFC-II/JD(R)/DCML-FDMF/976 dated December 2, 2004. 7th Golden Arrow Golden Arrow Selected Stocks Funds Limited (GASSFL) is a Pakistan-based, closed-end mutual fund. The Companys principal activity is to make investment in marketable securities. The Companys investment manager is AKD Investment Management Limited. 8th Meezan Balanced Fund Meezan Balanced Fund (the Fund) is a Pakistan-based closed-end balanced fund. The investment objective of the Fund is to generate long-term capital appreciation,
27

as well as current income. It invests in equity securities and Islamic income instruments, such as Sukuk (Islamic bonds), Musharaka and Murabaha instruments, Shariah compliant spread transactions, certificate of Islamic investments, Islamic bank deposits and other Islamic income products. Al Meezan Investment Management Limited (AMIML) serves as the Funds management company and Central Depository Company of Pakistan Limited (CDC) is its trustee. 9th JS Growth Fund JS Growth Fund (the Fund) is a Pakistan-based, closed-end investment company. The Funds investment objective is to enable the certificate holders to participate in a diversified portfolio by prudent investment management (investment return being of a combination of capital appreciation and income). JS Investments Limited is the management company of the Fund. 10th Pakistan Premier Fund Pakistan Premier Fund Limited (PPFL) is a Pakistan-based closed-end equity fund. The Company is engaged in providing investors long term capital appreciation from investments primarily in Pakistani equities. It primarily invests in shares of listed companies, term finance certificates and short-term reverse repurchase transactions. Arif Habib Investments Limited is the Companys investment advisor

Picking a Mutual Fund

Buying You can buy some mutual funds (no-load) by contacting fund companies directly. Other funds are sold through brokers, banks, financial planners, or insurance agents. If you buy through a third party, you may pay a sales charge (load). That said, funds can be purchased through no- transaction free programs that offer funds from many companies. Sometimes referred to as fund supermarkets, these programs let you buy funds from many different companies. They also provide consolidated recording that includes all purchases made through the super market,

28

even if they are from different fund families.

What to know before shop

Net assets value (NAV), which is a funds assets minus liabilities, is the value of a mutual fund. NAV per share is the value of one share in the mutual fund, and it is the number that is quoted in newspapers. One can basically just think of NAV per share as the price of a mutual fund. It fluctuate everyday as a fund holding and shares outstanding change. When you buy shares, you pay the current NAV per share plus any sales front-end load. When you sell your shares, the funds will pay you NAV less any back-end load. Finding Funds Nearly every fund company in the country also has its own website. Simply type the name of the fund or Fund Company they you wish to learn more about into a search engine and hit search. If you dont have a specific fund company already in mind, you can run a search for terms like no-load small cap fund or large-cap value fund. For a more organized search, there is variety of other resources available online. Two notable ones include: 1. The Mutual Fund Education Alliance is the not for profit trade association of the no-load mutual fund industry. They have a tool for searching for no-load funds. 2. Momingstar is an investment research firm that is particularly well known for its fund information Identifying Goals and Risk Tolerance Before acquiring shares in any fund, you need to think about why you are investing. What is your goal? Are long term capital gains desired, or is a current income preferred? Will the money be used for college expenses, or to supplement a

29

retirement that is decades away? Identifying goal is important because it will help you hone in on a right fund for task. For really short-term goals, money market funds may be the right choice, for goals that are few years in the future, bond funds may be appropriate. For long term goals, stocks funds may be the way to go. Of course, you must also consider the issue of risk tolerance. Can you afford and accept dramatic swings in portfolio value? If so, you may prefer stock funds over bond funds. Or is a more conservative investment warranted? In that case bond funds may be the way to go. The next question to consider include are you more concerned about trying to outperform your funds benchmark index or are you more concerned about the cost of your investment? if the answer is cost index funds are likely the right choice for you.

Risks in Mutual Fund Investing

There is some degree of risk in every investment. Although it is reduced considerably in mutual fund investing. Do not let the specter of risk stop you from becoming a mutual fund investor. However, it be-hooves all investors to determine for themselves the degree of risk they are willing to accept in order to meet their objectives before making a purchase. Knowing of potential risks in advance will help you avoid situations in which you would not be comfortable. Understanding the risk levels of the various types o mutual funds at the outset will help you avoid the stress that might result from a thoughtless or a hasty purchase. Let us now examine the risk levels of the various types of mutual funds. 1. 2. 3. 4. Low Level Risks Moderate level Risks High Level Risks Measuring Risks
30

LOW-LEVEL RISKS Mutual funds characterized as low-level risks fall into here categories 1. Money market funds 2. Treasury bill funds 3. Insured bond funds MODERATE-LEVEL RISKS Mutual funds considered moderate-risk investments may be found in at least the eight types categorized below. 1. 2. 3. 4. 5. 6. 7. 8. Income funds Balanced funds Growth and income funds Growth funds Short-term bond funds (taxable and tax-free) Intermediate bond funds (taxable and tax-free) Insured government/municipal bond funds Index funds.

HIGH-LEVEL RISKS The types of funds listed below have the potential for high gain, but all have high risk levels as well. 1. 2. 3. 4. 5. 6. 7. 8. Aggressive growth funds International funds Sector funds Specialized funds Precious metals funds high-yield bond funds (taxable and tax-free) Commodity funds Option funds

Figure below depicts three types of mutual fund portfolios structured according to risk level. You may wish to use this as a guide to
31

building a portfolio based on your level of risk tolerance. The percentages of each type of fund recommended in the portfolios reflect a reasonable degree of diversification, balance, and risk level as indicated. Portfolio Allocations Based on Risk Levels

LOW-LEVEL RISK CONSERVATIVE PORTFOLIO

50% Govt. Treasury Bill Funds 50% Money Market Funds

MODERATE-LEVEL RISK CAUTIOUSLY AGGRESSIVE PORTFOLIO

40% Growth & Income Funds 30% Govt. Bond Funds 20% Growth Funds 10% Index Funds

HIGH-LEVEL RISK AGGRESSIVE PORTFOLIO

25% Aggressive Growth Funds 25% International Funds 25% Sector Funds 15% High Yield Bond Funds

MEASURING RISK As you become a more experienced investor, you may want to examine other, more technical, measures to determine risk factors in your choice of funds.

32

Beta coefficient is a measure of the funds risk relative to the overall market. For example, a fund with a beta coefficient of 2.0 means that it is likely to move twice as fast as the general market both up and down. High beta coefficients and high risk go hand in hand. Alpha coefficient is a comparison of a funds risk (beta) to its performance. A positive alpha is good. For example, an alpha of 10.5 means that the fund manager earned an average of 10.5% more each year than might be expected, given the funds beta. Interest rates and inflation rates are other factors that can be used to measure investment risks. For instance, when interest rates are going up, bond funds will usually be declining, and vice versa. The rate of inflation has a decided effect on funds that are sensitive to inflation factors; for example, funds that have large holdings in automaker stocks, real estate securities, and the like will be adversely affected by inflationary cycles. R-Square factor is a measure of the funds risk as related to its degree of diversification. The information is supplied here merely to acquaint you with the terminology in the event you should wish to delve more deeply into complex risk factors. The more common risk factors previously described are all you really need to know for now, and perhaps for years to come. One caveat is in order, however. There is no such thing as an absolutely 100% risk-free investment. Even funds with excellent 10 year past performance records must include in their literature and prospectuses the following disclaimer: Past performance is no guarantee of future results. However, by not exceeding your risk tolerance level, you can achieve a wide safety and comfort zone with mutual fund portfolios such as those shown in Figure above.

33

Role of mutual funds in financial market place

Resource Mobilizer Financial Markets are mainly classified as Money Market and Capital Market. The term, money market is used to denote the financial institutions which deal with the short term borrowing and lending of money. The term, capital market is used to mean the institutes which deals with the lending and borrowing of long-term money. Resource mobilization by mutual funds is an important activity in the capital markets. Mutual funds would be one of the major instruments of wealth creation and wealth saving in the years to come, giving positive results. financial weapon of mass benefit Mutual funds are a force of public good: a product for the masses. They have admirably withstood the pressures of financial crisis and global assets under their management have now started rising again. Mutual funds play an integral role in the world of finance, a force that has powered the middleclass growth, provided depth to capital markets and added dynamism to economies. For long just a peripheral player in the world of capital markets, the mutual fund industry now commands the stage with $23 trillion in assets under management. Yet the incredible muscle of mutual funds is not appreciated by our policymakers. They at best consider mutual funds to be obscure products designed for wealthy individuals and large corporations. Much deeper analysis is required to appreciate how mutual funds have quietly revolutionized capital markets and how they can serve our economy as an important component of growth. Without holistic reforms, the industry is likely to remain a bit part player unable to fulfill its unquestionable potential. For individual investors mutual funds provide numerous benefits: access to professional investment management, diversification of funds in various asset classes, tax credit of up to Rs300,000, ability to invest for as little as Rs5000, liquidity offered by open-end funds and transparency due to role of regulator and trustee.
34

More significantly, through individual investors, mutual funds have the ability to change the workings of the marketplace itself. For one thing, investors in equity funds, as they become financially more sophisticated, will grow more patient, learn not to time the market and hold their investment in hope of high capital gains in the long-term. As the number of retail investors grows, depth of the capital market will increase and in time individuals and not a handful of corporations, will influence the marketplace. It is axiomatic that savings are essential to the wellbeing of individuals as well as the ailing, debt-ridden economy. The savings-to-GDP ratio, 10 per cent, is the lowest in the region. Indias savings rate has now touched 30 per cent. It is no wonder that we have a weak capital market and rely heavily on foreign debt to shore up our economy. Foreign aid and the IMF loans are no substitute for domestic savings and investment. An essential condition for financial savings is a capital market that can provide accessible and economical instruments, such as mutual and pension funds, to enhance savings. Only savings will ensure sustainable, long-term growth. So what needs to be done? Here are six proposals: * State enterprises should be allowed to invest in open-ended mutual funds. * Individual investors should be liable to pay capital gains tax at a reduced rate for investment in equity schemes. * Amend stock exchanges listing regulations to incorporate provision for debt securities. * Encourage debt securities trading through BATS. * Credit line from banks for mutual funds. * SECP-driven public awareness campaigns in partnership with the mutual fund industry for promoting saving/investing through mutual funds.
35

Policymakers must undertake to overhaul the archaic laws governing the postemployment benefits schemes managed by employers. The outdated rules prescribe minimal disclosure and transparency. Other than registration with the commissioner income tax, the retirement schemes are not regulated. Uniformity in taxations is required to ensure a level playing field with the voluntary pension schemes regulated by the SECP under the Voluntary Pension System Rules, 2005. Post-employment benefits schemes should also be regulated through separately formulated rules and brought under the SECP supervision. None of the Mutual Fund Association of Pakistans (MUFAP) taxation proposals to encourage growth of mutual and pension funds, which in fact would have enhanced revenue for the exchequer, were considered in the federal budget. The objective of every developing economy is to develop depth of the capital market to meet the needs of the real economy. A holistic, long-term approach is required to bring about the necessary reforms. Encouraging the growth and promotion of pension, insurance and mutual funds will go a long way in creating depth in the capital market and providing a source of credit for the government and private enterprises alike. Financing needs of large infrastructure projects, such as dams and motorways, should be met via capital markets. It is the capital market which must finance economic development and it is the capital market which should channelise peoples savings into such investments. Drivers in Chile do not have to wait until retirement to enjoy the benefits of their savings. Every day thousands do so when they drive from Santiago to Vina del Mar along the recently opened toll road. The toll road was funded from the countrys deep-pocketed pension funds. A catchy slogan on a large billboard reminds passing commuters: Your savings are financing this highway, and this highway is financing your retirement.
36

Financial Planning Plan involves various steps: gathering and processing information, establishing goals and setting objectives, drawing up, implementing and finally, monitoring the plan. While the initial steps leading up to it are important, the success of any financial plan depends on how well you implement it. You could say implementation is probably the most difficult stage: lack of access to the right securities or investments across desired asset classes, difficulty in rebalancing a portfolio due to the illiquid nature of some investments and lack of time to continuously track a portfolio are some of the key challenges that individuals face while implementing a financial plan. However, it is relatively easy to overcome most of these challenges with the innovative products and facilities that mutual funds have started offering in recent times. Here are some reasons why you could consider investing in mutual funds to help you implement a financial plan successfully. Wide range of products across asset classes Whether you are planning for retirement or children's education, you are most likely to need an allocation across different asset classes in order to earn returns at a risk level that you are comfortable with. These could include domestic equities, emerging market equities, global equities, bonds, cash, commodities, real estate, gold, etc. It is possible to invest in some of these directly, but for individuals, it is difficult to access some investments, such as bonds, for instance. More importantly, investing calls for time and specialised skills. For example, individual investors may have direct access to equities, but to choose stocks, you need time and talent in order to track companies, their performance and growth plans, etc. Investing in mutual funds makes investing simple as they offer you a variety of products - from the basic diversified equity funds to the more sophisticated real estate funds and exchange traded gold funds - that can help you implement your financial plan. Flexibility Financial planning does not end once you construct your desired portfolio. Monitoring investments at regular intervals and rebalancing is equally important. If there is a cost involved in liquidating your investments, it may affect overall performance of your portfolio. For this reason, it makes sense to invest in relatively liquid options that can help you to redeem your investments, if required. Also, while rebalancing, you may need to make incremental investments in some asset
37
A Financial

classes. Most mutual funds offer both these facilities thereby making the process of portfolio rebalancing a lot easier. Diversification Diversification is an important requirement of any investment strategy. Mutual funds ensure diversification within and across asset classes, across securities, across geographies and also across fund managers - if diversification in investment styles is what you are looking for. For example, the fund manager of an equity fund could focus only on large caps or may invest across all market caps. Or, there could be a fund manager who focuses on value investing or growth investing or a blend of both. As different investment styles often work at different points in a market cycle, investing in multiple funds managed by different fund managers provide "style diversification" to the investment strategy. Mutual funds facilitate regular investment If you earn a regular income like a salary, you may prefer to invest a certain amount at regular intervals. The Systematic Investment Plan (SIP) facility offered by mutual funds is one of the best ways to make such regular investments for your long-term goals. Since SIP investments can be as little as Rs. 500 per month, you can also diversify across different types of funds. For example, if you are planning for a retirement corpus of Rs. 10,000,000 after a 20-year period and if you expect equities to deliver 15% cumulative returns, you could consider investing Rs. 8000 every month in diversified equity funds over the next 20 years. (This example is for illustration purposes only. You may actually need to reduce your exposure to equities as you approach retirement. Also, the actual return that you earn on equity investments could be more or could be less than 15%).

Tax efficiency While risk and return are the two most important characteristics of any investment, the tax treatment of your returns (dividends or capital gains) also plays an important role in maximizing your post-tax returns. The tax efficient nature of mutual funds makes tem good investment options for the long-term. Also, ELSS funds or equity linked savings schemes help in availing income tax benefits under section 80 C and in providing a wealth-building opportunity alongside as they invest in equities. Investing in ELSS funds through the SIP route can help you to plan for your long-term financial goals tax-efficiently.

38

Final Word  Implementing and monitoring your financial plan is vital for successful financial planning.  Mutual funds offer a wide product range, convenience, tax-efficiency and other facilities to successfully implement a financial plan

Tax Implication
Dividends Income received from units of a mutual fund registered with the Securities and Exchange Board of India is exempt in the hands of the unit holder. A debt-oriented mutual fund is liable to pay income distribution tax of 14.1625% and 22.66% on the distribution of income to individual / Hindu Undivided Fund and other persons, respectively. In the case of money market mutual funds and liquid mutual funds (as defined under SEBI regulations), the income distribution tax is 28.325% across all categories of investors. Capital Gains Long-term capital gains arising on the transfer of units of an equity oriented mutual fund is exempt from income tax, if the Securities Transaction Tax (STT) is paid on this transaction i.e., the transfer of such units should be made through a recognized stock exchange in India (or such units should be repurchased by the relevant mutual fund). Equity oriented mutual fund means a fund where the investible corpus is invested by way of equity shares in Indian companies to the extent of more than 65% of the total proceeds of the fund. Short-term capital gains arising on such transactions are taxable at a base rate of 15% (increased by surcharge as applicable, education cess of 2% and secondary and higher education cess of 1%). If a transaction is not covered by STT, the long-term capital gain tax rate would be 10% without indexation or 20% with indexation, depending on which the assessee opts for. Short-term capital gains on such transactions are taxable at normal rates. A taxable capital loss (i.e., a transaction on which there is a liability to pay tax if the result were gains instead of loss) can be set-off only against capital gains. An exempt capital loss (i.e., a transaction which is exempt from tax if the result were gains instead of loss) cannot be set-off against taxable capital gains. A taxable long-term capital loss can be set-off only against long-term capital gains.
39

However, a taxable short-term capital loss can be set-off against both short-term and long-term capital gains

Al Meezan The Biggest Islamic Fund Manager

ASSETS UNDER MANAGEMENT EXCEED RS. 18 BILLION MARK

According to various estimates the size of Islamic finance industry is estimated around US$ 500 billion in terms of assets, and the market has been growing at about 10% a year for the last ten years. There are more than 300 Islamic finance institutions in 75 countries around the world providing not just commercial banking services but also funds managements etc. At present more than 500 Shariah-compliant funds operating globally. Eight asset management companies are offering Islamic funds in Pakistan with total assets under management exceeding Rs 23 billion as on 31st December 2007. Other asset management companies are also in the process of launching Shariah compliant mutual funds. Market share of Shariah complaint mutual funds currently stands over 6.5 per cent in Pakistan, which is expected to increase to almost 10 per cent by 2010. The history of Islamic mutual funds in Pakistan may be brief but the progress achieved is outstanding, when compared to the progress achieved in other countries. The enviable growth of the Islamic financial system can be attributed to the proactive approach of the regulators and a lot of effort being done by the players. Achieving one after another milestones would have not been possible without the dedicated due diligence by the fraternity of Shariah scholars. Among the eight Islamic asset management companies, Al Meezan Investments has the largest asst base. The total assets under management of Al Meezan Investments have increased to Rs. 16.69 billion as on December 31, 2007 from Rs. 12.16 billion as on June 30, 2007, showing a good growth of 37%. Currently the assets under management stand at Rs. 18 billion. With AM2 Management Quality Rating and 5-Star ranking for all eligible funds, the company clearly stays well ahead of all its competitors in the Islamic asset management market in the country. The Shariah advisory board includes eminent scholars from Pakistan, Saudi Arabia and Bahrain and operates under the supervision of Honorable Justice (Retd.) Mufti Muhammad Taqi Usmani.
40

Meezan Islamic Fund (MIF) is Pakistan's largest open end equity fund in the private sector. During the half year period ended December 31, 2007, MIF earned net income of Rs. 471.9 million as compared to Rs. 193.9 million in the corresponding period last year reflecting an impressive growth of 143.3%. The total net earning translates into Rs. 10.92 per unit. The net assets of MIF as on December 31, 2007 stood at Rs. 4,613 million (Rs. 63.02 per unit) as compared to Rs. 3,679 million as at June 30, 2007, reflecting an increase of 25.39%. At present, the net assets of Meezan Islamic Fund have crossed Rs.5,200 million. Meezan Islamic Income Fund (MIIF) is Pakistan's first and the largest Shariah compliant open ended income fund. During the half year ended December 31, 2007, MIIF earned a net income of Rs. 285.1 million (2.20 per unit). The net assets of MIIF as on December 31, 2007 stood at Rs. 6,777 million (Rs. 52.21 per unit) as compared to Rs. 3,162 million as at June 30, 2007, reflecting an increase of 114.33%. Total annualized tax free return of MIIF till December 31, 2007 was 9.4%. At present, the fund size is Rs. 7,414 million. Meezan Tahaffuz Pension Fund (MTPF) is Pakistan's first and the largest Shariah compliant pension fund scheme. It was launched in June 2007. MTPF consists of three sub-funds. During the half year period ended December 31, 2007, equity subfund earned net profit of Rs. 4.69 million. While the net profits in Debt sub-fund and Money Market sub fund were Rs. 2.23 million and Rs. 2.06 million respectively. At the close of half year total net assets in all three sub-funds of MTPF stood at Rs. 168.32 million. Al Meezan Mutual Fund (AMMF), a close ended equity fund, has been in operation since 1996. During the half year period ended December 31, 2007, AMMF earned a net income of Rs. 129.4 million (Rs. 0.94 per share) as compared to Rs. 45 million (Rs. 0.33 per share) in the corresponding period last year reflecting an impressive growth of 187%. As on December 31, 2007, AMMF's net assets stood at Rs. 2,041 million. Meezan Balanced Fund (MBF), a closed end balanced fund scheme, during the half year period ended December 31, 2007, earned net income of Rs. 62.7 million (Rs. 0.52 per unit) as compared to Rs. 55.4 million in the same period last year. The income was mainly generated through realized capital gains of Rs. 45.6 million, dividend income of Rs. 20.6 million and profit on Shariah compliant income instruments of Rs. 33.1 million. The net assets of MBF as on December 31, 2007 stood at Rs.1, 467 million (Rs. 12.24 per unit).

41

In line with the philosophy of developing Shariah compliant products to meet the investors" needs, Al Meezan Investments is going to launch next month Pakistan's first Shariah Compliant Capital Protected Fund Meezan Capital Protected Fund that will provide investment opportunity to the investors who desire high level of capital protection and also want to get healthy return from positive stock market development. Islamic banks, modarabas, Islamic mutual funds and takaful operating companies are jelling to achieve greater synergy as well as strengthening individual players. The beauty of Islamic financial system is that due to inherent advantages, its growth trajectory is remarkable even in the non-Muslim countries. The collective efforts of all the Muslim countries are helping in achieving quantum leaps and countries are learning a lot from each others' experience. There is enormous growth potential, which cannot be tapped without creating awareness about the benefits of Islamic financial system.

42

GLOSSARY
MUTUAL FUND a mutual fund is an investment that pools together money from a number of investors. It then uses professionals to manage and invest this money with the aim of achieving a return. AMC An Asset Management Company is the fund house or the company that manages the money. The mutual fund is a trust registered under the Indian Trust Act. It is initiated by a sponsor. A sponsor is a person who acts alone or with a corporate to establish a mutual fund. The sponsor then appoints an AMC to manage the investment, marketing, accounting and other functions pertaining to the fund. For instance, ABN AMRO Trustee (India) Private Limited is appointed as the trustee to the ABN AMRO mutual fund. ABN AMRO Asset Management (India) Limited is appointed as its investment manager. Various funds with different objectives can be floated under the umbrella of one parent. So ABN AMRO Equity Fund, ABN AMRO Opportunities Fund and ABN AMRO Flexi Debt Fund are all independent schemes of ABN AMRO Mutual Fund. They are managed by the ABN AMRO AMC. NAV The Net Asset Value is the price of a unit of a fund. When a fund comes out with an NFO, it is priced Rs 10. Later, depending on the value of the investments, this price could rise or fall. Load This is a fee that is charged when you buy or sell the units of a fund. When you buy the units of a fund, you pay a percentage of it as a fee. This is known as the entry load. Let's say you are investing Rs 10,000 and the entry load is 2%. That means you pay Rs 200 as the entry load and Rs 9,800 is invested in the fund. Now, let's assume you are selling the units of your fund. And the Rs 10,000 you invested initially is now Rs 15,000. Let's further assume the exit load is 2%. So you pay Rs 300 and get back Rs 14,700. Generally, if funds charge an entry load, they will not charge an exit load. Or vice versa. Only one of the loads is charged.

43

The load is a percentage of the NAV. Portfolio This is the term given to all the investments made by the fund as well as the amount held in cash. Corpus Let's assume a very small mutual fund has an initial investment of 1,000 units and each unit is worth Rs 10. Hence, the total amount with the fund is Rs 10,000. This is referred to as the corpus. Later, some other investors invest Rs 2,000. Now the corpus will be Rs 12,000 (Rs 10,000 + Rs 2,000). The total amount invested (Rs 12,000) is called the corpus or the total amount of money invested in the fund. AUM Assets Under Management is the total value of all the investments currently being managed by the fund. Let's say the corpus is Rs 12,000 but, due to a rise in the price of the shares it has invested in, the value of the units has increased. So the Rs 12,000 invested is now worth Rs 15,000. This figure is referred to as AUM. Diversified equity mutual fund This is a mutual fund that invests in stocks of various companies in various sectors. ELSS Equity Linked Saving Schemes are diversified equity mutual funds with a tax benefit under Section 80C of the Income Tax Act. To avail of the tax benefit, your money must be locked up for at least three years. Balanced fund A fund that invests in both equity (shares) and debt (fixed return investments) is known as a balanced fund. Debt fund These are funds that invest in fixed return investments like bonds. A liquid fund is one that invests in money market instruments these are fixed return investments of a very short tenure. NFO A New Fund Offering is the term given to a new mutual fund scheme. SIP

44

A Systematic Investment Plan refers to periodic investing in a mutual fund. Every month or every three months, the investor will have to commit to putting in a fixed amount. This will go towards the purchase of units. Let's say that every month you commit to investing, say, Rs 1,000 in your fund. At the end of a year, you would have invested Rs 12,000. If the NAV on the day you invest in the first month is Rs 20, you will get 50 units. The next month, the NAV is Rs 25. You will get 40 units. The following month, the NAV is Rs 18. You will get 55.56 units. So, after three months, you would have 145.56 units. On an average, you would have paid around Rs 21 per unit. This is because, when the NAV is high, you get fewer units per Rs 1,000. When the NAV falls, you get more units per Rs 1,000.

Expense ratio
The expense ratio is what it costs to operate the fund -- money that is collected through management fees, administrative fees and other asset-based charges. The expense ratio is revealed as a percentage of the fund's average net assets, and it is deducted before you are paid any return. High expense ratios eat up investors' profits. Here's why: Let's say Mutual Fund A and Mutual Fund B each has a 10 percent return before expenses. If Fund A's expense ratio is 2 percent higher than Fund B's, you lose an extra 20 percent of your expected returns each year when your money is in A. Ouch! Generally speaking, you want to pay 1 percent or less in expense ratios. A high expense ratio doesn't mean better results. For instance, Vanguard Capital Opportunity Index managed a return of more than 30 percent through the first three months of 2000 while keeping an expense ratio of 0.94 percent. Why pay more?

12b-1 fee

12b-1 fees pay funds' marketing, promotion and distribution expenses. The fee is named for the line of legislation that made it possible. The 12b-1 fee is included in the expense ratio, so you shouldn't worry about it, right? Ha! The 12b-1 lowers your overall return, and not all funds charge such fees. The argument for these fees is that they are used to sell the fund, which results in more people putting more money into the fund. This allows the fund to lower its cost ratio. By law, the 12b-1 fee can be no more than 1 percent. Don't rule out a fund because it has a 12b-1 fee, but choose funds that charge a 12b-1 of no more than 0.25 percent.

Alpha

Alpha is a measure of the difference between a fund's expected return and its real return. Alpha must be evaluated in the context of a fund's beta (volatility) and R-squared (benchmark index). A high alpha (more than 1) is a good thing. A negative alpha means the fund under performed.

45

Beta
Beta is a fund's volatility measured against the S&P 500 index, which has a set beta of 1. Therefore, if a fund has a beta higher than 1, it means it's moving up and down more than the rest of the market. A fund with a beta of 2 will move up 20 percent when the S&P rises 10 percent. Use a beta this way: In good times, look for funds with a higher beta because you'll get higher returns. In bear markets, look for funds with betas lower than 1. That way, your fund won't have losses larger than the average for the market.

Sale Price
Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase Price
Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price
Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load
Is a charge collected by a scheme when it sells the units. Also called, Front-end load. Schemes that do not charge a load are called No Load schemes.

Repurchase or Back-end Load

Is a charge collected by a scheme when it buys back the units from the unit holders

Call Risk.
The possibility that falling interest rates will cause a bond issuer to redeemor callits high-yielding bond before the bond's maturity date.

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

Credit Risk.
The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk.

46

Currency Risk.
The possibility that returns could be reduced for Americans investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk.

Income Risk.
The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates.

Industry Risk.
The possibility that a group of stocks in a single industry will decline in price due to developments in

that industry. Inflation Risk.

The possibility that increases in the cost of living will reduce or eliminate a fund's real inflationadjusted returns.

Interest Rate Risk. The possibility that a bond fund will decline in value because of an increase in interest rates. Manager Risk.
The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives.

Market Risk.
The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall.

Principal Risk.
The possibility that an investment will go down in value, or "lose money," from the original or invested amount.

47