What are Mutual Funds?
Mutual funds have become largely popular popu lar in the last two decades, so much in fact that for many people, investing means to buy mutual funds. We will start by looking at what mutual funds are: Mutual funds are one of the ways for new investors to buy stocks, bonds, real estate, o r even short-term cash investments. By pooling money with other investors, mutual funds offer a cost advantage to people. This pool of money is managed by a fund manager who invests the cash contributed in different projects. They provide a way for every day people peo ple to buy a broadly diversified portfolio of stocks, bonds, or other securities. This allows individual investor to invest in companies an d projects that may otherwise be too expensive for an individual to become involved with. Mutual Funds are operated by Asset Management Companies (AMC) which exists in the form of a corporation, owned by its shareholders. Asset management companies introduce new funds by establishing a Trust Deed, entered between the Asset Management Company and the Trustee, which in most cases is is the Central Depository Company of Pakistan Limited, with with due approval from the SECP under the Non-Banking No n-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (the “Rules”). The CDC performs p erforms the functions of the custodian and trustee, whereas the AMC can act as the registrar or can appoint an external registrar. The trustee sees to it that the mutual funds are behaving according to their set guidelines. The Board of Directors must also approve and appoint a legal advisor and auditor for legal and compliance affairs. Mutual funds come with low, medium or high risk so you can determine the level of risk that you wish to take. Another advantage to this type of fund is that they are diversified. d iversified. This makes mutual funds very safe, although they are not without risk.
Mutual funds are divided as: •
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Open-end Funds : The majority of mutual funds are open-ended. This means that the fund does not have a set number of shares. These funds are bound by law to be sold at the current net asset value (NAV). They are required to pay in cash within six working days, when the investor decides to sell. Open-end Op en-end funds always reflect the net asset value of the fund's underlying investments because shares are created and destroyed as necessary (You can purchase and sell these funds when you want to). In short: These funds continuously sell new shares and buy and buy already issued shares at the market price market price.. They are called 'open 'open'' because their size their size (related to total net asset value) value) fluctuates as the shares are bought are bought and sold. sold. Closed-End Funds: These funds have a set number of shares issued to the public through an IPO (initial public offering). The shares operate on the open market. As a result, shares of closed-end funds trade at a price cut or discount to net asset value. value. They have a fixed capital, and if you want to purchase these funds, you have to purchase them through a stock broker. These funds are also very restrictive because a closed-end fund does not redeem nor does it issue new shares. It schedules the fund shares to the laws of supply and demand, meaning if there is a buyer, then you can sell the shares and vice versa if there is a seller, then you can buy the shares.
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Load Funds and No-Load Funds: A load fund is a sales commission. If a fund charges a load, the investor will pay the sales commission along with the net asset value of the shares of the funds. No-load funds tend to produce elevated returns for investors due to the lower expenses linked with ownership.
Mutual Funds determine their market price by calculating the Net Asset Value. The NAV (Net Asset Value) represents a fund's per share market value. This is the price at which investors buy fund shares from a fund company and sell them to a fund company. It is calculated by dividing the total fund size by the number of units. In our report, we will be focusing mainly on open ended funds. Mutual funds fall into the following types of investment objectives:
Growth or Equity funds: Riskier than other types of funds these funds are made up of investments of only common stock. Although, these funds might end up making more money for they investors. •
Fixed-income Funds: Usually lower in risk these are made up of government and corporate securities that provide a fixed return. They are also known as debt funds. •
Balanced Funds: Offering both a moderate as well as a lower risk they combine both stocks and bonds in the investment pool. Low risk is accompanied by lower rates of return-meaning you risk less, but your investment won't earn as much. •
Money Market or Liquid Fund: A money market fund is a mutual fund that invests its assets only in the most liquid of money instruments. The portfolio seeks stability by investing in very short-term, interest-bearing instruments issued by the state and local governments, banks, and large corporations. •
Gilt Fund : These funds invest solely in government securities. Government securities have no default risk. Net asset values of these funds also fluctuate due to change in interest rates and other economic factors as is the case with debt funds. •
Index Funds: The goal of an index fund is to follow the performance of the stock market. If the overall market advances, a good index fund follows the increase. When the market declines, so will the index fund. Index fund portfolios consist of securities listed on the popular stock markets. •
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Islamic Funds: The investment made in different instruments is to be in line with the Islamic Shariah Rules. The Fund is generally to be governed by an Islamic Shairah Board. As some of the money lying in reserve may gain interest, the funds deal with them as they are not desirable in case of Islamic investments. Capital Protected Funds: These funds are issued for a specific tenure, which is usually for three years, however the tenure can fluctuate. It is a mix between open ended and closed
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ended funds, and if the investor wishes to withdraw before the tenure is over, then a heavy penalty is incurred. Comparison of Risk and Return
Equity Funds: In Equity Funds, a minimum of 70% has to be invested in the stock market. This type of fund is very high risk because investors are bearing the risk of the stock market. Because there is a high risk, there is also a high return associated with this fund. In the last fiscal year, the return on Equity Funds was approximately 40%. Balanced Funds: These funds have a 30%-70% investment ratio. This means that a minimum of 30%, and a maximum of 70% have to be invested in the stock exchange. This has a moderate risk associated with it, and the return is also reflected in that fact. The return depends on the percentage that is invested into the stock exchange. In July 2009, the return was approximately 25%. Money Market Funds: This involves large institutions buying and selling mutual funds. These funds are usually placed in a bank as term deposits, or they are used to purchase government bonds. Money market funds offer a better rate because of the large amount of money being invested. They have a low risk associated with them, and the return is also low. The last fiscal year showed that the return on money market funds in Pakistan was approximately 10.5%-11%. Income Funds: Here, the investor’s money is put in banks as well as government securities. They ideally have 30% invested in corporate bonds, and have a very low risk. Last years return on income funds was approximately 10%-11%. Capital Protected Funds: Majority of the investors money (80%-85%) is put into AA rated banks, which have a very low risk. Interest is collected on this investment, while the rest of the 15%-20% of the money is used to purchase equities or in the Money Market. This is done to increase the profits, because the return is mostly coming from here. The worst case scenario that can happen here is that investors get their money back with no return and thus the risk associated with Capital Protected Funds is very low. The return differs from year to year depending on the tenure of the Fund. Last year it was approximately 19%.
All Asset Management companies give a risk disclaimer before they sell their funds to make sure that it is realized that all returns are subject to market risk. Usually this has to do with equity based funds; however it is given for all. The percentage that is left after investing in the stock market is invested into the money market, which is fixed to government securities etc. The different types of fund subcategories:
Aggressive Growth Fund: A mutual fund which aims for the highest capital gains and is not riskaverse in its selection of investments. Investments held in these funds are companies that
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demonstrate high growth potential, usually accompanied by a lot of share price volatility. These funds are only for non risk-averse investors willing to accept a high risk-return tradeoff. Aggressive growth funds tend to have a very large positive with the stock market, and so they often produce very good results during economic upswings and very bad results during economic downturns. It is also called ‘Capital Appreciation Fund’. Asset Allocation Fund: A mutual fund that provides investors with a portfolio of a fixed or variable mix of the three main asset classes - stocks, bonds and cash equivalents - in a variety of securities. Some asset allocation funds maintain a specific proportion of asset classes over time, while others vary the proportional composition in response to changes in the economy and investment markets. Balanced Fund: A mutual fund that buys a combination of stock, preferred, bonds, and shortterm bonds, to provide both income and capital appreciation while avoiding excessive risk. Balanced funds are also known as ‘hybrid funds’. The purpose is to provide investors with a single mutual fund that combines both growth and income objectives, by investing in both stocks (for growth) and bonds (for income). Blend Fund, Hybrid Fund and Balanced Fund are the same thing. Bond Fund: A mutual fund which invests in bonds, typically with the objective of providing stable income with minimal capital risk. It is also called D ebt Holder. The exact type of debt the fund invests in will depend on its focus, but investments may include government, corporate, municipal and convertible bonds, along with other debt securities like mortgage backed securities. Crossover Fund: A mutual fund that invests in both public and private equity. This is to say that it invests in companies that are traded publicly, and in companies that are privately held. Equity Fund: A mutual fund which invests primarily in stocks, usually common. It is also known as a "Stock Fund". Fund of Funds: A mutual fund which invests in other mutual funds. Just as a mutual fund invests in a number of different securities, a fund of funds holds shares of many different mutual funds. This method is sometimes known as "Multi-Management". Global Fund: A type of mutual fund, closed-end fund or exchange-traded fund that can invest in companies located anywhere in the world, including the investor's own country. These funds provide more global opportunities for diversification and act as a hedge against inflation and currency risks. This is also known as ‘world fund’. Many people confuse a global fund with an international, or foreign, fund. The difference is that a global fund includes the entire world, whereas an international/foreign fund includes the entire world except for companies in the investor's home country.
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Growth Fund: A mutual fund whose aim is to achieve capital appreciation by investing in growth stocks. They focus on companies that are experiencing significant earnings or revenue growth, rather than companies those payout dividends. The hope is that these rapidly growing companies will continue to increase in value, thereby allowing the fund to reap the benefits of large capital gains. Hedge Fund: A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual fund s in both domestic and international markets with the goal of generating high returns. Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Income Fund: A mutual fund which emphasizes current income in the form of dividends or coupon payments from bonds and/or preferred stocks, rather than emphasizing growth. Income funds are considered to be conservative investments, since they avoid volatile growth stocks. Income funds are popular with retirees and other investors who are looking for a steady cash flow without assuming too much risk . Such funds hold a variety of government, municipal and corporate debt obligations, preferred stock, money market instruments, and dividend-paying stocks. Index Fund: A type of mutual fund with a portfolio constructed to match or track the components of a market index. An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. Money Market Fund: An open-end mutual fund which invests only in money markets. These funds invest in short term (one day to one year) debt obligations such as bills, certificates of deposit, and commercial paper. The main goal is the preservation of principal, accompanied by modest dividends. The fund's Net Asset Value remains a constant per share to simplify accounting, but the interest does fluctuate. Money market funds are very liquid investments, and therefore are often used by financial institutions to store money that is not currently invested. Unlike bank accounts and money market accounts, most deposits are not FDIC insured, but the risk is extremely low (only those funds administered by banks are FDIC-insured, but some others are privately insured). Although money market mutual funds are among the safest types of mutual funds, it still is possible for money market funds to fail, but it is unlikely. In fact, the biggest risk involved in investing in money market funds is the risk that inflation will outpace the funds' returns, thereby eroding the purchasing power of the investor's money. It is also called, ‘Money Fund’. Regional Fund: Mutual fund which invests in one specific region of a country or the world. A regional mutual fund will generally look to own a diversified portfolio of companies based in and operating out of its specified geographical area. However, some regional funds can also be set up to invest in a specific segment of the region's economy, such as energy.
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Specialty Fund: A mutual fund investing primarily in the securities of a particular industry, sector, type of security or geographic region. It is also called ‘Spec ialized Fund’.
Different roles in a Mutual Fund Company:
Unit holders: These are the individuals or companies who have purchased the mutual funds. The Asset Management Company : An investment company that buys a portfolio of securities selected by professional investment advisors to meet a specified financial goal. Custodian: Holds the funds assets, maintaining them separately to protect shareholder interests. Trustee : Holds, Invests and/or maintains the trust property from time to time at the direction of the asset management company, strictly in terms of the provisions contained and the conditions stipulated in the trust deed, the supporting documents, and the SECP rules. Sales Agents/ Distributers: Are responsible for receiving applications for performing distribution functions, including receiving applications for the insurance of u nits and redemption/ transfer applications. Registrar: Has the responsibility of maintaining investor’s records, issuing statements of accounts, issuing certificates representing units, processing redemption requests, processing dividend payments, and all other related and incidental activities.
Legal Advisor : The legal consultants for Fund matters.
Auditor: Certifies the funds financial statements.
SECP: They make sure that all the rules and regulations are being followed by the Asset Management Company.
How mutual funds are sold:
Asset management companies usually have their own teams of salespeople to sell their different funds. Otherwise they give selling rights of their funds to distribution companies. These distribution companies however are not a very popular alternative because they are separate from Asset Management Companies. An example of a distribution company would include IGI Investment Bank. These distribution companies have their own mutual funds, but they sell mutual funds from other asset management companies as well. Other ways mutual funds are sold, are through independent dealers (ID) who have to take an exam to become qualified mutual fund agents, and who work through commission. Professional fund managers have the training and experience to manage investments effectively. Investing in funds allows one to benefit from - 6 -
the expertise of professionals who have the resources to thoroughly study potential investments. Their investment decisions are based on extensive knowledge and research of market conditions and the financial performance of individual companies and specific securities. As economic conditions change, the fund may adjust the mix of its investments to adopt a more aggressive or a more defensive posture to meet its investment objective. How mutual funds work:
Mutual funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public. Mutual funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund. These investments may gain or lose value, but they do pay dividends. There are certain guidelines that Mutual Funds have to follow to continue operating. There rules governing mutual funds in Pakistan, include: 1. 2.
Investment Companies and Investment Advisors' Rules, 1971. (Gove rn closed-end mutual funds). Asset Management Companies Rules, 1995. (govern open-ended mutual funds) Updated information and details on these rules is available from the SECP website http://www.secp.gov.pk/laws.htm
These are set by the SECP (Securities and Exchange Commission of Pakistan). Asset Management Companies (AMC’s) have to comply with these rules and regulations which the SECP says is expected to create a level-playing field for all players in the industry. These are summarized below:
AMCs shall designate and disclose the location of its official points for acceptance of applications for issuance, redemption, conversion of units in the offering document of the open-end scheme(s) as well as on their website. AMCs shall receive applications only at designated points, which should have proper date and time stamping mechanism for timely acknowledgement of applications. The AMCs should also clearly specify cut-off timings for acceptance of application for issuance, redemption, conversion etc., of units of their open-end schemes including approved administrative plants in the constitutive documents, on the websites of AMCs and at the designated points. Such cut-off timings shall uniformly apply on all the investors/unit holders. The AMCs shall announce net asset value (NAV) of all open-end schemes (except for fund or funds of scheme) being managed by them latest by 1830 hours daily on their own
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as well as on the website of the Mutual Funds Association of Pakistan (MUFAP). However, the NAV of fund of funds scheme shall be announced by 1030 hours of the next business day.
AMCs shall ensure that in case of suspension of redemption of units of open-end scheme due to extraordinary circumstances in terms of provisions of the constitutive documents and Non-Bank Finance Companies (NBFCs) and Notified Entities Regulations, 2008, the issuance of fresh units shall also be kept suspended until and unless redemption is resumed. The register of unit holders of open-end scheme may be closed for the purpose of declaration of dividend for a period not exceeding the maximum time period as specified in the constitutive documents for payment of redemption proceeds to the unit holders. Any cost associated with sales, marketing and advertisement of co llective investment schemes and Shariah Advisor’s fee (in case of Islamic collective investment schemes) shall not be charged to the collective investment scheme. All expenses incurred in connection with the incorporation, establishment and registration of collective investment scheme (formation cost) in terms of regulations shall be reimbursable by a collective investment scheme to an AMC subject to audit expenses.
Current Situation in Pakistan:
In order to promote investment through mutual funds, the SECP has allowed provident funds to invest up to 50 percent of their funds in unit trust schemes authorized by the SECP and, further, to expose up to 20 percent of their funds to a single scheme. Moreover, the SECP has given permission to form index funds, sector funds and fund of funds as well as conversion of a closedend fund to an open-end fund in order to provide product diversification. It has been made obligatory for asset management companies to get the unit trust schemes that they manage, rated by a rating agency registered with the SECP. Management companies are also required to widely disseminate ratings of their funds so that institutional as well as individual investors may make informed decisions. ICP mutual funds were privatized, and, three lots of funds were formed: ICP Mutual Funds Lot ‘A' comprising of 13 funds; ICP Mutual Funds Lot ‘B' comprising of 12 funds; and Lot ‘C' comprising of SEMF. Lot A was acquired by JS Investments and renamed the JS Growth Fund, while Lot B was acquired by PICIC. These funds were privatized without being converted into a corporate or trust structure. New fund managers were given a time limit of six months by the Privatization Commission and ICP (under the Management Rights Transfer Agreement) to restructure the privatized funds and bring them in a form acceptable under the prevalent Rules. The SECP took necessary actions, including amendments in Rules as well as transforming and aligning the structure of the privatized funds according to the existing legal provisions for facilitating their privatization. Among other conditions, the SECP required that assets of these funds should be placed in custody of separate entities, which were eligible to act as the custodian
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and trustee of these funds. Subsequently, the new fund managers were also allowed to merge certain funds and transform them into a trust. Why invest in a Mutual Fund?
Mutual funds are vigorously managed by an experienced fund manager who regularly monitors the stocks and bonds in the fund's portfolio. Because this is their job, they spend more time o n selecting the right places to invest in. For an individual investor, mutual funds provide informed investing without the constant worry of analyzing financial statements or calculating financial ratios. The benefits that mutual funds provide are: •
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Liquidity: Liquidity gives the investor the ability to readily access his money in an investment. Fund shares are liquid investments that can be sold on any business day. Funds are required by law to buy, or redeem, shares each business day. The price per share at which you can redeem shares is known as the fund’s net asset value (NAV). NAV is the current market value of all the fund’s assets, minus liabilities, divided by the total number of outstanding shares. Diversification : Funds allow investors to diversify their investment portfolio automatically by holding a wide variety of securities. Moreover, since the assets are pooled with other investors, a fund allows greater diversification at a fraction of the cost than would otherwise be probable for a single investor portfolio. Variety: The fund industry in Pakistan is still in a development phase, yet it offers investors a wide variety of fund types to choose from, depending on their investment objectives. Fund types include pure equity, money market or debt funds or hybrid funds like fixed and variable asset allocation funds or benchmark funds which pursue a certain index. These categories continue to grow as the investor needs become more complex. Convenience: Units can be purchased or sold directly from a fund or through a broker, financial advisory services, bank or insurance agent, by mail, over the telephone, and over the internet. Fund companies also arrange for automatic reinvestment or periodic distribution of the dividends and capital gains paid by the fund. Funds may offer a wide variety of other services, including monthly or quarterly account statements, tax information, and 24-hour phone, computer access to fund and account information, exchanges among funds, automatic investments and withdrawals, and check-writing privileges for some funds. Mutual funds also provide extensive investor education and shareholder communications, including websites, newsletters, brochures, and retirement and other planning guides. Regulation and Disclosure: All fund companies operating in Pakistan are subject to strict regulation and oversight by the Securities and Exchange Commission Pakistan (SECP). As part of this regulation, all funds must provide investors with full and complete disclosure about the fund in a written prospectus describing the fund’s investment objective, its investment methods, information on how to purchase and redeem shares, information about the investment adviser, risks of investments and fund fees and expenses. Unit holders are also to be provided with annual and semiannual reports that contain recent information on the fund’s portfolio, performance, and investment goals and policies.
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Taxation on Mutual Funds: The income of mutual funds is exempt from Income Tax, if not less than 90% of the income of the year, as reduced by capital gains is distributed amongst the unit holders as dividend or bonus units.
Disadvantages of Mutual Funds: •
Fees: All mutual funds have fees and expenses that are paid by investors. These costs are significant because they affect the return on the investment; therefore investors need to calculate their returns net of all such deductions. The fees and any other charges are usually mentioned in the offering documents and the fund brochure printed by the Asset Management Company. Fees generally fall into two categories: management fees Load charges.
Management fees is calculated as a fixed percentage of the average net assets managed by the firm for providing office space and professional management, including all accounting and administrative services. The second category is sales commissions described as “front-end loads” (sales charges when you buy) or “back-end loads” (sales charges when you sell). “No-load” funds, as the name implies, do not have front-end or back-end sales charges. These fees are for undertaking the distribution and selling of the funds. •
Taxation on Unit Holders: Holders of mutual funds are subject to Income Tax on dividend income received from a mutual fund (excluding the amount of dividend paid out of capital gains on listed securities) as under: Public Company and Insurance Company-5% If received by any other person, including a non-resident-10% Capital gain on disposition of units in a mutual fund is exempted from tax till such time that capital gain on sale of securities listed on the stock exchanges is exempt from such tax.
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Investment Complexity: When you buy or sell mutual funds, you are making multiple trades at multiple prices. If you are trying to accomplish a particular investing goal with a mutual fund, targeting a certain price through your transactions can get very complex. It’s not as easy as buying a simple asset like an exchange traded fund. Lack of Liquidity : Yes, there are a lot of different mutual funds in the investment world, but that doesn’t necessarily mean they are very liquid. With mutual funds, the final transactions aren’t complete until the end of a trading day. It’s not until the final bell when you actual know the price of trades for the fund as a whole. That creates difficulties
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on days when the market is a volatile time-bomb. You need instant information in order to adjust your trading strategy. Mutual funds do not offer that option. Lack of Information: There is a lack of information when it comes to mutual funds. What you are buying (or selling) within the fund is not always transparent and some information is even delayed. This creates a challenge when you need fund information to make investment decisions. Transfer Difficulties: Complications arise with mutual funds when a managed portfolio is switched to a different financial firm. Sometimes the mutual fund positions have to be closed out before a transfer can happen. This can be a major problem for investors. Liquidating a mutual fund portfolio may increase risk, increase fees and commissions, and create capital gains taxes.
Risks of Investing in Mutual Funds
Mutual funds are capital market instruments and therefore subject to the same risks as the underlying investments. Specific risks include:
Credit risk - potential that an investment (specifically fixed-income securities) will go down when assigned a negative rating (downgraded) by a reputable credit rating service. Default risk - risk associated with an issuer of a debt instrument that may not have the financial ability to meet regular interest payments or is incapable of repaying the debt at maturity. Equity investment risk - risk resulting from changes in a specific company or industry developments and prospects, as well as changes in interest rates, economic conditions and stock market news. Interest rate risk - risk resulting from increased interest rates in the market place, that the income earned from an original investment will not be worth as much as the going market rates. Liquidity risk - inability to sell a security reasonably quickly at the prevailing market price or convert an asset into cash as quickly as possible. Political risk - potential for changes in government to impact the value of an investment. It may also include policy changes made by governments.
Fund Reporting
Mutual funds are a highly regulated industry by the SECP. To keep investors informed about the fund’s performance the management publishes daily returns on their website, monthly fund manager’s reports and quarterly and annual audited accounts. Legal documents affecting the fund’s operations are also available on the company websites or present at all sales offices.
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Prospectus/ Offering document - A mutual fund’s prospectus describes the fund’s goals, fees and charges, investment strategies and risks, as well a s information on how to buy and sell units. The SECP requires a fund to provide a full prospectus before accepting any investment. Trust Deed - Agreement signed, between the trustee and the fund sponsors, which details the appointment of the trustee/ custodian and the roles and responsibilities as trustee and custodian which include safekeeping and possession of the fund’s assets, movements of the fund’s assets and their investment. Financial Statements - These statements show the performance o f the fund in the outgoing period and help the investor evaluate how successfully the fund has achieved its stated objectives. Shareholder reports typically include two main types of information a) the fund’s financial statements and performance and b) a list of the securities the fund held in its portfolio at the end of the most recent accounting period. Reports and Website Information - AMCs regularly update their websites with daily fund prices, whereas monthly fund manager’s reports are added when the month ends, which details the market conditions, reasons for the fund’s performance and future outlook. Websites also provide fund prices (recent or historical); compare trends, company information, copies of all legal documents and other useful data.
List of Asset Management Companies in Pakistan:
1. JS Investments 2. AKD Investment Management Limited 3. Al Falah GHP Investment Management 4. Al-Meezan Investment Management Limited 5. AMZ Asset Management Limited 6. Arif Habib Investment Management Limited 7. Asian Capital Management (Pvt.) Limited 8. Askari Asset Management Limited 9. Atlas Asset Management Limited 10. BMA Asset Management Limited 11. CROSBY Asset Management Limited 12. Dawood Capital Management Limited 13. Faysal Asset Management Limited 14. First Capital Investments Limited 15. Habiib Assets Management Limited 16. HBL Asset Management Limited 17. KASB Fund Limited 18. National Asset Management Company Limited 19. National Fullerton Asset Management Limited (NAFA) 20. National Investment Trust Limited 21. NBP Capital Limited 22. Noman Abid Investment Management Limited 23. PICIC Asset Management Company Limited 24. Prudential Fund Management Limited 25. Safeway Management Limited
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26. UBL Fund Managers Limited 27. WE Investment Management Limited JS Investments: A case study
Founded in 1995, JS Investments Limited (JSIL) is the oldest and one of the largest private sector asset management companies in Pakistan with assets under management spread across various mutual funds, pension funds and separately managed accounts. JSIL's successful track record, creative and diverse thinking and product offering has helped set the asset management industry standards in Pakistan by always endeavoring to innovate and to be the first to bring new financial products to Pakistan, providing investors to better manage their wealth. Its Founding partners include INVESCO PLC (formerly known as AMVESCAP PLC) - one of the world's largest fund managers with global reach and International Finance Corporation (IFC) - the private sector arm of the World Bank Group. JSIL is part of the Jahangir Siddiqui Group, one of Pakistan's most diversified and prestigious financial institutions. The Jahangir Siddiqui Group maintains a strong presence in the nation's investment banking, corporate finance, equity market operations, debt factoring and insurance sectors. The group has offices throughout the major cities in Pakistan and manages its international operations from its London and Dubai offices. The group comprises businesses with over 18,000 employees and profit after tax of $510 million in 2007. The company is listed on the Karachi Stock Exchange and has a market capitalization of over PKR 1.4 Billion (as at December 31, 2009). JS Investments provide both open end and close end funds. Its open end funds include: •
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JS Islamic Fund (Formerly UTP Islamic Fund): This fund aims to g row investor’s capital in the long term in adherence with principles of Shariah compliance as advised by the Shariah Advisory Board (SAB) of this fund while ensuring liquidity. The fund investments are limited to asset classes approved by the Shariah Advisory Board and all companies under investment consideration are regularly screened for Shariah compliance. JS Aggressive Asset Allocation Fund: JS AAAF is a dynamic asset allocation fund that aims to achieve superior risk adjusted growth in investors’ capital ov er the long term. The fund operates a diverse portfolio of equity and fixed income investments and it may constantly adjust the mix as equity markets rise or fall and the economy strengthens or weakens. JS KSE 30 Index Fund (Formerly UTP A30+ Fund): The main focus of the JS KSE 30 Fund is to approximate the performance of KSE-30 Index, as adjusted for transaction and other costs, by investing in most or all of the common stocks that comprise the KSE-30 Index in proportions in which they are represented in the Index. JS Cash Fund: JS Cash Fund (JS CF) is an open-end Money Market Scheme that mainly invests in low risk short-term fixed income instruments including money market instruments to provide a regular and reasonable return to investors while ensuring high liquidity. The fund shall invest primarily in short duration instruments within Pakistan
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and may even hold some or all of its assets in cash for the purpose of maintaining liquidity. Unit Trust of Pakistan : UTP is a balanced fund that aims to preserve and grow investor’s capital in the long term while providing a regular stream of current income on an annual basis. The fund operates a diverse portfolio of equity and fixed income investments whereby the equity component is meant to provide the growth in capital while dividends on the equity component along with the fixed income investments help generate the current income. It is the first private sector fund of Pak istan. JS Fund of Funds: JS FoF (formerly UTP FoF) is a fund of funds that aims to grow investor’s capital in the long term while diversifying the asset manager risk bu ndled together with the benefits of an asset allocation fund. The fund operates a diverse portfolio of equity, balanced, fixed income and money market funds (both open and closed ended) with the option to adjust the asset mix as equity markets rise or fall and the economy strengthens or weakens. JS Aggressive Income Fund: JS AIF aims at generating current income on investments while maintaining the prospects of capital appreciation by investing in a diversified portfolio of money market and fixed income instruments. The fund may aggressively adjust asset weightings to take advantage of directional macro and micro economic trends and may hold some or even all of its assets in cash to either provide liquidity or for defensive purposes. JS Income Fund : JS IF is a mutual fund that invests in high quality fixed income and money market instruments to provide returns comparable to those offered by most term deposits, while ensuring daily liquidity like current or savings accounts JS Capital Protected Fund : JS CPF (formerly UTP CPF) is a low-risk profile, capital protected product that aims to safeguard investor capital by placing a significant percentage of the fund as bank deposit(s), and use the remaining funds to gain exposure into equity markets. The fund operates a portfolio of high return fixed income and money market instruments, as well as equity market investments or any other SECP permissible investment that the management feels would be appropriate to maximize total return. JS Capital Protected Fund IV: JS CPF IV aims to combine a strategy of providing 100% security of initial investment and the potential to beat term deposit returns through exposure into equity markets with an aggressive asset allocation strategy. JS Principal Secure Fund I: JS PSF I aims to combine a strategy of providing 100% security of initial investment and the potential to beat term deposit returns through exposure asset allocation strategy. JS Principal Secure Fund II: This is an open ended fund which has capital protection.
Its Close End Funds include: •
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JS Large Cap. Fund: The fund invests primarily in equity securities of large market capitalization companies - over the PKR 1bln mark. Returns are maximized through a combination of capital appreciation and income. Up to 20% of the fund's assets can be invested in debt securities. JS Growth Fund: The main objective of JS GF is to enable the Certificate Holders to participate in a diversified portfolio of high quality equity securities listed on the stock exchanges and to maximize the investment return, by prudent investment management.
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UTP-GF seeks to achieve long term growth in the value of the investment that is aimed to out perform the underlying inflation rate in Pakistan as w ell as most of the other types of investments available. JS Value Fund Limited: The fund maintains a mix of equities and debt instruments. Earnings comprise of capital appreciation, dividend income, and interest income. The portfolio seeks capital growth through investments in marketable securities with betterthan-average appreciation potential and liberal dividend policies. To benefit from rising interest rates, high levels of bank deposits and CFS funding are maintained.
JS Investments offer many services to its customers. It requires KYC (Know your customer) which is slowly emerging in the mutual finds market. Salesmen have to take exams to become qualified to sell the different types of funds. They are subject to corporate responsibility and are required to follow a code of ethics while conducting business. Their long-term corporate success depends, among other things, on their ability to conduct business in a responsible manner. JSIL has adopted the “The Asset Manager Code of Professional Conduct” (Code) formulated by the CFA Centre for Financial Market Integrity for the purposes of strengthening corporate governance, enhancing compliance culture, and promoting ethical and professional standards among employees. The code defines core values that all employees, especially fund managers, are required to follow when performing business operations or when interacting with colleagues, clients and other stakeholders. It also plays an important role in guiding the Company's efforts to inspire and maintain the trust and confidence of all its stakeholders. JS Investments also offer services such as the option to switch funds. This is that for example if an investor holds units in UTP, and wants to switch these units from UTP to the JS Growth Fund, then this service is provided to them. Moreover, the redemption (selling of units) is done easily through the sales team. The forms that investors need to fill out for d ifferent services are included in this report. Conclusion
In our report we discussed all about Mutual Funds and provided a clear overview on its different aspects. Mutual funds are investment vehicles that are made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. Mutual funds allow an investor to spread out his or her money across a few, as a handful, to as many as several thousand companies at one time. There are three types of Mutual funds: 1. Open-End Funds 2. Closed-End Funds 3. Load Funds and No-Load Funds Mutual funds determine their market price by calculating the Net Asset Value - NAV The dollar value of a single mutual fund share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding. It is calculated at the end of each business day. Mutual fund investors make money either by receiving dividends and interest from their investments, or by the rise in value of the securities. There are many types of mutual funds which can be classified based on asset class, investing strategy, region, etc. Mutual
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funds are easy to buy and sell. You can either buy them directly from the fund company or through a third party such as distribution companies. The advantages of Mutual Funds are: 1. 2. 3. 4. 5. 6. 7.
Diversification Professional Management Liquidity Diversification Variety Convenience No taxation on Mutual Funds
In our report we have also included a case study of JS investments to show the report reader that how mutual funds actually operate in the market. The report is based on the Pakistani economy and how mutual funds function.
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