2. Group Members
Sharyar Anjum F12BA007
Kainat Saleem F12BA027
Mariam Arif F12BA029
Muharra Bukhari F12BA043
Fiza Majid F12BA052
3. Content
What are Mutual Fund?
History of Mutual Fund
Structure of Mutual Fund
Types of Mutual Fund
Rules that govern Mutual Fund
Role of SECP and MUFAP
Charges in Mutual Fund
Net Asset Value
Taxation
Advantages and Disadvantages
Risk
Portfolio Management
How investors earn in mutual Fund?
How to invest in Mutual Fund?
4. Mutual Fund
Mutual Fund is an investment programme funded by
shareholders that trades in diversified holdings and is
professionally managed.
An investment vehicle that is made up of a pool of funds
collected from many investors for the purpose of investing
in securities.
Each investor gets a share of the pool proportionate to
the initial investment.
5. Mutual Fund w.r.t Capital Market
Mutual Fund is a trust that pools the savings of a
number of investors who share a common financial goal.
The money thus collected is invested in capital market
instruments such as shares, debentures, stocks and other
securities.
Mutual fund is the most suitable investment for a
common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at
a relatively low cost.
6. Mutual Fund w.r.t Money Market
It is a category of liquid funds in which investment is
done entirely in cash/cash equivalent securities with less
than one year maturity, referred to as money market
instruments.
The purpose of these funds is to provide a safe place for
investment in easily accessible cash-equivalent assets
characterized as low-risk, low-return investment.
8. History of Mutual Fund
The first mutual fund was established in Europe.
A Dutch merchant Adriaan van Ketwich created the first
mutual fund in 1774.
First mutual fund outside the Netherlands was the Foreign &
Colonial Government Trust, which was established in London in
1868.
Mutual funds were introduced in United States in 1890s. They
became popular during the 1920s.
In 1893, the first closed-end fund “The Boston Personal
Property Trust” was formed.
9. History of Mutual Fund
In year 1924, the first open-end fund “Massachusetts
Investors’ Trust of Boston” was the formed.
In Pakistan NIT(National Investment Trust) offered first
open end fund in 1962.
ICP(Investment Corporation of Pakistan) offered a series
of closed end funds in 1966, these were later privatized in
2000.
1994-95 - More funds launched in private sector
2006 - Total number of AMCs are 30 managing 56
mutual funds
10. Parties involve in Mutual Fund
Sponsor
Board of Trustees
Custodian
Asset Management Company
Fund Manager/Portfolio Manager
11. Parties involve in Mutual Fund
Sponsors:-
Registered companies or financial institutions are called sponsors.
Sponsors are the most important entity of mutual fund. Sponsors must
have a good financial record in past.
Trustee:-
Refers to Board of Trustees who is given the legal responsibility to
hold and safeguard the fund for the benefit of the unit holders. Trustees in
MUFAP are NBP, CDC, HMB, MCBFS.
Custodian:-
It is an independent entity that holds and safe keeps the assets. Mostly
financial institutions or banks act as custodians.
12. Parties involve in Mutual Fund
Asset Management Company:-
It is the prime entity of any fund. It manages all the
investments made by the investors. Records of pricing and
accounting of data is looked after by these Asset Management
Companies. It also calculates the Net Asset Value of the funds.
Fund Managers/ Portfolio Managers:-
Under an Asset Management Company, there are Fund
Managers or Portfolio Managers, who take necessary decisions
related to the investments made by the investors. They are the
person who monitor and manage your funds and investments.
13. 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”).
14. Structure of Mutual Fund
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.
15. Structure of Mutual Fund
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.
16.
17. Types of Mutual Fund according to
Maturity Period
Open Ended Mutual Fund:-
“An open-ended Mutual fund is one that is available for
subscription and repurchase on a continuous basis.”
These Funds do not have a fixed maturity period.
The scheme provide excellent liquidity facility to the investors.
The fund manager buys and sells units constantly as demanded by
the investors.
The capitalization of the funds changes constantly as it is always
open for the investors to buys and sells their units.
The buying and selling of units takes place at a declared NAV(net
asset value).
18. Types of Mutual Fund according to
Maturity Period
Close Ended Mutual Fund:-
“A close-ended Mutual fund has a stipulated maturity
period e.g. 5-7 years. The fund is open for subscription only during
a specified period at the time of launch of the scheme.”
Such funds have fixed capitalization.
Units of close ended schemes are traded on stock exchange in
the secondary market.
Price is determined on the basis of supply and demand. There are
2 prices for such funds, one that is market determined and the
other is NAV based .
19. Types of Mutual Fund according to
Investment
Equity Fund
Balanced Fund
Asset Allocation Fund
Fund of Funds Scheme
Shariah Compliant(Islamic) Fund
Capital Protected Fund
Index Fund
Money Market Fund
Income Fund
Aggressive Fixed Income Fund
Commodity Scheme
20. Types of Mutual Fund according to
Investment
Equity Funds:-
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.
At least 70% of the net assets invested in listed equity
securities.
Remaining net assets invested in cash or near cash
instruments, treasury bills.
21. Types of Mutual Fund according to
Investment
Balanced Fund:-
These funds provide investors with a single mutual fund
that invests in both stocks and debt instruments (Notes, Bonds,
Certificates, Mortgages and leases) and with this diversification aimed
at providing investors a balance of growth through investment in stocks
and of income from investments in debt instruments.
Rating of bank not lower than AA-.
Weighted average time to maturity of non equity assets should not
exceed 2 years.
Investment in CFS and spread should not exceed 25%.
22. Types of Mutual Fund according to
Investment
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).
23. Types of Mutual Fund according to
Investment
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.
Capital Protected Scheme:
In this type of scheme, the payment of 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.
24. Types of Mutual Fund according to
Investment
Index 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.
25. Types of Mutual Fund according to
Investment
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, 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.
26. Types of Mutual Fund according to
Investment
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.
27. Rules that govern Mutual Fund in Pakistan
There are two rules govern mutual fund in Pakistan, which
are;
1. Investment Companies and Investment Advisors’ Rules,
1971. (Govern Close Ended Mutual Funds)
2. Asset Management Companies Rules, 1995. (Govern
Open Ended Mutual Funds)
28.
29. Role of SECP in Mutual Funds
Enhanced role of Trustee:-
Every mutual fund is required to have an independent trustee
as a key stakeholder in protecting the interests of the unit-
holders. So, SECP believes that the role of trustee needs to be
enhanced.
Empowerment of Unit Holders:-
The SECP believes in empowerment of unit holders of a fund
and for the purpose, envisions that the unit holders may be
provided specific powers (such as change of Management
Company) in relation to material aspects of a fund.
30. Role of SECP in Mutual Funds
Product Innovation:-
In order to promote the industry, the SECP is receptive to the
innovative ideas and products that offer diverse solutions to
satisfy the needs of participants of the industry. For this
purpose, money market funds are under consideration.
Independence of MUFAP:-
In order to make the association more effective in meeting its
mandate, its present board structure/composition is under
review. The SECP will explore ways whereby some
representation on behalf of trustees and investors through
independent directors is achieved.
31. Mutual Funds Association of Pakistan
Mutual Funds Association of Pakistan is the trade body
duly licensed by the Government of Pakistan for the
mutual fund industry in Pakistan.
All Asset Management Companies (AMCs) and
Investment Advisory ( IAs ) licensed by SECP to launch
Mutual Funds and perform Investment Advisory Services
are required under NBFC Rules 2008 to become Members
of MUFAP.
32. Role of MUFAP
The MUFAP has a mandate to develop the industry, which
includes
Devising ways and means for ensuring investor protection.
Policy Issues & Shaping Regulation
Market Practices – developing and implementing Industry
Codes and Guidelines
Investor awareness & education
Research & Statistics
Training
33.
34. FREQUENTLY USED TERMS
Trust Deed:-
It is the principal document of formation and
management of mutual funds b/w AMC’s and Trustee.
35. FREQUENTLY USED TERMS
Sale Price:-
Sale price is the price you pay when you invest in
a scheme. Also called Offer Price. It may include a sales
load.
Repurchase Price:-
It is the price at which a close-ended scheme
repurchases its units and it may include a back-end load.
This is also called Bid Price.
36. FREQUENTLY USED TERMS
Redemption Price:-
It is the price at which open-ended schemes
repurchase their units and close-ended schemes redeem
their units on maturity. Such prices are NAV related.
Sales Load:-
Is a charge collected by a scheme when it sells the units.
Schemes that do not charge a load are called No Load
Schemes.
37. How do Mutual Funds determine their Unit Price?
NAV is the price at which investors buy (bid price) fund
shares from a fund company and sell them (redemption
price) to a fund company.
The NAV is equal to the market worth of assets held in the
portfolio of a Fund, minus liabilities, divided by the number
of units outstanding.
Formula to calculate NAV:-
NAV = Current Market Value of all the Assets – Liabilities/
Total Number of Units Outstanding
38. Calculation of NAV
Example:-
Lets assume that a particular mutual fund held
Rs.20,000 worth of securities, Rs.10,000 of cash, Rs.5000
of liabilities. If the fund had 100 shares outstanding then
NAV would be:
NAV per share=(20,000+10000-5000)/100
NAV per share= 50.00
39. How do Mutual Funds determine their Unit Price?
In order to determine the sale price of the unit sales
load is added to the NAV. In case there is no sales load
the NAV will be the sale price as well as the redemption
price.
A fund’s NAV will change daily as the value of fund’s
securities, cash held, liabilities and the number of
shares outstanding fluctuates.
40. Charges Involved in Mutual Fund
Front-end Load:-
This load is charged to investor upon investing in open-end
fund, however some MUF’s are not charged this fee.
Back-end Load:-
This load is charged to investor when he redeems his
investment in mutual fund, however some MUF’s are not
charged this fee.
Management Fee:-
This is the fee charged by the AMC’s for the management of
fund.
41.
42. Taxation in Mutual Funds
As funds are listed at the stock exchanges, unit holders of
the mutual funds, other than a company, are entitled to a
tax credit under section 62 of the Income Tax Ordinance,
2001 on purchase of new units.
Rate of withholding tax on dividend income from
Mutual Funds:-
Stock Funds
Dividend received from stock fund if dividend receipts
are less than capital gain than tax rate applicable is 12.5%
43. Taxation in Mutual Funds
All other mutual funds other than stock funds
For Banks and Companies: Dividend received by a
company from collective investment scheme, or a mutual
fund, other than stocks than tax rate applicable is 25%.
For individuals and other corporate and non-corporate
unit holders tax rate applicable is 10% for filers and 15% for
non-filers.
44. Taxation in Mutual Funds
Capital Gain Tax:-
Holding Period
Where holding period of a security is less than 12
months , tax rate applicable is 12.5%
Where holding period of a security is 12 months or
more but less than 24 months, tax rate applicable is
10%.
Where holding period of a security is 24 months or
more ,tax rate applicable is 0%
45. Why do people invest in Mutual
Fund?
Mutual funds offer investors an affordable way to diversify
their investment portfolios.
Mutual funds allow investors the opportunity to have a
financial stake in many different types of investments.
These investments include: stocks, bonds, money markets,
real estate, commodities, etc…
Individually, an investor may be able to own stock in a few
companies, a few bonds, and have money in a money market
account. Participation in a mutual fund, however, allows the
investor to have much greater exposure to each of these asset
classes.
46.
47. Advantages of Mutual Funds
Professional Management:-
Mutual Funds provide the services of experienced and
skilled professionals, backed by a dedicated investment
research team that analyses the performance and
prospects of companies and selects suitable investments
to achieve the objectives of the scheme.
Diversification:-
Securities from hundreds or even thousands of issuers it
reduces the risk of loss.
48. Advantages of Mutual Funds
Convenient Administration:-
Investing in Mutual Fund reduces paperwork and helps you
avoid many problems such as bad deliveries, delayed
payments and follow up with brokers and companies. Mutual
Funds save your time and make investing easy and convenient.
Liquidity:-
Mutual fund can be bought and sold on any business day, so
investors have easy access to their money. Many individual
securities can also be bought and sold readily.
49. Advantages of Mutual Funds
Transparency:-
Investors get regular information on the value of your
investment in addition to disclosure on the specific
investments made by your scheme, the proportion invested in
each class of assets and the fund managers investment
strategy and outlook.
Flexibility:-
Through features such as regular investment plans, regular
withdrawal plans and dividend reinvestment plans; you can
systematically invest or withdraw funds according to your
needs and convenience.
50. Advantages of Mutual Funds
Choice of Schemes:-
Mutual Funds offer a family of schemes to suit your
varying needs over a lifetime.
Affordability:-
A mutual fund invests in a portfolio of assets, i.e. bonds,
shares, etc. depending upon the investment objective of
the scheme. An investor can buy in to a portfolio of
equities, which would otherwise be extremely expensive.
51. Advantages of Mutual Funds
Dividend Reinvestment:-
As dividends and other interest income is declared for the
fund, it can be used to purchase additional shares in the
mutual fund, thus helping your investment grow.
52. Disadvantages of Mutual Funds
Management Risk:-
When you invest in a mutual fund, you depend on the
funds manager to make the right decisions regarding the
funds portfolio. If the manager does not perform as well
as you had hoped, you might not make as much money on
your investment as you expected. Of course, if you invest
in Index Funds, you forego management risk, because
these funds do not employ managers.
53. Disadvantages of Mutual Funds
No Guarantees:-
Performance of mutual funds are not guaranteed. Value of
investment may go up or down.
Units of funds are neither guaranteed by AMC’s or by the
government.
Lack of Control:-
Investors typically cannot ascertain the exact make-up of a
fund's portfolio at any given time, nor can they directly
influence which securities the fund manager buys and sells or
the timing of those trades.
54. Disadvantages of Mutual Funds
Price Uncertainty:-
With an individual stock, you can obtain real-time pricing
information with relative ease by checking financial websites
or by calling your broker. You can also monitor how a stock's
price changes from hour to hour — or even second to second.
By contrast, with a mutual fund, the price at which you
purchase or redeem shares will typically depend on the fund's
NAV, which the fund might not calculate until many hours after
you've placed your order. In general, mutual funds must
calculate their NAV at least once every business day, typically
after the major exchanges close.
55. Disadvantages of Mutual Funds
Taxes:-
During a typical year, most actively managed mutual funds
sell anywhere from 20 to70 percent of the securities in
their portfolios. If your fund makes a profit on its sales,
you will pay taxes on the income you receive, even if you
reinvest the money you made.
56.
57. Risk in MUF’s
Call Risk:-
The possibility that falling interest rates will cause a
bond issuer to redeem or call its high-yielding bond
before the bond's maturity date.
Country Risk:-
The possibility that political events (a war, national
elections), financial problems (rising inflation,
government default), or natural disasters (an earthquake,
a poor harvest) will weaken a country's economy and
cause investments in that country to decline.
58. Risk in MUF’s
Credit Risk:-
The possibility that a bond issuer will fail to repay interest
and principal in a timely manner. Also called default risk.
Currency Risk:-
The possibility that returns could be reduced for
Americans investing in foreign securities because of a rise
in the value of the U.S. dollar against foreign currencies.
Also called exchange-rate risk.
Income Risk:-
The possibility that a fixed-income fund's dividends will
decline as a result of falling overall interest rates.
59. Risk in MUF’s
Industry Risk:-
The possibility that a group of stocks in a single industry
will decline in price due to developments in that industry.
Inflation Risk:-
The possibility that increases in the cost of living will
reduce or eliminate a fund's real inflation-adjusted
returns.
Interest Rate Risk:-
The possibility that a bond fund will decline in value
because of an increase in interest rates.
60. Risk in MUF’s
Market Risk:-
The possibility that stock fund or bond fund prices
overall will decline over short or even extended
periods. Stock and bond markets tend to move in
cycles, with periods when prices rise and other
periods when prices fall.
Principal Risk:-
The possibility that an investment will go down in
value, or "lose money," from the original or invested
amount.
63. Approaches to Portfolio Management
Mutual funds can be broadly classified into two categories
in terms of the fund management style i.e.
1. Actively managed funds
2. Passively managed funds(popularly referred to as index
funds).
64. Approaches to Portfolio Management
Passively Managed Funds:-
Passively managed funds/index funds are aligned to a
particular benchmark index like KSE 100 index KSE 30
index. The endeavor of these funds is to mirror the
performance of the designated benchmark index, by
investing only in the stocks of the index with the
corresponding allocation.
65. Approaches to Portfolio Management
Actively managed funds:-
Actively managed funds are the ones wherein the fund
manager uses his skills and expertise to select invest-
worthy stocks from across sectors and market segments.
The sole intention of actively managed funds is to identify
various investment opportunities in the market in order to
clock superior returns, and in the process outperform the
designated benchmark index.
66. Approaches to Portfolio Management
In active fund management two basic fund management
styles that are prevalent are:
1. Growth Investment Style
2. Value Investment Style
67. Approaches to Portfolio Management
Growth Investment Style:-
The primary objective of equity investment is to obtain
capital appreciation. this investment style would make the
funds manager pick and choose those shares for
investment whose earnings are expected to increase at the
rates that exceed the normal market levels. they tend to
reinvest their earnings and generally have high P/E ratios
and low Dividend Yield ratio.
68. Approaches to Portfolio Management
Value Investment Style:-
The funds manager looks to buy shares of those
companies which he believes are currently under valued in
the market, but whose worth he estimates will be
recognized in the market valuation eventually.
69. Investor Earn in three Ways
Investors can earn money from mutual funds in three ways:
1. Dividend Payments:-
A fund may earn income in the form of dividends and interest
on the securities in its portfolio. The fund then pays its
shareholders nearly all of the income (minus disclosed
expenses) it has earned in the form of dividends.
2. Capital Gains Distributions:-
The price of the securities a fund owns may increase. When a
fund sells a security that has increased in price, the fund has a
capital gain. At the end of the year, most funds distribute these
capital gains (minus any capital losses) to investors.
70. Investor Earn in three Ways
3. Increased NAV:-
If the market value of a fund's portfolio increases after
deduction of expenses and liabilities, then the value (NAV)
of the fund and its shares increases. The higher NAV
reflects the higher value of your investment. With respect
to dividend payments and capital gains distributions, funds
usually will give you a choice: the fund can send you a
check or other form of payment.
71. How to invest in Mutual Funds?
So let’s suppose you decide that you want to start investing
in the KSE Meezan Index Fund.
You will be asked to fill out two forms. One is a form from the
investment management company itself.
The second is a form from the Central Depository Company
of Pakistan. The CDC is the central registry of all investment
transactions in the country. It exists to make sure that your
asset management company or brokerage firm cannot simply
run away with your money. It is not impossible for investors to
be cheated by their broker or fund manager, but it is now more
difficult because of the CDC.