INP-WealthPk

Mutual Funds: A Better Way to Invest

November 09, 2021

  By Ayesha Saba ISLAMABAD, Nov 09 (INP-WealthPK) In the early years of the growth of the financial industry, investors had few investment opportunities. However, with the passage of time, a lot of investment channels are now available to investors for investment. One such channel is the mutual funds with effective financial management in place. Mutual funds have seen a tremendous growth in the last few years and countries like the United States, Australia, Germany, France, the UK, Canada and China have the largest mutual fund industries. At the end of 2020, open-end mutual fund assets worldwide were $63.1 trillion. A mutual fund is a type of financial vehicle that pools the money of investors with a common financial goal. The pooled funds are invested in securities such as stocks, bonds, money market instruments and other similar assets in order to meet the predefined investment objectives. These are the asset management companies that provide an opportunity to all those small investors who lack expertise or are unable to diversify their investment, where the potential investors do not have such investment knowledge, information, and facilities to invest in the capital or money markets. Mutual funds act as a bridge between investors and their destine objective. Compared with risk and return, mutual funds provide a high return as the investment in a diversified portfolio. Today, however, mutual funds are well-specialised and present almost limitless diversity. The types of mutual funds portfolios available range from conservative to aggressive, from stocks to bonds, from domestic to international portfolios, from taxable to tax-free, and from virtually no-risk money market funds to high-risk options funds. In this modern era, no one can deny the importance of mutual funds, which are considered a new pillar of the economy. Pakistan has experienced a phenomenal, remarkable growth in the mutual fund industry over the last few years. The assets managed by the mutual funds industry crossed the one-trillion-rupee mark for the first time at the end of 2020-21, according to the data released by the Mutual Funds Association of Pakistan (MUFAP). According to statistics, assets under management or AUM has grown at the annualised rate of 15.7 per cent over the last 10 years. The total AUM amounted to Rs1.02 trillion at the end of June 2021, which is 64.3% up from a year ago. The growth graph of mutual funds is moving upward because in the financial market, it shows the investors’ interest in this mode of investment. In Pakistan, mutual funds are regulated by the Securities and Exchange Commission of Pakistan (SECP) with the objective of protecting the investors and developing the capital market. SECP implements a transparent and rigorous process before issuing licenses to fund management companies. Analysts believe one of the major reasons for the sudden surge in AUM of mutual funds is the government’s decision to stop the cash-rich institutional investors like insurance companies from investing in the National Savings Schemes at the beginning of 2020-21. Pakistan’s mutual fund industry is still tiny in size compared with the regional mutual fund industry. The reason is that it is still at an immature stage and investment options are limited to equity, government security funds, fixed income and money market funds. With maturity in the industry, the investors may have the options to diversify investments into commodities, real estate and other avenues. Today, the greatest challenge facing asset management companies is a lack of awareness of the general public about mutual fund products. Individuals are unaware of better returns, benefits and security they can get by investing in the mutual funds. They don’t go for any other avenue to keep or save money except banks. On the other hand, banks invest in different avenues such as mutual funds, TFCs, stocks, government bonds, treasury bills etc. Owing to this unawareness, some misperceptions prevail in society that mutual fund investments are only for long-term investors and are locked and cannot be cashed out. Contrary to these misperceptions, a number of money market funds are now available for short-term investors and the investments can be easily cashed out. Pakistan is a classic emerging market struggling to develop its capital market, with different factors like political and socioeconomic volatility exerting a negative impact. The country has to make its mutual fund industry efficient, enabling individual as well as institutional investors to invest their money. Policymakers like the Securities and Exchange Commission (SECP) also need to monitor the industry and provide easy access to investors.