A mutual fund is a collection or assortment of stocks, bonds, money market instruments and similar assets. Broadly speaking, a mutual fund can be a collection of various stocks or stocks & bonds or government bonds & certificates of deposits or stocks & fixed income securities or any other combination of securities that are grouped together as a single investment instrument.
Mutual fund investments are governed by Money Managers or Fund Managers, who invest or manage the funds in a way to create capital gains for income of investors. Mutual funds are operated by Asset Management Companies (AMCs) which exist in the form of public limited companies registered under the Companies Ordinance 1984. A Trust (and Trust Deed) is established by the Asset Management Company through which a mutual fund is launched. The Trustee performs the functions of the custodian of the assets of the fund whereas the Fund Manager takes the investment/ operational decisions regarding the fund.
Mutual funds provide for an optimal investment package to invest into in order to get competitive returns to meet long term or short term financial goals. An investor may have long term financial goals such as arranging funds for child’s marriage or saving for retirement or for child’s education etc. Conversely, an investor may have short term financial goals such as saving for going on a vacation or cruise or buying a new car etc.
It is pertinent to mention that the investor must have his investment objectives outlined for himself as to what is his risk/ return profile, how much can he invest and for how long. These are some basic questions that an investor must know the answers to before making any investments.
By investing in mutual funds, the investor gets the advantage of investing in various securities in one investment package. This allows the investor to have a diversified portfolio of securities and have his investments managed by professionals.
Furthermore, by investing in mutual funds, the investor is also able to avail tax credit. This tax credit is available for individuals on the lower of (a) the amount of actual Cost of Investment, (b) 20% of Taxable Income for the tax year or (c) Rs 1 Mn. The tax credit availed on acquisition of such shares will need to be paid back, if such shares are disposed off within 24 months of the date of acquisition.
For self-employed individuals, the maximum tax credit of Rs 220,417/- is available on annual taxable income of Rs 6 Mn or above at an average rate of 22% whereas Rs 203,571/- is the maximum tax credit available on annual taxable income of Rs 7 Mn or more at an average tax rate of 20%.
For more details on the above, please consult: www.mufap.com.
Types of Mutual Funds: An investor must be aware of the two broad types of mutual funds. They are:
Mutual Funds are of various categories. An investor may invest in the fund that suits his investment strategy, time horizon of investment, how much risk he can tolerate, what are his cash flow requirements or any other investment objectives/ requirements. An investor may consult the Mutual Funds Association of Pakistan (website: www.mufap.com ) for further guidance. The categories of funds are listed as follows:
|Fund Category||Investment In||Characteristics & Features|
|Money Market Fund||Short-term fixed income securities||Lower risk, high liquidity|
|Income Fund||Money market securities, Term Finance Certificates/ Sukuks, Commercial Paper, & spread transactions.||Less risk, limited capital appreciation. These funds are required to sustain atleast 25% of net assets in cash and/or near cash instruments to meet liquidity requirements|
|Equity Fund||Stocks||High risk level, high capital appreciation|
|Balanced Fund||Equities & fixed income securities||Lesser risky with objective of growth & regular income. About 30% to 70% of the net assets are invested in listed equities|
|Asset Allocation Fund||Equities & fixed income securities||Higher risk, high return. Potential to invest 90% of net assets in equities at any point in time. Varying investment of assets within the fund|
|Capital Protected Fund||Term Deposit & as per authorised investments in the offering document||The original amount of the investment is protected. These funds have a mutually agreed upon fixed maturity period|
|Index Tracker Fund||Securities and stocks to mirror a market index such as the KSE 100 Index||The fund’s performance tracks the underlying index’s performance. Atleast 85% of net assets is required to be invested in securities that constitute the selected index or its subset. The balances of net assets are kept in cash or near cash instruments such as bank deposits (excluding Term Deposit Receipts & Treasury Bills not exceeding 90 days maturity)|
|Aggressive Fixed Income Scheme||Fixed income securities & medium to lower quality of assets||High return investment. Investment in govt. securities, fixed income debt securities, deposits with bank(s), certificates of investment, & commercial paper etc. Atleast 10% of net assets are kept in cash or near cash instruments such as bank deposits & treasury bills not exceeding 90 days maturity|
|Commodity Scheme||Commodities such as gold, crude oil, silver, agri commodities||Stable returns investment. Investment in commodity & commodity futures such as gold. Atleast 70% of net assets must be invested in commodity or commodity futures contracts annually, based on average quarterly investment calculated on a daily basis.|
|Fund of Funds||Other varieties of mutual funds||Balanced returns. Investment in diverse portfolio of equity, balanced, fixed income and money market funds|
|Shariah Compliant (Islamic) Funds||Shariah compliant securities i.e. shares, Sukuk (Islamic bonds), and GoP Ijara Sukuk etc||All categories of conventional mutual funds have their shariah compliant variants. These funds are approved by Shariah Advisor|
It is important for an investor to remember some key points regarding investment in mutual funds:
NAV = (Current Market Value of all Assets – Expenses – Liabilities) / (Total Number of Units Outstanding)
There are two ways an investor can invest in mutual funds:
The documents needed for opening a mutual fund account are as follows:
An investor must keep in mind the fees and charges involved with investing in mutual funds. Some of these charges are as follows:
The taxes charged against investment in mutual funds are relaxed for the investor. These taxes are, broadly, Withholding Tax and Capital Gains Tax (CGT).
Conclusively, it is safe to say that Mutual Funds are an optimal form of investment for many investors as they provide avenues to invest as per individual requirements of investors. Furthermore, they are transparent, liquid, diversified and balanced-risk modes of investment for the savvy investor, in general, and the novice investor in particular.