Mutual Funds Basics

Mutual funds are often described as pooled investments. When an investor buys the units in a mutual fund the money is pooled with that of other investors whose goals are similar. A professional fund manager uses this money to buy stocks, Sukuk (Islamic Bond), or money market instruments that make up the fund’s portfolio of investments.

  • A Mutual Fund is a single portfolio of investments where investors put their money to be managed by an Asset Management Company on behalf of its many investors. This allows each investor access to a professionally managed pool of funds.

    The Fund Manager invests the Fund’s capital in profitable avenues and attempts to earn a return for the Fund’s investors. The income earned through these investments and the capital appreciation realized are shared by its unit-holders in proportion to the number of units owned by them.

    Mutual funds benefit all investors, allowing them to diversify their financial resources and reap the benefits of investing in mutual funds. If you want to learn how to invest in mutual funds and what are mutual fund advantages, feel free to reach out to us, and we’ll be more than happy to help you out.

    Types of Mutual Funds

    Mutual Fund schemes may be classified based on their structure and their investment objective.

    Open-ended Funds: These are mutual funds that 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 continuously prevailing Net Asset Value (NAV). These units can be purchased and redeemed through the Management Company, which announces offer and redemption prices daily.

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

    Structure of Mutual Funds

    Mutual Funds are operated by Asset Management Companies (AMCs), which exist in the form of a public limited company registered under the Companies Act, 2017. 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 Pakistani law, banks and central depository companies, approved by the SECP, can act as trustees.

    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 the mutual fund industry. The SECP also carries out continuous monitoring of mutual funds through reports that the Mutual Funds have to file with the SECP regularly. In addition, SECP conducts on-site & off-site inspections of the AMCs.

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

    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 this diversification is aimed at providing investors a balance of growth through investment in stocks and income from investments in debt instruments.

    Asset Allocation Fund: These Funds may invest their assets in any type of securities at any time in order to diversify their 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 that invest in Shariah Compliant securities i.e. shares, Sukuk, Ijara Sukuk, 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.

    Capital Protected Scheme: In this type of scheme, the payment of the original investment is guaranteed with any further capital gain which may accrue at the end of the contractual term of the Fund. Such funds are for a specific period.

    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.

    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 / Sukuk like T-bills / PIBs, or preference shares.

    Aggressive Fixed Income Scheme: An aggressive income fund aims to generate a high return by investing in fixed income securities while taking exposure to medium to lower-quality assets also.

    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.

  • Mutual funds make saving and investing simple, accessible, and affordable. The advantages of mutual fund include the following:

    Accessibility: Mutual Funds units are easy to buy.

    Liquidity: Mutual Fund unit holders can convert their units into cash on any working day. They will promptly receive the current value of their investment. Investors do not have to find a buyer; the Fund buys back (redeems) the units.

    Diversification: By investing the pool of unit holders’ money across several securities, a mutual fund diversifies its holdings. A diversified portfolio reduces the investors’ risk. It would be difficult for an average investor to buy varied securities to achieve the same level of diversification as is available with investment in a mutual fund.

    Professional Management: Asset Management Company evaluates all the opportunities that arise in the market, carefully examines them, and then decides for investing the mutual fund’s money whereas it is not an easy task for an individual and even for the corporate company if investing is not their core business.

    Convenience: Investors remain occupied with their daily tasks and find it difficult to follow the market on daily basis. Mutual Funds on other hand act on your behalf and monitor your investment on minute to minute basis. Being experts in their area, they are also better equipped to decide on a timely basis.

    Return Potential: Due to their expertise in investment decision-making and availability of dedicated resources, Mutual Funds have the potential to provide a higher return in the medium to long term. Mutual funds also have the advantage of diversification which reflects in better returns in long term.

    Transparency: Mutual Funds are watched by regulators, settlement houses (stock exchange), trustees, auditors, and in our case Shariah Auditors also. Multiple levels oversee and audit builds the trust of investor as it makes the investment process very transparent. In addition to this, the Fund also prepares and discloses periodic financial statements, which provide an in-depth review of all the major activities undertaken by the fund over the period.

    Flexibility: Mutual Funds provide various value-added services which make it very easy for investors to manage and track their investments. They can even invest or redeem in mutual funds by just sitting at home through online transactions. Mutual funds have goal-based plans such as Systematic Investment Plans (SIP) and Savings Plans which are convenient for investors to invest and achieve their long-term objectives such as kids’ education or marriage.

    Choice of Schemes: Mutual Funds offer a variety of product schemes to suit your varying needs and financial goals.

    Well Regulated: All Mutual Funds are registered with SECP and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SECP. In addition to that, mutual funds’ assets are placed with the Trustee to further ensure investors’ asset protection.

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