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Mutual Funds
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A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The combined holdings the mutual fund owns are known as its portfolio. Each share represents an investor’s proportionate ownership of the fund’s holdings and the income those holdings generate.

Over the past decade, Pakistani investors increasingly have turned to mutual funds to save for retirement and other financial goals. Mutual funds can offer the advantages of diversification and professional management. But, as with other investment choices, investing in mutual funds involves risk. And fees and taxes on fund returns. It pays to understand both the upsides and downsides of mutual fund investing and how to choose products that match your goals and tolerance for risk.

TYPES OF MUTUAL FUNDS

There are basically two types of Mutual Funds:

  • Open-Ended Mutual Funds
  • Closed-Ended Mutual Funds

Open-ended

These are mutual funds which continually create new units or redeem issued units on demand. They are also called Unit Trusts. The Unit holders buy the Units of the fund or may redeem them on a continuous basis at the prevailing Net Asset Value (NAV). These units can be purchased and redeemed through Management Company which announces offer and redemption prices daily.

Close-ended
These funds have a fixed number of shares like a public company and are floated through an IPO. Once issued, they can be bought and sold at the market rates in secondary market (Stock Exchange). The market rate is announced daily by the stock exchange.

STRUCTURE OF MUTUAL FUND

Mutual Funds are operated by Asset Management Companies (AMCs) which exists in the form of a public limited company registered under Companies Ordinance, 1984. The AMC launches new funds through the establishment of a Trust Deed, entered between the Asset Management Company and the Trustee, with due approval from the SECP under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (the “Rules”). The Trustee performs the functions of the custodian of the assets of the Fund. The trustee ensures that the Fund Manager takes the investment decisions within the defined investment policy of the mutual fund. Under Pakistan law, banks and central depository companies, approved by the SECP, can act as trustee.
At present Central Depository Company of Pakistan (CDC) is acting as Trustee of most of the funds of the industry.
The Securities & Exchange Commission of Pakistan (SECP) is the regulator of mutual funds industry and is very stringent in issuing licenses to fund management companies, especially in the case of Collective Investment Scheme (CIS). The SECP also carries out continuous monitoring of mutual funds through reports that the mutual funds have to file with the SECP on a regular basis. In addition, SECP conducts on-site inspections of the AMCs.

CATEGORIES OF MUTUAL FUND 

SECP the Regulator has categorized the Schemes of mutual funds as under:- 

Money Market Scheme: Money Market Funds are among the safest and most stable of all the different types of mutual funds. These funds invest in short term debt instruments such as Treasury bills and bank deposits.

Income Scheme: These funds focus on providing investors with a steady stream of fixed income. They invest in short term and long term debt instruments like TFCs, government securities like T-bills/ PIBs, or preference shares.

Aggressive Fixed Income Scheme: The aim of aggressive income fund is to generate a high return by investing in fixed income securities while taking exposure in medium to lower quality of assets also.

Equity Scheme: An equity scheme or equity fund is a fund that invests in Equities more commonly known as stocks. The objective of an equity fund is long-term growth through capital appreciation, although dividends and capital gain realized are also sources of revenue. 

Balanced Scheme: These funds provide investors with a single mutual fund that invests in both stocks and debt instruments and with this diversification aimed at providing investors a balance of growth through investment in stocks and of income from investments in debt instruments. 

Asset Allocation Fund: These 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. 

Fund of Fund Scheme: Fund of Funds are those funds, which invest in other mutual funds. These funds operate a diverse portfolio of equity, balanced, fixed income and money market funds (both open and closed ended).

Shariah Compliant (Islamic) Scheme: 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.

Index Tracker Scheme: Index funds invest in securities to mirror a market index, such as the KSE 100. An index fund buys and sells securities in a manner that mirrors the composition of the selected index. The fund's performance tracks the underlying index's performance.

Commodity Scheme: These schemes enable small investors to take advantage of gains in commodities such as gold through pooled investments. They invest at least 70%of their assets in commodity futures contracts, which include both cash-settled and deliverable contracts.

WHY INVESTMENT IN MUTUAL FUNDS

For some investors, mutual funds provide an attractive investment choice because they generally offer the following features: 

  • Professional Management—Professional money managers research, select, and monitor the performance of the securities the fund purchases.
  • Diversification—Diversification is an investing strategy that can be neatly summed up as “Don’t put all your eggs in one basket.” Spreading your investments across a wide range of companies and industry sectors can help lower your risk if a company or sector fails. Some investors find it easier to achieve diversification through ownership of mutual funds rather than through ownership of individual stocks or bonds.
  • Affordability—Some mutual funds accommodate investors who don’t have a lot of money to invest by setting relatively low dollar amounts for initial purchases, subsequent monthly purchases, or both.
  • Liquidity—Mutual fund investors can readily redeem their shares at the current NAV—plus any fees and charges assessed on redemption—at any time.
  • Tax Cedit—According to Section 62 of the Income Tax Ordinance, 2001, a “resident’ tax payer other than a company, is entitled to tax credit on investment in new shares offered to public by a public company listed on a stock exchange in Pakistan. This tax credit is available on the lower of (a) the amount of actual Cost of Investment (b) 20% of Taxable Income for the tax year or (c) Rs. 1.5 million. The tax credit availed on acquisition of such shares will be need to be paid back, if such shares are disposed off within 48 months of the date of acquisition. Units of Mutual Funds are covered under the definition of shares as per Income Tax Ordinance, 2001.
 
 
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