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Mutual Funds

Introduction to Mutual Funds

A mutual fund is a professionally-managed trust that pools the savings of its many investors and invests them in securities such as stocks, bonds, and short-term money market instruments. These funds are managed by professional fund managers in accordance with each fund’s objectives.

The funds are generally well diversified and offer an attractive way for savings to be managed without paying high fees or requiring constant attention from individual investors. Mutual funds present an option for investors who lack the time or knowledge to make traditional and complex investment decisions. By putting your money in a mutual fund, you allow the fund manager to make essential investment decisions for you.

How do Mutual Funds work in Pakistan?

Mutual Funds or Collective Investment Schemes (CIS) are pools of investment of investors savings which are managed by professional fund managers. The ownership of the fund rests with the investors and the title of assets is with the trustee of the mutual fund. The Fund Manager (Asset Management Company) actively manages the placement of these assets in various securities. A mutual fund invests in securities based on the investment objective of a particular scheme which is clearly laid down in the Offering document for that scheme.

The fund adds value to the investment in two ways: Income Earned and Capital Appreciation. This is shared between unit holders in proportion to the number of units they own.

Money Market Fund

Money Market Funds invest in short-term T-Bills, bank deposits and commercial papers with objective of capital preservations and reasonable income. Minimum rating requirement is AA and the maximum average maturity of is 90 days and maximum single asset maturity is 6 months.

Income Fund

Income Fund seeks a high level of current income and preserve inflation adjusted value by typically investing in Government Bonds (PIBs) and corporate bonds (TFCs / corporate Sukuks in Pakistan). Minimum requirement of cash & equivalents is 25%. Maximum average maturity other than Government Securities is 4 years.

Capital Protected Fund

A Capital Protected Fund is a type of mutual fund that normally seeks to protect at least the initial investment made by an investor, if the units in the Fund are held for the specified term.

Asset Allocation Fund

An Asset Allocation scheme may invest its net assets in any asset class (stocks, money markets and bonds etc.) at any time up to 90%. Minimum requirement of cash & equivalents is 10%. The objective of this scheme is to provide downside protection along with upside potential.

Balanced Fund

Balanced Fund invests in bonds, money market and stocks. It has a minimum investment limit of 30% and maximum investment limit of 70% in stocks. Minimum requirement of cash & equivalents is 10%.

Fund of Funds

A fund of funds is an investment strategy of holding a portfolio of other mutual funds rather than investing directly in shares, bonds or other securities.

Equity Fund

An equity fund is a mutual fund that invests primarily in stocks (at least 70% and maximum of 100%) and remaining assets in T-bills and bank deposits.

Regulatory Framework for Mutual Funds

The mutual fund’s industry in Pakistan is regulated by the SECP with an objective of protection of the investors and promotion and development of the capital market in the country.

SECP has notified the Non-Banking Finance Company Rules, 2003, and the Non-Banking Finance Companies & Notified Entities Regulations, 2008, which specify key parameters for AMCs to ensure their conduct in relation to the management of a mutual fund is acceptable. The regulatory framework requires adequate disclosure by the AMCs in relation to a mutual fund, to enable investors to make informed investment decisions.

The governing regulatory framework for the mutual fund industry includes:

  • Non-Banking Finance Companies (Establishment & Regulation) Rules, 2003
  • Non-Banking Finance Companies & Notified Entities Regulations, 2008
  • The Companies Ordinance, 1984
  • Circulars and Directives issued by the SECP under the provisions of the Ordinance