MUTUAL FUNDS By: Uzair Ahmad (Relationship Manager) NBP Fullerton Asset Management Ltd.

Qualification: MBA (Finance) Mutual Funds Distributor Certification Stock Brokers Certification IM|Sciences (2011) Institute of Capital Markets, Karachi (2010) Institute of Capital Markets, Karachi (2011) Professional Qualification:

Mutual Funds are a pool of money invested by small, medium & large Investors. Simply put, a mutual fund is a type of investment. You can think of it as a group of people with similar goals who, instead of investing on their own, pool their money. They hire a professional manager to invest that money in securities, such as stocks, bonds, and money market instruments. Mutual Funds

4 Introduction to Mutual Funds YOU– The Investor Mutual Funds Professional Fund Managers MBA’s CA’s CFA’s Investments Stocks Money Markets TFC’s Bank Deposits CFS Mutual Funds

5 History of Mutual Funds The mutual fund industry was born in the United States 87 years ago. The first open-end mutual fund was founded on March 21, 1924 and after one year had 200 shareholders and $392,000 in assets. By the end of the 1960s there were around 270 funds with $48 billion in assets. Today, mutual funds assets in the United States are more than their bank deposits. Similar stories are being repeated in other countries.

Mutual Funds around the Global & Local Market Mutual funds are very popular today, known for ease-of-use, liquidity, and unique diversification capabilities. Mutual Fund around the Globe: Country Assets (US$ Billion) No. of Funds USA 8,977 14,026 Europe 5,561 29,690 Asia & Pacific 1,815 11,620 Africa Hong Kong 404 1,040 India Japan 406 2,576 Korea 189 6,568 New Zealand Philippines 1 28 Pakistan Taiwan

Mutual Fund in Pakistan: The mutual fund industry was introduced in Pakistan by the Government in the form of National Investment Trust (NIT) it was constituted under the trust deed dated 12th November Executed between the National Investment Trust Ltd (NITL) as the Management Company and the National Bank of Pakistan as the Trustee. Mutual Funds in Pakistan are running under the Non-Banking Finance Companies (NBFC) Act 2003 and regulated by Securities and Exchange Commission of Pakistan (SECP).

8 Trustee A trustee is a party who is given the legal responsibility to hold and safeguard the fund property in the best interest of or for the benefit of investors. Asset Management Company only takes investment decisions. The trustee makes payments from the fund’s account for the securities purchased and the securities are then placed into the same account according to the trust deed. The trustee for Mutual Funds in Pakistan is Central Depository Company (CDC), which is running under Government of Pakistan. CDC is also the trustee for the entire stock market investors in the country (size ~ Rs billion).

9 Who can invest in mutual funds? Individuals Companies Financial Institutions Banks Non-profit Organizations Provident Funds Pension Funds Gratuity Funds Foreign Nationals (fulfilling requirements of the government)

Types of Mutual Funds There are two types of Mutual Funds. Close Ended Fund Open Ended Fund

Close Ended Funds Closed End Funds have a predetermined and fixed number of shares outstanding. Closed-end funds behave more like stocks because they trade on an exchange and the price is determined by market demand after an initial public offering (IPO) process. Closed-end funds can be traded below their net asset value or above.

Close Ended Funds The closed-end fund "company" still has its own stock, which is traded on an exchange and trades above or below its underlying value, or net asset value (NAV), in this case. They also trade according to market demands. Every seller must have a buyer.

Open Ended Funds A type of mutual fund, where there are no restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell. It's important to understand that each mutual fund has different risks and rewards.

Open Ended Funds In general, the higher the potential return, the higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk - it's never possible to diversify away all the risk. This is a fact for all investments.

15 Types of Open Ended Funds Equity / Stock Funds Money Market Funds Debt Funds Balanced Funds Islamic Funds Index Funds Global /International Funds

Equity / Stock Funds These funds invest mainly in the shares of companies and undertake the risk of price movement at the stock exchange. Such funds are clearly expected to out-perform other types of funds in a rising market. Their strength is the expected dividends and windfall income through capital gains.

Money Market Funds These funds primarily invest in assets which have maturity less than 1 years e.g. Treasury Bills Short term Bank Deposits (CD) Commercial Papers & other securities. They are generally not affected by volatility at the debt market & stock exchanges. The risk of Money Market funds is very low and so is the return.

Debt Funds The objective of Income funds is to seek a high level of current income than Money Market funds. Investors seeking higher income are willing to accept moderate risk & price fluctuations. Bond/Income funds usually invest money in:  Bank Deposits  Term Finance Certificates (Corporate Bonds)  Government Bonds

Balanced Funds The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation. The strategy of balanced funds is to invest in a combination of fixed income and equities. A balanced fund might have a weighting of 60% equity and 40% fixed income & any other depending on the situation of capital market.

Islamic Funds These funds mainly invest in Riba free securities. Islamic funds conduct all their activities according to the Islamic Shariah based on the guidelines provided by the Shariah Advisory Board appointed for the fund. A Shariah Advisory Board comprises of eminent Islamic and financial scholars, who have considerable experience in the field of Islamic studies. Islamic Funds can be equity, income or balanced fund as long as the policies meet the Shariah principles.

Index Funds This type of mutual fund replicates the performance of a broad market index such as KSE 100 Index. An investor in an index fund figures that most managers can't beat the market. The asset allocations of the index funds mostly the same as compare to their benchmark index.

Global / International Funds An international fund (or foreign fund) invests only outside your home country. Global funds invest anywhere around the world, including your home country. It's tough to classify these funds as either riskier or safer than domestic investments. They do tend to be more volatile and have unique country and/or political risks. The world's economies are becoming more inter-related, it is likely that another economy somewhere is outperforming the economy of your home country.

23 The Benefits of Mutual Funds Simple to invest Diversification A mutual fund is diversified because it invests in many different types of securities thus offering better risk management. Professional management Mutual funds are managed by Asset Management Companies through professional portfolio managers, who in coordination with the research department, identify the best securities for a fund and make timely and profitable short term & long term investment decisions.

Low Cost Diversifier portfolio allocated to investor even on minimum investment. Transparency Most transparent form of investment. Prices can be monitored daily. Liquidity You can liquidate your investment anytime. Highly Regulated Mutual Funds are regulated by Securities & Exchange Commission of Pakistan (SECP) The Benefits of Mutual Funds

Life Cycle Planning Investor can link their investment plans to future individual & family needs and make changes as the life cycle changes. Market Cycle Planning For investors who understand how to actively manage their portfolio, their investments can be moved as market conditions change. Taxation Benefits Investment in open end funds also enjoys a Tax-Rebate under section 62 of the Income Tax Ordinance The Benefits of Mutual Funds

Risk Associate with Mutual Funds Market Risk Credit Risk Liquidity Risk Interest Rate Risk

27 Mutual Funds are diversified investments. Mutual Funds are, by definition diversified investments therefore they are lower-risk investments, especially when compared to individual stocks. Most investors use mutual funds in order to diversify their holdings and provide some stability to their portfolios. Mutual Funds are managed by Asset Management Companies through professional fund managers. Mutual Funds distribute 90% of their realized income to the investors.

28 Investment opportunities in Pakistan ModeReturnsRisk Liquidity Tax BanksLowLow High (with penalty) Yes National SavingsLowLow High (with penalty) Yes TFC / Bonds Medium Medium Medium Yes PropertyMedium Medium Low Yes StocksHighHigh High No Mutual FundsHigh/Low High/Low High (without penalty) No

29 Tax benefits of investing in Mutual funds 0%1.2%Tax Deduction 0%4.2%Tax Deduction Bank DepositsMutual Funds* Corporate (35% Tax Bracket) Pre tax return12.0%12% After tax return7.8%12% Individuals (10% Tax Bracket) Pre tax return12.0%12% After tax return10.8%12% Comparison of Income Funds with Bank Deposits * Subject to completion of 1 year when capital gain tax is exempted.

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