A mutual fund may be either an open-end or a closed-end fund. An open-end mutual fund does not have a set number of shares; and continuously issues and redeems units. On the other hand, closed-end mutual fund has a fixed number of shares and is then traded on the secondary market, where the value of the shares fluctuates with the market.
Mutual funds vs. direct investments Mutual funds are popular because they make investing in financial markets easy. From an investors' viewpoint mutual funds have several advantages such as:
-- Professional management and research to select quality securities.
-- Spreading risk over a larger number of stocks.
-- Ability to add funds at set amounts and smaller quantities such as PKR 1,000/5,000 per month
-- Ability to convert the Units into cash at any time and receive the amount within 6 working days.
-- Economies of scale: Because a mutual fund buys and sells large amounts of securities at a time, its transaction costs are lower than what an individual would pay for securities transactions.
Mutual Funds in Pakistan
Mutual funds are well-regulated in Pakistan. The Securities & Exchange Commission of Pakistan (SECP) is the regulator of mutual funds industry and is very stringent in regulating the mutual funds through monitoring and inspections. SECP Regulations require that the custody of all the assets of the mutual funds is maintained with an independent trustee who is registered with the SECP.
The mutual funds industry has been introducing many attractive products which are especially attractive for the small investors/ savers and it is precisely this sector which is most important for mutual funds to target and develop. Until the end of the 1990s the only categories of mutual funds in Pakistan were equity and balanced funds in both classes of mutual funds ie closed end and open end. Since then, the mutual fund industry introduced many new products suited to meeting the investment needs and risk appetite of a very broad cross section of the investing public such as Pension funds, Money Market Funds, Fund of Funds, Income Funds, Capital Protected/Preservation Funds, Index Tracker Funds, Commodities Funds and Income Funds for investment return to be paid monthly, quarterly or annually. In addition, the mutual funds industry also offers Shariah compliant funds under each of the categories mentioned above. These categories of funds cater to the needs of all type of investors, those who want to invest to supplement their current income and do not want to take risk and those who want to invest for long term growth and to meet their retirement needs.
The growth trend in the mutual funds industry is as shown in the table below:
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Total Net Assets (PKR millions)
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As on June 30
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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
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Total Size of
the Industry 25,343 51,055 93,819 125,057 159,798 301,261 335,228 182,360 200,048 250,757 380,538 361,690 416,160 443,470
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How to Start Investing?
To select the appropriate mutual fund(s), the first step is to determine your objectives for savings/ investments which includes:
-- Return needs: what kind of returns are you expecting from your investments
-- Risk Tolerance: How much risk are you willing to take (ie how much loss in value can you tolerate)
-- Time horizon: when do you need your money?
-- Liquidity needs: when do you need your money? Do you need monthly income or can you let it grow?
Please remember that you cannot have high returns with low risk. You must be vary of any such scheme which offers you high returns with low risk. Risk and Return are directly related. The higher the risk, the higher the potential for return and vice versa.
Based on the results of the above assessment, the mutual funds can be selected for your portfolio and you should monitor your investments on periodic basis.
Long Term Horizon: If you are saving for long term say more than 5 years, then to let your money grow faster, you should put at least a portion of your money in equity mutual funds. Saving for retirement, saving for children's education falls under the long term needs.
Medium Term Horizon: For investors who do not need access to their money for one to five years. Since this time horizon leaves limited time to recover from a market downturn, caution has to remain a factor. You should look towards Balanced Funds and Income Funds.
Short Term Horizon: For purposes of investing, the best mutual funds investment for the short term are those that have no restrictions and focus on very low risk investments(such as money market funds). Short-term investing is taken to mean a year or less which allows for very little time to recover from losses.
Conclusion
Investing through mutual funds is very simple and an easy way to start your investment journey. One must just remember that there can be no such thing as a 'one size fits all' and every investment decision must be in accordance with your unique investment needs.