mutual funds in pakistan(final)

Mutual Funds in Pakistan

Mutual Fund

“A mutual fund is a collective investment scheme, which specializes in investing a pool of money collected from investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets”

What is Mutual Fund

Mutual Funds Association of Pakistan

(MUFAP)Mutual Funds Association of Pakistan is the trade body duly licensed by the Government of Pakistan for the mutual fund industry in Pakistan. All Asset Management Companies (AMCs) and Investment Advisory ( IAs ) licensed by SECP to launch Mutual Funds and perform Investment Advisory Services are required under NBFC Rules 2008 to become Members of MUFAP.

MUFAP

• A company/corporation that pools money from many investors and invest the money in securities such

as stocks, bonds and short term debts. • The combine holdings of a mutual fund are known as its portfolio. • Investors who buy shares in mutual funds become entitled to ownership in the fund and the income it

generates. • A mutual fund is managed by a management company (Asset Management Company) • The management company is a bank of human resources, considered to be professionally qualified

personnel • The portfolio of mutual fund is managed by a "Portfolio Manager", whose responsibility is to be invested

in, and satisfies the desire of the investors • Every day, the fund manager/ portfolio manager counts up the value of all funds holding, figures out

how many shares have been purchased by shareholders, and then calculates the Net Asset Value (NAV) of the mutual fund, the price of a single share of the fund on that day.

• NAV (Net Asset Value) A funds NAV fluctuates along with the value of its underlying investments. The formula for NAV is:

NAV = (Market Value of All Securities Held by Fund+ Cash and Equivalent Holdings - Fund Liabilities) / Total Fund Shares Outstanding

• EXAMPLE: lets assume at the close of trading yesterday that a particular mutual fund held $10,500,000 worth of

securities, $2,000,000 of cash, and $500,000 of liabilities. If the fund had 1,000,000 shares outstanding, then yesterdays NAV would be NAV = ($10,500,000 + $2,000,000 - $500,000) / 1,000,000 = $12.00

This slide is not including just for knowledge

Fund

Managers

Securities

Returns

Investors

Diagrammatically

Structurally there are Two types of Mutual Funds

Open-Ended Mutual Fund Closed-Ended Mutual Fund

Types of Mutual Funds by Maturity

Period

Open-Ended Mutual FundAn Open-Ended fund is a type of mutual fund that does not have restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell them.

Types of Mutual Funds

Closed-Ended Mutual FundsA closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.

Also known as a "closed-end investment" or "closed-end mutual fund."

Types of Mutual Funds

NATIONAL INVESTMENT NATIONAL ASSET TRUST MANAGEMENT COMPANY NBP FULLERTON ASSET LIMITED MANAGEMENT LIMITED NATIONAL FULLERTON ABAMCO LIMITED ASSET MANAGEMENT AKD INVESTMENT LIMITED - NAFA MANAGEMENT LTD. NATIONAL IINVESTMENT AL FALAH GHP INVESTMENT TRUST LTD. MANAGEMENT NBP CAPITAL LIMITED AL-MEEZAN INVESTMENT AMZ ASSET MANAGEMENT SAFEWAY MANAGEMENT LTD. LTD. ARIF HABIB INVESTMENT

Mutual Funds Companies In

Pakistan

UBL FUND MANAGERS LTD. MANAGEMENT LTD. WE INVESTMENT ASIAN CAPITAL MANAGEMENT LIMITED MANAGEMENT (PVT.)

LTD DAWOOD CAPITAL ASKARI ASSET MANAGEMENT LTD. MANAGEMENT LTD. FAYSAL ASSET ATLAS ASSET MANAGEMENT LIMITED LTD. FIRST CAPITAL BMA ASSET MANAGEMENT INVESTMENTS LTD HABIB ASSETS MANAGEMENT LTD. HBL ASSET MANAGEMENT LTD KASB FUND LIMITED

MU Companies

Through investment point of view SECP the Regulator has categorized the Schemes of mutual funds as under. Equity Fund Balanced Fund Asset Allocation Fund Fund of Fund Scheme Shariah Compliant Fund (Islamic) Money Market Fund Fixed Income Fund Index Fund Income Fund Specialty Fund

Types of Mutual Funds by Investment

Objective

Equity Mutual Fund

An Equity fund is an open or closed-end fund that invests primarily in stocks, allowing investors to buy into the fund and thus buy a basket of stocks more easily than they could purchase the individual securities. The objective of an equity fund is long-term growth through capital appreciation, although dividends and capital gain realized are also sources of revenue.Example: Growth funds (usually not pay dividend)

Types of Mutual Funds

Balanced FundThese funds invest in a mix of equities and fixed income securities. They try to balance the aim of achieving higher returns against the risk of losing money. They tend to have more risk than fixed income funds, but less risk than pure equity funds.Balanced funds tend to stick to a relatively fixed allocation of stocks and bonds. They hold more equities and fewer bonds.Example: Income funds (seek to generate income but give some attention to capital appreciation)

Types of Mutual Funds

Balanced Fund

Asset Allocation FundThese Funds may invest its assets in any type of securities at any time in order to diversify its assets across multiple types of securities & investment styles available in the market.Asset allocation funds, invest in more than one financial market at a time.It is appropriate for the average investor because it gives you diversity and risk management.

Types of Mutual Funds

Asset Allocation Fund

Types of Mutual

Funds Fund of Fund

SchemeThese funds invest in other funds. Similar to balanced funds, they try to make asset allocation and diversification easier for the investor.

Example: Hedge funds

Shariah Compliant Fund (Islamic)Islamic funds are those funds which invest in Shariah Compliant securities. i.e. shares, Sukuk, Ijara sukuks etc. as may be approved by the Shariah Advisor of such funds. These funds can be offered under the same categories as those of conventional funds.

Types of Mutual Funds

Type of Mutual Funds

Money Market FundsThey are generally a safer investment, but with a lower return than other type of mutual funds. These funds invest in short-term fixed income securities.

Example: Government bonds, Treasury bills etc.

Fixed Income FundsThese funds buy investments that pay a fixed rate of return. They aim to have money coming into the fund on a regular basis, mostly through the interest rates.

Example: Investments that are bought are government bonds, investment corporate bonds and high-yield corporate bonds.

Type of Mutual Funds

Index FundsThese funds aim to track the performance of a specific index. The value of the mutual fund will go up or down as the index goes up or down. Index funds typically have lower costs than actively managed mutual funds.

Example: KSE, PSE (Pakistan stock Exchange)

Type of Mutual Funds

Bond Funds

A bond fund or debt fund is a fund that invests in bonds. They typically pay periodic dividends that include interest payments on the fund's underlying securities plus periodic realized capital appreciation.

Types of Mutual Funds

Specialty Funds

These funds focus on specialized mandates such as real estate, commodities or socially responsible investing. Example: a socially responsible fund may

invest in companies that support environmental stewardship, human rights, and may avoid companies involved in alcohol, tobacco, gambling, weapons and the military.

Types of Mutual Funds

A mutual fund can be measured in various ways. Three common metrics are:

Net Asset Value (NAV) change Yield Total Return

Measuring Mutual fund Performance

Net Asset Value (NAV) The NAV is the share price of the fund, obtained by

dividing the value of the fund's holdings by the number of outstanding shares. The share price is what you would have to pay to buy into the mutual fund, plus any fees. The change in NAV, reported at the end of every market day, reflects the increase or decrease in the value per share.

Net Asset Value (NAV) Formula

Net Asset Value (NAV) =

Value of Fund

Number of Shares

Example:

Net Asset Value(NAV)

Net Asset Value (NAV) Example

$100,000,000 total fund value

10,000,000 shares

= $10 per share

Yield percentage is the amount of income

from dividends and interest divided by the NAV, or price per share. A mutual fund yield can be easily compared to a bond yield.

Yield

Mutual Fund Yield Formula

Yield % =

Income Distribution per Share

Price per Share

Example:

Yield Example

Mutual Fund Yield Example

$.60 income per share

$10 per share

= 6% yield

Total return is the current value of shares

plus all distributions taken as cash minus the initial investment.

Total Return

Mutual Fund Total Return Formula

Total Profit or Loss = Current Value of Shares + Cash Distributions - Initial Investment

Example:

Total Return Example

Mutual Fund Total Return Example

$12,000 current value of shares + $3,000 total cash distributions - $6,000 initial investment = $9,000 Profit

Like shares of any stock, selling Mutual Fund shares may cause you to

realize a capital gain or loss. Mutual Funds also distribute dividends received and their own realized capital gains, usually at the end of the year; these distributions, if in cash are taxable.

Annual profits are distributed in the form of bonus units. Bonus units (tax-free) are not considered as income under the Income Tax Ordinance 2001.

Individuals will be subject to with holding tax of 10% on dividends and Income tax of 10% (excluding the amount of payout from capital gains.)

Public and Insurance Company will be subject to with holding tax of 5% on dividends and Income tax of 5% (excluding the amount of payout from capital gains.) However unit holders will be allowed a tax credit on the purchase of units as per the prevailing tax law.

Tax Benefit of MF

If you hold units beyond one year, you get the

benefits of indexation. Simply put, indexation benefits increase your purchase cost by a certain portion, depending upon the yearly cost-inflation index (which is calculated to account for rising inflation), thereby reducing the gap between your actual purchase cost and selling price. This reduces your tax liability.

Benefits of Indexation

The units will be liable to zakat just like any other

financial instrument; however if the unit holder provides an affidavit then no zakat will be deducted.

Zakat Implications on MF

Before you invest, you have to understand the

fund’s investment goals and make sure you are comfortable with the level of risk. Even if 2 funds are of the same type, their risk and return characteristics may not be identical

Note

For Individuals:The individual investor is required to provide the following at the designated sales points of the Asset Management Company Copy of CNIC Application / Account opening Form Purchase of Units Form Zakat Affidavit (Optional) KYC Form FATCA Form Cheque in favor of Trustee of the Fund

How to Invest in MF

Corporate: The corporate/ Provident/ Pension Fund investors are required to provide the following: Memorandum and Article of Association/ Trust deed Board / Trustee Resolution approving the investment Application/Account Opening Form Purchase of Units Form Power of Attorney and/or relevant resolution of board of

directors/ trustee delegating authority to any of its officer to invest

NTN of the institution with tax status CNIC of the officer to whom the authority has been

delegated Cheque in favor of Trustee of the Fund

Hoe to Invest in MF

Redemption payments are made to the

investors within a period of a maximum 6 working days, either through a cross-cheque or through a bank transfer by submitting the Redemption form at designated Sales Points of an AMC (Asset Management Company).

How to Disinvest in MF

Investors earn through Mutual Funds in three ways: Dividend PaymentDividend is paid in the form of cash on monthly/quarterly/ annual basis depending upon the category of the fund and from AMC to AMC.

Change in PriceIf fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit

How Investors Earn Through MF

Capital Gains TaxMutual funds are required to withhold Capital Gains Tax (CGT) as per below: 12.5%, where holding period of a security is

less than twelve months. 10%, where holding period of a security is

twelve months or more but less than twenty-four months.

Zero, where holding period of a security is twenty-four months or more

How Investors Earn Through MF

Advantages & Disadvantages

Some advantages of Mutual funds are:

AccessibilityMutual funds units are easy to buy.

Dividend ReinvestmentAs dividends and other interest income is declared for the fund, it can be used to purchase additional shares in the mutual fund, thus helping your investment grow.

Advantages of Mutual Funds

DiversificationInvesting in a diversified portfolio can be very expensive. The nice thing about mutual funds is that they allow anyone to hold a diversified portfolio. The reason why investors invest in a diversified portfolio is because it increases the expected returns while minimizing the risk. LiquidityMutual funds are considered liquid assets since there is high demand for many of the funds in the marketplace. Since this is the case, an investor can convert the asset to cash by quickly selling it to another investor.

Advantages

Professional managementMutual funds do not require a great deal of time or knowledge from the investor because they are managed by professional fund managers. This can be a big help to an inexperienced investor who is looking to maximize their financial goals. Convenient Administration Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient

Advantages

Choice of SchemesMutual Funds offer a family of schemes to suit your varying needs over a lifetime. 

Advantages

CostOne downside to mutual funds is that they have a high cost associated with them in relation to the returns they produce. This is because investors are not only charged for the price of the fund but they will often face additional fees. Depending on the fund, commission charges can be significant. FeesThe fees that are charged will depend on the type of mutual fund purchased. If a fund is riskier and more aggressive, the management fee will tend to be higher. In addition, the investor will also be required to pay taxes, transaction fees as well as other costs related to maintaining the fund.

Disadvantages of Mutual Funds

Fluctuating ReturnsMutual funds are like many other investments without a guaranteed return. There is always the possibility that the value of your mutual fund will depreciate. Unlike fixed-income products, such as bonds and Treasury bills, mutual funds experience price fluctuations along with the stocks that make up the fund

Disadvantages

Management Risk When you invest in a mutual fund, you depend

on the funds manager to make the right decisions regarding the funds portfolio. If the manager does not perform as well as you had hoped, you might not make as much money on your investment as you expected. Of course, if you invest in Index Funds, you forego management risk, because these funds do not employ managers

Disadvantages