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Investing 101:

Do the Right Thing by Yourself and Your Money!

So you have some extra cash and money to throw around? But what if you don’t? We will show you how to save some and what to do with that extra cash.

Imagine you are working a nine to five job and your salary is Rs. 100,000/- p.m. Not so much, not so little! But you can do many things with it. One of the best things you can do with it is to start saving and investing. Start saving 20% of your income every month. As a rule of thumb, it is optimal to save atleast 20% of your income. Now don’t let this money sit idle. This saving may well be invested in mutual funds. Mutual funds have provided for a decent return of about 8-10% p.a. on average historically. So saving and investing Rs. 20,000/- every month in mutual funds, for a period of 1 year will leave you with Rs. 240,000/- as principal plus Rs. 14,400/- as profit @ 8% p.a. at the end of year 1, assuming the rate remains constant.

Now what do you plan to do with this money? Continue investing it in mutual funds and earn enough to beat the beast of inflation (Headline CPI recorded at 6.2% Y-Y basis as of Dec 2018)*? Perhaps this will not be enough for you.

What if you would like to spend this money? Would you like to buy that great sound system, that home theatre, that wardrobe or that jewellery for your wife on her birthday? If you are thinking along any such lines, think again!

You know there is so much that you can do with your money but there is so little that you can take from it if you just keep it idle or spend it right away. It will thus translate into a loss-making story. How about making this a profitable story?

First and foremost, keep some money aside for emergencies. Who knows what’s going to happen tomorrow. There could be the odd illness, an accident, a severe ailment that you or any family member can be affected by. What if your car gets damaged in an accident and you don’t have the cash nor the insurance to get it repaired. For that purpose, you need some funds. This is where your emergency funds will come in handy and help you in your medical emergencies or from your immobile state (due to car damage) in a country where a decent transportation system is almost non-existent. So keep some funds aside for your emergency needs.

Second of all, use some of this money to clear any debts that you might have. Credit card bills can be a huge bite off your monthly salary. So clear these debts and set yourself free. If you have any loan payments or installments against your car or your house, try to clear off a big chunk of these payments without affecting a whole lot of your savings.

Thirdly and mostly importantly, you can now use your hard-saved & invested money and put it to good use. But how do you put your money to good use? The answer lies in further investment. There are multiple asset classes to invest into nowadays that provide for decent returns. You could invest in Savings Certificates, Treasury Bills, PIBs, Commodities, Money Market, Real Estate, Mutual Funds and Stocks. Each asset class has its pros and cons. If you keep your funds in savings accounts, while the funds are risk-free, the returns are nominal. In case of Savings Certificates, while the returns are competitive your funds may be locked-in for a long time. In case of bonds, the returns are competitive but there may be some limitations in terms of the tenure involved etc. Of all these asset classes, historically, the stock market has provided better returns. This is illustrated by the graph below.

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Historically, the KSE 100 Index stocks have given a return of 20.2%** CAGR (Compounded Annual Growth Rate) in the last ten years and about 15.13%*** CAGR in the last 15 years. These figures compare fairly well with the returns gained from other investment vehicles.

So select the brokerage firm you want to do business with, open an account, and start investing in the stock market. Whether you do so in equities or in mutual funds or both is totally up to you. Because stock or equity mutual funds comprise a pool of diversified portfolio of stocks which are professionally managed, hence investing in mutual funds along with direct equity/ stock market is a good idea.

If you invest Rs. 150,000/- of your saved funds in the stock market and let it compound for several years, you can get a good return in the end. Instead of keeping them in a savings account or investing these funds in any other investment vehicle, investing them in the stock market for a period of five years, for example, can get you Rs 376,369/- (+), assuming the rate remains constant. This is more than double of what you started off with!

This shows that investing in the stock market is not only a better proposition than investing in any other asset class in terms of returns, historically speaking, but it will also equip you better in shielding your funds from inflation. Just with 20% of your salary saved & invested for a period of one year, you can save for emergencies, pay off some of your debt and invest in the stock market (&/or mutual funds) and thus come out on top with a return of Rs 376,379/- (+) after five years of investment. So save better, invest better, and reap the rewards of investing in the stock market!

*(Source: SBP) // **(From Jan 2009 to Dec 2018)// ***(Dec 2003 to Dec 2018; Source: Bloomberg)// + (@ 20.2% CAGR)

Disclaimer: The contents of this article comprising of information pertaining to financial products, including but not limited to securities, derivatives products, listed companies or companies proposed to be listed on PSX and any content of third parties are strictly of a general nature and are provided for informative and educational purposes only. Such content/ information is not intended to provide trading or investment advice of any form or kind and shall not under any circumstances be construed as providing any recommendation, opinion or indication by PSX as to the merits of the said product, security or company and also not be interpreted as comprehensive and interpretive of all applicable regulatory provisions.

Investing 101:

Perfect Plan to Celebrate Your Retirement

In the rigmarole of our daily lives, we usually forget the importance of savings and investing for the future. We are busy paying the due installments against our car, house, annual kitty, and bills, amongst other expenses. At the same time, we have to save for our children, their education, their marriages and for all that entails us being “responsible” parents.

But what is it that we have really forgotten to think over in this rat-race of life? We seem to have forgotten what will happen once we retire and once the proverbial tap starts to run dry. How will we meet our expenses then? There will be medical bills, utility bills and insurance bills to be paid. There could be expenses incurred for any foreign trips, social gatherings and invitations attended. This is just an example of the number of expenses that we may well have to face when we retire and are on our own. The time is now to think of ourselves and our welfare in our post-retirement age!

Considering the ever increasing expenses, the impact of inflation and the decrease in purchasing power of our currency, how does one beat all these negatives, and still come out on top with enough funds to cover expenses post-retirement? The answer lies in saving and investing. But with so many investment instruments and asset classes to choose from, which one would be optimal, which one would protect us from the loss of purchasing power and shield us from inflation, yet leave us enough to help us meet our daily expenses?

Enter the Stock Market! Financial instruments such as mutual funds and equities have not only provided good returns but have also shielded investors from hard-hitting effects of inflation in the longer term. We have seen dividend yields of 5.7%* for last one year and compounded rate of return of 15.13%** of KSE 100 Index stocks over the last 15 years. We can avail these returns for ourselves and have enough savings by the time of retirement. However, we must save and invest for the long term to be able to earn the dividends and returns that we seek to put us in a comfortable position in future.

Consider you are under 35 years of age and earn a salary of Rs 80,000/- p.m. So, what is your target date? Presuming it is 65 years of age, you have 30 years to save and invest. So, can you cut back on your expenses for now? Is it necessary to eat outside and attend every social invitation? Can you save on electricity bills and petrol costs? If there is a possibility to save funds to the tune of Rs 6000/- p.m., then you are off to a good start. If you can count on some familial support, as is generally the case in our society, then you are on the right track to save and invest on the basis of these additional funds. Suppose you get a stipend of Rs 7000/- p.m. from your parents/ family support, you now have a total of Rs 13,000/- p.m. saved with yourselves. Saving these funds (Rs 13,000/- p.m.) for around a year can leave you with an amount of Rs 160,000/- to start investing.

Armed with this amount of money, you can buy the minimum lot of 500 shares of a diversified portfolio of companies listed on the KSE-100 Index. You can then let the investment grow at the compounded annual rate of return of 15.13%** per annum, assuming the rate remains constant. Furthermore, as your salary increases, if you save an incremented amount every two years, and invest the same until retirement, you can earn compounded returns on these as well. These savings and investments can leave you with a combined total of Rs 4.79 Crores at your retirement @ 15.13%** CAGR. The progression of your investment and its returns is illustrated in the graph below.

So with an initial investment of Rs 160,000, you can start investing in the Stock Market. Subsequently, if it is not easy for you to save every year and as your salary increases, then every two years you can save an incremented amount and invest the same until retirement. This periodic saving and investing for a period of thirty years, until retirement, can leave you with an amount of Rs 4.79 Crores.

Even if you have a small amount of saving, and if you start early, you can save enough for the rainy days at your age of retirement. So investing at the right time in KSE-100 Index stocks might be the optimal way forward for you.

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*Source: Bloomberg)

**(Compounded Annual Growth Rate of KSE 100 Index stocks between 31/12/03-31/12/18) (Source: Bloomberg)

Disclaimer: The contents of this article comprising of information pertaining to financial products, including but not limited to securities, derivatives products, listed companies or companies proposed to be listed on PSX and any content of third parties are strictly of a general nature and are provided for informative and educational purposes only. Such content/ information is not intended to provide trading or investment advice of any form or kind and shall not under any circumstances be construed as providing any recommendation, opinion or indication by PSX as to the merits of the said product, security or company and also not be interpreted as comprehensive and interpretive of all applicable regulatory provisions.

How To’s:

How to enter the stock market electronically

In line with the Pakistan Stock Exchange’s (PSX) commitment to make investing in the stock market a convenient process, the online account opening facility has been introduced for an account with security brokers.

With the process of digitisation of market functions, the online trading facility was on-boarded for investors almost two decades ago. It has been facilitated by the PSX through its KiTS (Karachi Internet Trading System) platform which is the basis of the online trading applications and software provided by brokerage houses to their clients.

The system enables investors to view their cash position, trade summaries, trade confirmations and custody position at the click of a button. The missing link was that the opening of an account was not online which was introduced in January 2021.

With the advancement in technology, the Covid-19 outbreak, and the Roshan Digital Account platform being launched which facilitated fulfilling know-your-customer (KYC) requirements online, online account opening was the next step on the path of innovation and progress.

The PSX is making efforts with the SECP to make the KYC requirement into a unified system whereby there will be a singular database that can be shared

Furthermore, the PSX, along with its cohorts in the capital markets, is making efforts with the Securities and Exchange Commission of Pakistan to make the KYC requirement into a unified system whereby banks and other market entities will have a singular database which they would be able to share and utilise for account opening of applicants.

This will make redundant the process of initiating KYC formalities every time an individual wants to open an account with any of the market entities.

Already, there are more than 50 brokerage houses that are offering an online account opening facility. Prospective investors can choose from a range of brokerage houses by going through the list on the PSX website.

The process of online account opening is a simple one. It involves filling out the online account opening form available on the brokers’ website, filling in the necessary details and submitting requisite documents online. The documents required for online account opening are:

Copy of valid and attested computerised national identity cards(CNIC)/national identity card for overseas Pakistanis (NICOP)/alien registration cards (ARC)/Pakistan origin card (POC)/passport of the main applicants. Copy of valid and attested CNIC/NICOP/ARC/POC/passport of the joint applicants. Copy of valid and attested CNIC/NICOP/ARC/POC/passport of the nominee (optional — only for Single Accounts). An attested copy of power of attorney (if the contact person is other than the main applicant), duly attested by a notary public Employee card/job card for salaried person. Company’s letterhead for business individuals mentioning the name, CNIC, designation etc. Salary slip for salaried persons. Income statement for Business individuals or monthly income mentioned on the company’s letterhead. Copy of utility bill/driving license/insurance policy/rent agreement (If the address is not as per CNIC). Copy of zakat declaration of the applicant and the joint applicant (if applicable). In the case of a non-Muslim, an affidavit shall be submitted. Note: non-resident/ foreigners shall submit the documents duly attested by either notary public or consul general of Pakistan having jurisdiction over the applicant(s).

After the documents are submitted, the back-end process begins. The documents are verified by the National Clearing Company of Pakistan Limited (NCCPL) and a verification code is generated and communicated via SMS by NCCPL to the customer to complete and acknowledge the verification. The customer can then submit his payment cheque to the brokerage house in order to begin investing in securities listed on Pakistan Stock Exchange.

With about 50 per cent of the local populace living in rural and far-flung areas, the online account opening facility is a definitive method for enabling the peripherally located population to also take part in the investment scene on the stock market without having to travel all the way to a brokerage house physically. Similarly, for overseas Pakistanis, this is also a very valid option of account opening as this will allow them to access Pakistan’s capital market while they are living abroad.

Disclaimer: The contents of this article comprising of information pertaining to financial products, including but not limited to securities, derivatives products, listed companies or companies proposed to be listed on PSX and any content of third parties are strictly of a general nature and are provided for informative and educational purposes only. Such content/ information is not intended to provide trading or investment advice of any form or kind and shall not under any circumstances be construed as providing any recommendation, opinion or indication by PSX as to the merits of the said product, security or company and also not be interpreted as comprehensive and interpretive of all applicable regulatory provisions.

The author is the head of Marketing & Business Development, Pakistan Stock Exchange Ltd.

Source: Published in Dawn, The Business and Finance Weekly, April 4th, 2022 News-link

Investing 101:

Sahulat Account: a simplified way to invest in PSX

It is aimed at facilitating new customers who fall in low-risk category

It has never been more important to save money than it is now. Saving money helps us to meet our expenses for emergencies, child(ren)’s education, big purchases, or accumulating wealth for future use.

However, with costs of staples, daily items, utilities, fuel, transportation and other items rising on a frequent basis, everyone is caught in the web of inflation.

Making ends meet and fulfilling one’s responsibilities towards home and family expenses has become a matter of deep concern for all.

Inflation not only makes it very difficult for the common man to make ends meet, but it also eats into our savings, resulting in loss of value of money if kept aside and not invested.

In such a scenario, it is important to make arrangements to tackle the inflation dragon and deal with it head-on.

While there are several possibilities how one can do that, such as investing in bonds, National Savings Scheme, gold or other asset classes, the returns from investing in the stock market outweigh those from other asset classes.

Investing in securities on the stock market for the long term can result in fruitful gains for the investor as passive investment has its own significant benefits.

As of June 30, 2021, historical returns from the KSE-100 index for the 10-year period from 2011 to 2021 are 14.55% (on compounded annualized basis), which is relatively higher than the returns from other asset classes for the same period.

While Pakistan’s macroeconomic indicators are on the mend, more is needed to control the galloping inflation, which directly affects the standard of living of the nation.

With inflation at 7.28% in FY21 and Consumer Price Index (CPI) up at 13% YoY in January 2022, it is expected that inflation might go further up before coming down in the latter part of 2022.

Keeping the above factors in mind, it is important to earn additional income in order to beat inflation and make ends meet.

While getting a second job or starting a new business may not be for everyone, for most middle-class consumers it is an uphill task to meet the rising costs of living. In such a scenario, the stock market may well prove to be the proverbial knight in shining armor and save the day.

To invest in the stock market, the first step is to open an account. For those members of the public who are pressed for time or find the account opening process cumbersome, the Sahulat Account is the ideal solution to their quest for opening an account to invest in the stock market.

Even for those members of the public who do not have salaried income, who are students, housewives, novice investors or others who cannot fulfil stringent account opening requirements, the Sahulat Account is the optimal solution.

All licensed securities brokers are offering the Sahulat Account facility. This facility was initially introduced in 2016 to facilitate small-to-medium range individual investors who can invest up to Rs800,000 in their investment account.

The Sahulat Account facility has been introduced to facilitate new customers who fall in the low-risk category. This account keeps the interest of retail investor at the forefront while making the account holder’s entry in the market a simple process.

Source: Daily Express Tribune dated February 24, 2020 News-link

Investing 101:

Keeping an eye out while investing in PSX

We all want our hard-earned funds to grow and increase. While this is possible by investing prudently in the right asset classes and vehicles of investment suitable to us in keeping with our risk/ return objectives and our risk tolerance levels, it is equally important to keep an eye out for our portfolio of investments in order to secure our investments.

There are several ways of securing your investment portfolio:

Selecting the right securities broker:This requires shortlisting a number of Securities Brokerage firms based on the following parameters and then choosing the one most suitable to your investment needs such as:

Ease of communication & understanding of your defined investment objectives. Availability of research material.

Availability of online trading facility.

Provision of trade confirmations.

Brokerage charges levied are in-line with your budget.

Filling of Customer Relationship Form (CRF) or Sahulat Form:

Your account can be opened by filing either CRF or Sahulat Form with the Securities Broker. CRF allows the investor to experience the full potential of stock market while Sahulat Form is ideal for those who are risk averse or want to undergo simplified process of account opening. CRF allows investors to trade in all markets such as Ready Market, Futures Market and Leveraged Products while Sahulat Form only allows trading in Ready Market and that too up to a limit of Rs800,000.

Opening an Investor Account:You must open an Investor Account with Central Depository Company (CDC) to secure the custody of the shares purchased whereby the account is totally under your control.

Evaluate your risk/ return objectives and risk-taking capacity: You must assess what are your risk/ return objectives; how much risk are you willing to take against what level of expected returns. You may also consider your risk-taking capacity in terms of how long can you afford to stay in the market in case of a downturn.

Documentation:You must ensure that all documents (and copies thereof) regarding your account and its transactions are available with you so you have a complete picture and record of your account, investment portfolio and its transactions.

Confirmations through SMS/Email/Courier: Make sure that you receive all trade confirmations from your Securities Broker as well as NCCPL via SMS, Email or courier.

Be thorough in your trading practices:Make sure that you communicate your order instructions to one person in the brokerage firm so as to avoid any miscommunication and confusion. Also, in case of any discrepancies, you must contact your Securities Broker immediately and not leave things to chance.

Avoid discretionary trading practices: Avoid discretionary trading practices whereby a Securities Broker is given the freedom to execute trades for you.

Online Trading through Broker App:The App or Software provided by your Securities Broker will enable you to invest on the Stock Exchange as per your own decisions. Make sure to obtain the access to this downloadable App or procure the software from your Securities Broker.

Possible Complaints as an Investor:While you may have taken all necessary measures to ensure your investment portfolio is safe & secure, you may face an issue in the course of making your investment which could necessitate a complaint registration process on your part.

These issues can be:

Commitment for high returns:You may be promised sky high returns against a particular investment when in fact there may be no such returns to be gained from that investment and you are pushed into incurring losses over that particular investment.

Portfolio Management offers from your Securities Broker or trader:Your Securities Broker or trader may make offers to manage your portfolio.

Securities brokers and traders are not permitted to manage a client’s investment account.

They cannot invest or trade on behalf of the client except with specific instructions from client for each trade.

Being sold a particular scrip without your express consent: You may be sold a scrip by a Securities Broker without taking your express consent for that purchase. This is a serious issue and lapse of proper SOPs exercised on part of the Securities Broker regarding proper trading.

Buy or Sell transaction without permission: Your Securities Broker trades on your behalf without your express permission.

Default: The Securities Broker whose services you are utilizing defaults.

Redressal of Your Complaints/ Grievances:

You can approach the Securities Broker as a first line of action to redress your grievance. If that doesn’t help, you can approach the Regulatory Affairs Department (RAD) of PSX as the frontline regulator for redressal of your grievance, particularly in case of default by the Securities Broker. This is possible through the following process:

You may register a complaint by submitting the prescribed Investors’ Complaint Form (available on PSX website) at investor.complaints@psx.com.pk or electronically at csir.psx.com.pk

PSX takes up the matter with the concerned Brokerage House and tries to resolve the matter through mediation.

If the dispute is not settled even then, PSX resolves the matter through Arbitration in accordance with procedures prescribed under Chapter 18 of PSX Regulations.

In case of Default by a Brokerage House/ Securities Broker, PSX constitutes a Default Committee.

PSX invites claims by investors against the defaulting Securities Broker by placing an ad in newspapers and on PSX website.

PSX appoints auditor for verification of claims.

PSX Disburses available funds to approved claimants.

PSX settles the approved claims of a defaulter Securities Broker as follows:

The assets of Securities Brokers in custody of the Exchange are liquidated to settle approved claims of claimants. The assets comprise of:

  • Office(s) within the Exchange premises, if any, in the control of the Exchange; (b) Base Minimum Capital maintained with the Exchange in accordance with the Chapter 19 of PSX Regulations;
  • Securities available in the House Account and Investor Account of the defaulter Securities Broker; and
  • Securities available in the Sub-Account in CDS for maintaining custody of securities belonging to the defaulted Securities Broker.

If the customers’ claims admitted by the Exchange against a defaulted Securities Broker are more than the amount available out of sale proceeds of assets of such Securities Broker for satisfying such claims, then remaining amount shall be paid from Centralised Customers Protection Compensation Fund (CCPF), established by the Exchange with the sole mandate to compensate customers of a defaulter Securities Broker, up to a maximum of RS 500,000/- per claimant, in accordance with Chapter 24 of PSX Regulations.

You can also file your complaint through another mode - Prime Minister’s Performance Delivery Unit [PMDU]:

PMDU is a nationwide complaints and grievances redressal mechanism to provide citizens an opportunity to seamlessly communicate with all government entities to have their issues resolved with priority and to address complaints lodged by the citizens through Pakistan Citizen’s Portal – a Government-owned mobile application. PMDU dashboard has also been assigned to PSX, CDC and NCCPL. All complaints received by PSX on PMDU dashboard are being resolved on priority basis.

The above is a brief of why it is important to secure your investment portfolio and what to do in case you need redressal of your complaints. In any case, it pays to be vigilant and careful with your account, its transactions and its documentation. For further information and guidelines, you are welcome to visit the PSX website at https://www.psx.com.pk/psx/resources-and-tools/investors/know-your-rights-information-for-investors

Disclaimer: The contents of this article comprising of information pertaining to financial products, including but not limited to securities, derivatives products, listed companies or companies proposed to be listed on PSX and any content of third parties are strictly of a general nature and are provided for informative and educational purposes only. Such content/ information is not intended to provide trading or investment advice of any form or kind and shall not under any circumstances be construed as providing any recommendation, opinion or indication by PSX as to the merits of the said product, security or company and also not be interpreted as comprehensive and interpretive of all applicable regulatory provisions.

The article does not necessarily reflect the opinion of Business Recorder or its owners.

Source: Daily Business Recorder dated March 2, 2022 News-link

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.

Why Invest in Mutual Funds:

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.

Benefits of Investing in Mutual Funds:

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:

Types of Mutual Funds: An investor must be aware of the two broad types of mutual funds. They are:

  • Closed-Ended Mutual Funds:These funds are traded on the Secondary Market, following an IPO. However, not all closed-ended mutual funds are listed on the Stock Exchange.
  • Open-Ended Mutual Funds: These funds are issued in the form of Units to investors, which can be redeemed, as well, on the basis of their Net Asset Value (NAV) at any time. These funds can be purchased and redeemed through the Management Company which announces their offer and redemption prices daily. These funds can also be listed on the Stock Market.

Categories of Mutual Funds:

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


Key Points to Remember:

It is important for an investor to remember some key points regarding investment in mutual funds:

  • Net Asset Value (NAV): Net Asset Value is the market value of the assets of a mutual fund minus its expenses and liabilities. The per unit NAV is the Net Asset Value of the funds divided by the number of units/ certificates outstanding on the Valuation Date. NAV denotes the performance of a mutual fund.
  • NAV = (Current Market Value of all Assets – Expenses – Liabilities) / (Total Number of Units Outstanding)

  • Expense Ratio: Expense Ratio is the mutual fund’s annual fund operating expenses, expressed as a percentage of the fund’s average net assets. An Expense Ratio of 1% p.a. means that each year 1% of the fund’s total assets will be used to cover expenses. Expense Ratios are important to consider when choosing a category of mutual fund as they can significantly affect returns.
  • Redemption: Units of open-end mutual funds can be partially of fully redeemed at any time as the investor may decide from the Asset Management Company that manages the funds.
  • Fund Manager Report: This is a monthly report produced by an asset management company in which information on composition and performance of the mutual funds is presented.

How to Invest in Mutual Funds:

There are two ways an investor can invest in mutual funds:

  • Financial AdvisorsMost Financial Advisors and Wealth Managers guide an investor to purchase units or shares of mutual funds. A Financial Advisor may be the right channel for an investor to get guidance and buy into mutual funds.
  • BanksMost banks offer investment products including mutual funds. An investor may contact a bank to invest in mutual funds.

The documents needed for opening a mutual fund account are as follows:

  • CNIC Copy
  • Application/ Account Opening Form/ Purchase of Units Form
  • Zakat Affidavit (Optional)
  • KYC Form/ FATCA Form
  • Cheque/ Pay Order/ Demand Draft (payable to the respective Trustee)

Fees & Charges:

An investor must keep in mind the fees and charges involved with investing in mutual funds. Some of these charges are as follows:

  • One-time Fee: There is a one time fees that an investor pays for investment/ divestment in an open-end fund. Details of these funds are disclosed in the offering documents of mutual funds.
  • Front-end Load: This is charged to the investor upon purchase of units of the fund.
  • Back–end Load: This is charged whenever an investor redeems his investment in the mutual fund.
  • Contingent or Deferred Sales Load: This is charged only when there is no front-end load. It is charged on redemption of investment however mutual funds progressively reduce this charge if an investor holds an investment for a longer period of time.
  • Management Fee: This is the fee charged by the AMC for the management of a fund.
  • Trustee Fee: This is the fee charged by the Trustee for the provision of trusteeship and other services for the fund’s assets.
  • Other Fees: All expenses incurred in connection with formation and registration of open-end mutual funds including but not limited to execution and registration of constitutive documents, fee payable to SECP, auditor’s fee, fee payable to rating agencies, legal costs etc.

Applicable Taxes:

The taxes charged against investment in mutual funds are relaxed for the investor. These taxes are, broadly, Withholding Tax and Capital Gains Tax (CGT).

  • Withholding Tax (on Dividend Income) on Stock Funds: It is 12.5% if the dividend receipts are less than Capital Gain.
  • Withholding Tax (on Dividend Income) on all other Mutual Funds (except Stock Funds):It is 25%.
  • Withholding Tax (on Dividend Income) on all other Mutual Funds (except Stock Funds) for Individuals & Other Corporate & Non-Corporate Unit Holders:It is 10% for filers and 15% for non-filers.
  • CGT where holding period of a security is less than 12 months: 12.5%
  • CGT where holding period of a security is 12 months or more but less than 24 months: 10%
  • CGT where holding period of a security is 24 months or more:0%

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.

Investing 101:

Investing in the Market and Market Corrections

So you are an investor who is waiting for the market to take a correction before investing. It’s always tempting to wait for a dip before entering the market. But here are some facts that might encourage you to invest before the market starts to tumble.

  • Corrections are temporary: While corrections in the market occur frequently, yet they are only temporary. When the market starts to go down, it doesn’t mean that it will stay there; it will turn around and start rising again. This is how the Capital Market works. So even if there is a downturn in the market, it will eventually rise again, enabling you to ride through the trough of the market unscathed.
  • Staying out of the market is not prudent: Keeping yourself out of the market may be more harmful than being invested in the market even if the market is going through a slump. This is because if you invest for the long term (e.g. for a period of 10 years), then whether you entered the market at its low point or high point or at any other point in time, you would still be earning something (for example: through periodic dividends and other payouts, depending on the stock-picks in your portfolio).
  • Timing the market may be counter-productive: Timing the market may be counter-productive because it is nearly impossible to time the market. While you are waiting on the sidelines to invest when the time is right, you may realise that you have lost precious time during which you may well have been invested in the market to get returns, dividends or capital gain from the market
  • Taking emotional decisions is disadvantageous: You may be tempted to take emotional decisions which may be reactive to the market situation. This reactiveness is usually the result of rumours in the market or an effort to time the market. These emotional decisions could lead to pre-mature divestment from the market or waiting on the sidelines for a long period of time before investing in the market. In either case, you may be at a disadvantage because the correct course of action is to stay put and not make any emotional decisions. For this, you may well be rewarded by the market in the long term.
  • Investing prudently is all you need: By investing prudently, you are able to ride the wave of the market, and come out safe and sound. For example, if you invest in stocks which have a high dividend yield, then you may as well stay invested in the market even during a downturn, earning dividends while staying put in the market.
  • After a correction, the market makes a rapid up-swing: Once the market takes a dip, it makes a rapid come-back. So if you think you will wait till the market stabilizes before investing, you may well have missed the rally. Therefore, it is a good idea to invest in the market at any time you deem fit. You do not have to wait and see till the market goes up or down.
  • Corrections differ from a bear market: Corrections are all too common in the market movement and are a healthy sign of a good market. On the other hand, a bear market is when the market takes a correction of 20% or more. The bear market usually lasts much longer than a correction. In either case, as advised earlier, it is better to be invested in the market for the long term than for the short term.

In conclusion, we can say that no matter what the market movement and its corrections, it is better to invest prudently and avoid reactive decisions while being invested in the market for the long term.

Investing 101:

Investment Avenues in Pakistan

Pakistan holds great potential not only for local investors but for Pakistanis living abroad as well. A lot of people are unaware that there are many investment avenues in Pakistan apart from the commonly known avenues like Stock Exchange, Property and Mutual Funds. Today, we will take a look at the major investment avenues that hold amazing potential for people to invest in.

Real Estate

While most people are aware of this investment option and its potential, we would still like to mention it because of how lucrative it is. Investing in real estate is a wise option but it is not a feasible option for every investor due to the fact that real estate purchasing requires a large amount, which is why it is not suitable for students or people with lower investment amounts.

National saving schemes

National saving schemes or Special Savings Certificates come with a maturity of three years period. These schemes were introduced on Feb 4th, 1990 and offer a unique investment option for small to medium savers, allowing them to meet their financial requirements. These certificates come in various denominations and the profit is payable semi-annually.

Bank Deposits

Bank deposits are one of the most common savings options; however, not a lot of people know what type of account they need in order to be able to not just save but get a profit as well. If you have a bank account that you opened to receive your salary, receive education funds from your family or something similar, there’s a high probability that you have a current account. If you want to make profit out of your savings in the bank account, you need to open a savings account.

Stock Market

(Ready Market, Futures, Tradable Bonds, ETF’s, Options)

The stock market is a place where companies list themselves to make their shares available to a broad range of investors to purchase these shares. You, as an investor, have the option to choose from multiple stocks of different companies to buy in order to build your investment portfolio. The share prices of the shares listed on the Stock Exchange fluctuate according to the buy & sell transactions taking place.

Foreign Exchange

If you have decided to invest in the Stock Market, then it is a decision well worth taking. Consider this that Pakistan Stock Exchange has performed better over the last several years, above and beyond other investment vehicles available in the country. Returns earned from the Stock Exchange were higher as compared to other asset classes over the ten year period, Jan 2009 to Dec 2018.

Govt. Securities & Bonds

The foreign exchange market is the largest and most liquid market. Investing in foreign currency is also a great option to diversify your portfolio. Investing in foreign currency, aka forex, is trickier than trading stocks, mutual funds, bonds or other investment avenues in the local market.

Pakistan Investment Bonds (PIBs) are debt securities issued by the State Bank of Pakistan. These bonds are issued in denominations of multiples of Rs 100,000/- and available in tenors of 3, 5, 10, and 20 years. The yield on these bonds is fixed and disbursed semi-annually. The coupon rate or semi-annual return on these bonds are paid until maturity.

PIBs are a good way to earn competitive returns while keeping the investment secure. These bonds are guaranteed by the Government of Pakistan and therefore the chances of a default or any discrepancy in the payouts from these bonds is very low.

There are two ways to invest in PIBs. Either through Primary Dealers/ Scheduled Banks or through the Secondary Market/ Stock Market. An Investor Portfolio Securities (IPS) Account is opened with the Primary Dealer/ Scheduled Bank which allows an investor to invest in the PIBs. Any person or entity which has an account with a Primary Dealer or a Scheduled Bank offering this facility, can open an IPS account. Click here to learn more about Pakistan Investment Bonds

Mutual Funds

Investing in mutual funds is easier than most of the other types of investments. The process of investing in mutual funds is simple; you open an investor’s account with an Asset Management Company (AMC) and deposit the desired money by having your advisor fill up a simple deposit form. Once the money is deposited, you can sit back and relax while your investment money increases. The AMC does all the work on your behalf and you can withdraw your profits or entire amount whenever you want. The best part is that you are promised a fixed profit so you are in a win-win situation. However, it is to be kept in mind that the profits may be lesser than some of the other investment avenues.

Currencies

Investing in currencies is very common. It works in a simple manner. You buy a currency, let’s say US Dollars and keep them with you till the currency’s value goes up to such a point where you can sell the same at a profit. All you have to do is trade the foreign currency with your own and voila, you have made a profit on your saving!

Commodities

Commodities work similar to investing in Stock Market. However, offered by PMEX, Commodities deal in raw materials, basic resources, agricultural, or mining products such as iron ore, sugar, or grains like rice and wheat. A lot of Brokerage firms that deal in Stocks also deal in Commodities.

Here’s an article on How and Where Should You Invest to help you choose your investment avenue and also learn how to make an investment portfolio.

Investing 101:

Investing in Islamic Equity Mutual Funds

Equity markets play a key role in the economy. These markets provide capital to the companies. Islamic equity market deals with Sharia compliant stocks. In Pakistan, the people who prefer to invest in Shariah-compliant financial instruments can opt for Islamic Equity Mutual Funds.

Islamic Equity Mutual Funds

Islamic Equity Mutual Funds are part of Meezan Investment offering. The Investment of Islamic mutual funds is deployed in Shariah Compliant assets. The working of these investment are based on Islamic principles that is; they are free of Gharar( speculation) and Riba (interest).

Islamic Equity Mutual Funds ensures that the secured funds are invested in Sharia-compliant assets only. As similar to Conventional equity funds, Islamic Equity Funds also ensures transparency, financial screening, liquidity and diversification. Thus, the investors do not only have the benefit of halal investment, but also the financial competency and efficiency of the investment.

The webinar was held on 8th Oct, 2021. The webinar included the details of Islamic financing options offered by Meezan Bank. The speaker spoke about different Islamic and conventional equity funds. He also spoke about the benefits of investing into Islamic equity instruments. Apart from explaining the purposes and benefits, the speaker also answered all the questions asked by the attendees

The webinar was directly broadcast through PSX social media platforms and via zoom meeting. A lot of queries appeared in the comments sections. These were either addressed during the webinar or answered later via email.

Webinar Outline

The webinar was based on the following pointers, on which the speaker talked about in detail:

  • Landscape of Islamic Mutual Funds
  • Growth of Islamic AUMS Vs Conventional
  • Introduction to Al Meezan Investments
  • Difference between Islamic and Conventional Equity Funds
  • Introduction and Return Comparison of Islamic Indices

Webinar Presenter’s Background

The session was conducted by Mr. Mohammad Asad on 7th October 2021. Mr. Mohammad Asad is the Chief Investment Officer (CIO) of Al Meezan Invetments. He has expertise and experience in various business areas including credit analysis and investment management. He has 24 years of experience in the capital market of Pakistan. He has also worked as marketing head in leading financial institutions including State Life Insurance Corporation of Pakistan, ANZ Grindlays Bank, Metropolitan Bank Limited and A.F. Ferguson & Company.

About PSX Webinars

PSX Webinars are designed to create investment awareness among potential investors residing in Pakistan as well as overseas Pakistanis. These webinars are created keeping the most commonly asked questions in mind for each investment related area. Team PSX note the questions and arrange the seminars to educate the investors and general public.

Investing 101:

Pakistan Investment Bonds

Pakistan Investment Bonds (PIBs) are debt securities issued by the State Bank of Pakistan. These bonds are issued in denominations of multiples of Rs 100,000/- and available in tenors of 3, 5, 10, and 20 years. The yield on these bonds is fixed and disbursed semi-annually. The coupon rate or semi-annual return on these bonds are paid until maturity. PIBs are a good way to earn competitive returns while keeping the investment secure. These bonds are guaranteed by the Government of Pakistan and therefore the chances of a default or any inefficiency in the payouts from these bonds is very low. There are two ways to invest in PIBs. Either through Primary Dealers/ Scheduled Banks or through the Secondary Market/ Stock Market. An Investor Portfolio Securities (IPS) Account is opened with the Primary Dealer/ Scheduled Bank which allows an investor to invest in the PIBs. Any person or entity which has an account with a Primary Dealer or a Scheduled Bank offering this facility, can open an IPS account.

After opening the IPS account, an investor needs to instruct his bank (Primary Dealer/ Scheduled Bank) to buy the PIBs from the primary market through “non-competitive bidding” process in regular auctions conducted by the SBP. The non-competitive bidding process allows an investor to take part in the primary auction of the PIB through Primary Dealers. On the other hand, a simpler way of investing in PIBs is through the secondary market or the Stock Exchange. An investor can instruct his bank to buy the PIB(s) through the Exchange by Exchange certified brokers. This will directly result in the ownership of PIB(s) by the investor without going through the extensive process of non-competitive bidding. So by investing in PIBs, an investor can reap the rewards of a safe and competitive-returns instrument, earning profit semi-annually at market rate for a period of maturity as deemed fit by the investor. Pakistan Stock Exchange is proud to have PIBs listed on its board for the benefit of the new and the experienced investor.

Investing 101:

How To Know Your Investment Doubling Period

The question “when would my money double?” is a question that crosses every investor’s mind sooner or later. If you have also wondered about when you can double your money by investing in stocks or another investment avenue of your choice, you have come to the right place. As a matter of fact, you will be surprised to know how easy it is to estimate the doubling period of your investment.

That being said, let us introduce to you the rule of 72. The 72 Rule is used to estimate an investment’s doubling time given a fixed annual rate of return. Here’s the formula to utilize for the calculation:

Formula: Doubling time = 72/Interest rate

Example: If you have invested Rs.100,000 and are getting a profit rate of 25% p.a.

Then

72/25=2.88 ~3 years

Thus, you will double your investment in 3 years and will have Rs. 200,000.

Thus, you will double your investment in 3 years and will have Rs. 200,000.

The formula is pretty easy to understand and would take you only a few seconds to do your calculation based on the amount that you have invested or are planning to invest. Again, as mentioned earlier, it is not necessary that you invest in the stock market in order for this formula to work. Whichever investment avenue that promises you a fixed return, confirms that the rule of 72 will work for you.

It is important to mention here that in finance, there are also rule of 70 and the rule of 69.3 which are the methods for estimating an investment’s doubling time. So, it is up to you which formula you want to use to find out how long it will take for your investment to get doubled. You can also bookmark and use this automated calculator if you like: Rule of 72 Calculator

Pakistan Stock Exchange will soon be introducing a number of useful calculators to help you calculate various things as an investor. This will enable users to utilize official calculators by PSX instead of random calculators and tools from the web.

Investing 101:

Rebalancing Your Investment Portfolio

Your prime strategy in investing should not only be diversification of your investment in accordance with your investment strategy, but also rebalancing your investments in accordance with your target asset allocation. When you invest, you do so optimally in different asset classes, allocating a certain percentage for each of the assets. This asset allocation is done in accordance with your investment strategy which is developed on the basis of your financial situation, risk/ return objectives, risk tolerance level, and holding power. After you have decided on your asset allocation, then you need to fine tune it with the passage of time. This is called rebalancing of your investment portfolio.

Rebalancing is necessary to make sure that your investment portfolio is in keeping with your target asset allocation which has already been devised on the basis of your investment strategy. Suppose you have Rs 1 Mn, of which you have invested Rs 0.7 Mn in stocks and Rs 0.3 Mn in bonds. After a period of 5 years, your stocks have grown really well, but your bonds have remained stagnant. So what started off as an asset allocation of 70% stocks and 30% bonds shifted to 80% stocks and 20% bonds. This is referred to as ‘Portfolio Drift’ in investor-speak.

Now you might want to correct this portfolio drift by rebalancing your portfolio. You can do so by selling off some of the stocks and investing that money in bonds to return the portfolio to your desired asset allocation/ target asset allocation of 70% stocks and 30% bonds.

However, your target asset allocation may not necessarily be kept at the above configuration. With the passage of time, you might want to shift the target asset allocation to another configuration of your desire. For example, you might want to keep your investment portfolio as 80% stocks and 20% bonds or have any other configuration of your suitability. But whatever the configuration of your investment portfolio, you would want to rebalance your portfolio to avoid the portfolio drift that can occur over a period of time.

But the question you might want to ask is why rebalance the portfolio? Why not let the assets that have gained in value continue growing, and not rebalance the investment portfolio? The simple answer to this question is: What goes up must come down. While this is just a phrase of speech, it reflects well on the capital market. A rising market is a good time to sell off some of your assets. This will provide you an opportunity to realise gains from your investments while the market is at higher levels. Conversely, this will allow you to re-enter the market and re-invest to rebalance your portfolio when the market takes a dip again. This rebalancing has allowed you to sell high and buy low, thereby turning your investment strategy into a successful one.

Apart from selling high and buying low, another opportunity that rebalancing provides is that it protects the investors from being over-exposed in the market. An ignored portfolio often sees the assets bloat up, vulnerable to a market crash. This is specially true of stocks and the stock market. When you sell some of your over-valued stocks at a crest of the market, you are avoiding the possibility of being stuck in a rut when/ if the market crashes.

There are, however, some downsides to rebalancing. Every time you buy or sell a stock, mutual fund, ETF, or any other type of security, you are incurring charges such as commissions, taxes, entry & exit load fees (mutual funds). So this might be a drawback for you, if you rebalance too often or too regularly.

To get maximum advantage of rebalancing, you may want to do so periodically at certain instances of the market movement. If, for example, the portfolio drift is such that the stocks attain 72% weightage (from the initial 70% weightage) in the investment portfolio, then it is not necessary to rebalance at that time. Perhaps it would be better to wait out and ride the market wave till the portfolio drift is substantial enough to warrant a rebalancing. For example, if you set a threshold of 10% and your target asset allocation is 70% stocks and 30% bonds. So when the portfolio drift reaches 80% or 60% stocks, then you may want to rebalance, regardless of when you had last rebalanced your portfolio.

You may also set a certain time interval to rebalance your portfolio. For example, a period of three months or six months may be a good interval of time to rebalance. This will allow you to avoid the recurring charges incurred on too much rebalancing and at the same time will protect your portfolio from getting inflated or over-valued.

Another way to rebalance is to do so through buying only, instead of selling off assets. For example, if your target allocation of 70% stocks and 30% bonds has drifted to 75% stocks and 25% bonds, then instead of selling stocks, you invest in bonds and keep doing so until your target asset allocation is aligned back to 70% stocks and 30% bonds. You can do the same with dividends as well, whereas the dividends earned can be re-invested and thus assets can be bought to rebalance the portfolio. This way you can do rupee cost averaging against your investment when buying the said assets at different rates.

It is pertinent to mention that the closer you get to retirement, the more the attention should be paid to asset allocation and rebalancing. When you’re younger, you can afford to take your time in rebalancing your investment portfolio as you can sustain hits when the market suffers a crash or a major down-trend.

Conclusively, there are several methods to rebalancing your investment portfolio, of which you can use an individual method or a combination thereof, and you may rebalance based on the time interval or gap suitable to you.

Investing 101:

Start Young & Start Smart – 3 Ways to Get Started on Investment on a Small Budget

There are so many reasons why we put off investing for ourselves. It is not just the tedium of our daily lives but also the inhibiting thought that perhaps huge sums of money are required to make an investment that puts us off from investing. However, nothing could be further from the truth than these discouraging thoughts. The reality is that with a little amount of money you can start investing and get sufficient gains from that investment. The optimal situation is for you to start early when you are young and start smart, even with a small budget.

The question is how to start and how much to start investing with. There are three simple ways where you can invest and get sufficient returns.

  • Invest in Securities on the Stock Exchange:There are several types of securities to invest in the Stock Exchange. There are equities, mutual funds, bonds, and more recently, Exchange Traded Funds (ETFs) amongst other securities to invest in Pakistan Stock Exchange. The earlier you start investing, the more returns you can earn. You can invest in equities, mutual funds or ETFs with as little as Rs 10,000/- per month and, by way of compounding, you can earn substantial returns. For example, if you have Rs 10,000/-, you can buy a few units of mutual funds, ETFs or some stocks available on the stock market. The returns and dividends earned from these investments can be reinvested to generate additional earnings over time; thereby, you will be earning compounded returns. You can have a diversified portfolio of stocks, mutual funds and ETFs with the passage of time. With the fall in the market movement, these securities can be averaged out at a lower cost and sold off when the market is high, thus resulting in substantial capital gains for you. On the other hand, you can keep stocks or units of mutual funds etc which have sufficient dividend yields to allow for a steady stream of income from your investment.It may be mentioned that the ETF is a new type of security for the local market which offers the diversification of mutual funds with the kind of liquidity available in stocks. It is a cost-effective source of investment with characteristics of mutual funds, thereby requiring less financial knowledge or know-how on part of the investor for investing in ETFs. ETFs are a popular source of investment internationally and they are an ideal investment instrument for both, the savvy investor as well as the novice investor.
  • Invest in a Small Property: You can invest in a property which can appreciate in value over time. This property may not be very expensive and may be relatively small in space, for example an apartment in a building, so that you can pay for it through a small budget. If it is located in a good area, then it can be expected to have fair capital appreciation over a period of time. So it would be ideal to look for a small property like an apartment in a good area/ zone of your city. Now the question arises, how to pay for such an investment. The optimal way would be to finance that property through a low-interest competitive package secured from a bank against a collateral while renting out the said property to a third party. This way, the rental income that you may get from the property may well be used to pay off the financing secured from the bank. If your rental payments are short of paying off the loan repayments to the bank, then you may add some funds from your own pocket in paying off the said installments. After all, this is money being invested by you for your future. Needless to say, at the end of the financing period, you will become a proud owner of that dwelling. All this, for no or little extra cost to your pocket.Herein, the challenge, however, is two-fold. First is to find such a property which suits the depth of your pocket and second is to secure a loan or financing at competitive rates. However, this can all be achieved with a little bit of effort on your part in searching for the right property and looking for the most competitive interest rates on offer. Once you have addressed these factors, you have sailed through to a reasonably priced source of investment which will serve you well in the long run and even after your retirement.
  • Start a Side Business: You can start a side business with as little capital as possible and earn a fair income from it. Ofcourse, the biggest question is what kind of business or work should it be. There are numerous options to choose from. From tutoring to freelance writing, internet marketing, editing & proofreading, sewing or tailoring, and interior decorating etc., there are many choices of work that you can start on your own part-time and earn some side income from. However, you have to assess what is the job of your suiting and stick to it after your regular office hours or on weekends. The kind of businesses or work mentioned above entails small investment and can be started off through personal contacts or through online/ social media marketing.

So these are the three ways you can earn some income while not having to invest a great amount of money. Best of luck to your efforts and future endeavors while you earn your income on a small budget!

Investing 101:

Types of Risks Involved in Investing in the Stock Market

Investing in the stock market is a great way to make money specially when you are investing for the long term. However, there are some risks involved which may well be outlined for you for your better understanding of the stock market. These types of risks are as follows:

  1. Volatility: Volatility refers to price fluctuation of a stock or security over a period of a year. Not just the stock itself but also the market may be affected by volatility across the board. Volatility can occur due to the following reasons in general:
    • Geopolitical Events: In a connected world where economies and politics are all connected, an event occurring in one economy can have an impact on another. For example, a recession or an economic downturn in the U.S. can have an adverse impact on economies globally. Similiarly, a military threat posed by one country to another, can have an adverse affect on the economies of both the countries and/ or the countries of the region.
    • Economic Events: Any significant change in the monetary policy, tax regulations, GDP growth, export and import figures etc, or even the weather can have an impact on the economy of a country. This in turn causes volatility in the local markets.
    • Inflation: The rising costs of goods and services or deliberate government action along those lines can impact the future value of assets such that income may be reduced on account of less purchasing power. Inflation can cause volatility in the markets.

    The above three factors can impact the volatility of stocks or securities and make the market go up or down in accordance with the unfurling of events or the rise and fall of inflation. There are a few ways to manage or deal with volatility. These include buying stocks with consistently rising dividends, adding bonds to your portfolio (as bonds are generally stable, fixed income instruments) or reducing exposure to stocks or securities which are highly volatile.

  2. Timing: Trying to predict how the market will play out in the future and accordingly invest in the market is called timing. It is logical to think that one should buy when the market is at a low and sell when the market is at a high. That seems like sound advice. While it is easy to think that way, it is not easy to implement the same. This is because there is no way to tell if a market has reached its low-point or high-point. Everything is relative. So it is very possible that what you think is the market- low and invest in it, may actually turn out to be a market high, wherein the market takes a further downturn from your entry point.
  3. In order to manage this timing risk, one can employ the use of what is called Rupee Cost Averaging. This means a constant amount of rupees is invested when the price of a stock falls resulting in greater number of stock bought and investing the same amount when the price of a stock rises resulting in lesser number of shares purchased of the same company. This results in having greater number of shares of a company at an averaged-out cost. This can help you as an investor against market fluctuations and downside risk.

  4. Overconfidence:Overconfidence in one’s abilities may lead to errors of judgement, thereby resulting in wrong investment decisions. Failure to recognise your biases towards certain stocks, too much concentration in a single stock or industry, very high amount of leverage, and being on the sidelines of the stock market for too long are some of the effects of overconfidence.
  5. In order to beat the impact of overconfidence, one must stay grounded and use strategies to reduce the effect of overconfidence. These strategies include:

    • Diversification: Try to spread your risk by purchasing different stocks belonging to different industries. Buying five or ten different stocks spread over different industries is a good idea. Better yet, you may as well invest in ETFs or mutual funds to have automatic diversification of your portfolio.
    • Long-Term Investments: Holding your stocks for the long term is a good idea to beat the effect of overconfidence. Particularly, if you invest in good companies for the long term, such as 10 years or more, you are bound to reap good returns from such investments.
    • Do Not Leverage: Try not to leverage your purchase based on borrowing as holding shares in custody is a far better proposition than buying shares against borrowed money. This way you can protect yourself against market and stock downturns or any crisis in the economy or the stock market.

So the three main types of risks involved in investing in the stock market are volatility, timing and overconfidence. The ways to manage and curb these risks have also been briefly outlined for you to have a smooth and productive investment experience. So, go ahead, take a plunge and invest in the stock market, keeping these risks and mitigating factors in mind, in order to earn good returns from your investments.

Investing 101:

ETF-Changed the investment game

Exchange traded funds have revolutionized the investment market and are also known as “Legos of the investment world.” These vibrant investment vehicles offer an astonishing range of asset classes with a diverse investment portfolio and niche trading strategies. ETFs allow you to invest in everything under the financial sun in building a customized portfolio, and can readily be traded like stocks through your brokerage account. It is also an attractive option for the newbie investors, as it does not let you dwell into the complex analysis paralyses to decide on various investment alternatives. When you buy an ETF, you actually invest in buying all the stocks that are included in the investment basket without having to buy each of them separately. Just like stocks ETFs are also traded throughout the day and can be regulated through stockbrokers’ platforms.

Now, one of the most common questions that we are often asked is,why to invest in ETFs when they act and seem exactly like an ordinary stock?

Let us zoom in a little more to have clear insight about what goes behind the scene.

ETFs provide a wide variety of access to the top companies and each ETF is a fund that enables you to have the most alluring portfolio of different shares, bonds, and other instruments. With Stock ETFs you get to have the opportunity of gaining exposure to hundreds of shares of different companies without taking the toll of much risk either. The high level of transparency for both holdings and the investment strategy, enables investors to evaluate potential risks and return which also extends a great help for the new investors. It mainly features to track specified benchmark or index of securities. There is an underlying Net Asset Value (NAV) that is updated on the trading software to help investors in making wise decisions to buy or sell the units. Like other stocks, the price of an ETF may fluctuate 7.5% on either side up or down every day, starting from the face value of Rs. 10 per unit. Authorized Participants (APs) are designated to create and redeem ETFs, Asset Management Companies (AMCs) assemble the required portfolio of asset component and turn the basket over to the fund in exchange for numerous newly created ETFs. Later, when there is a need of redemption, APs return the ETF shares to the fund and receive the portfolio basket.

ETF’s VS Mutual Funds

Investors have long looked for a variety of ways to expand their investment horizons and always come up with a number of innovative options to gain most out of their investments. Whereas ETFs abbreviation of Exchange Traded Funds differ in a lot of ways from mutual funds. Mutual funds also contain various stocks, bonds and other assets but they are supposed to be selected individually from the investment basket and are actively managed by a fund manager. While, ETFs let you participate without bearing the expense or risk of buying an individual share, because through ETFs the actual investment in a company is in fractions and if the index goes down for a specific company, it would obviously cost in fraction out of the whole portfolio or investment. This approach helps in mitigating the risk along with extending the benefit of spending minimum time in managing the portfolio. An ETF is structured like an index fund whereas it is traded like an individual stock. As for index fund, you cannot take advantage of the market movement during the trading day.

Cost plays an important role in planning for an investment decision. It is higher in Mutual funds because of the active management approach, which requires to have a full time fund manager. However, ETFs are known as passively invested assets that feature slow cooker approach of investing that mirrors the concept of “Set and forget it.” The inherent factor of diversification in ETFs will heighten the chances of steady growth. For passive investors, ETF is an appropriate option to invest in the financial market that does not require to gather ample information about each and every stock individually before making a buying decision. So, whatever type of fund you choose, the investment decision comes down with a priority of individual investors about what they value most to honor their financial goals.

A quick rundown

The chart below will give you a quick sweep in a glance about Mutual fund vs ETFs

Exchange Traded Funds Mutual Funds
Traded through stock broker/dealers Traded through numerous channels
Listed on stock exchange Not listed on stock exchange
Capital gains are reinvested and may distribute the capital gain if make-up of the underlying assets is adjusted Capital gains within the funds are distributed to the shareholders
Dividend is redeemed to the brokerage account Dividend may be reinvested automatically
It requires passive trading approach Active trading approach is required
Low management fees High management fees and total expense ratio


Benefits of ETFs

One of the biggest draws for investors contemplating ETFs benefits is the ease of use and trading. It provides ease of trading for the new investors, who are willing to participate in the financial investment games but too apprehended due to the lack of expertise. As investing in ETFs does not require the investment decision for the individual stocks. ETF benefits the investors in opting for the investment option with a passive approach and rest is managed by the expert managers functioning at the back end on the entire mechanism.

The flexible nature of the unique investment vehicle allows the convenience of trading at any time of the day, as the price changes or varies throughout the trading session. Also, ETFs are traded on exchanges due to which it features high liquidity, and can be bought and sold whenever needed on an urgent basis.

While trading ETFs you can enjoy the feature of diversity that makes it less risky than any other investment vehicle, it also allows you to have a diverse portfolio of a gamut of stocks of different companies. If for instance, the stock of any one company is not performing better it would not affect you much because of the advantage you receive while trading in a diverse portfolio.

Accelerating to new heights

As soon as these innovative investment products made their entry into the financial market of Pakistan, it gained unprecedented popularity among investors while offering massive opportunities to the new investors as well. ETFs are firmly establishing an investment vehicle that will continue to grow and become a game-changer in the financial world. Using ETFs to piece together the portfolio in the most dynamic way allows the investors to sync in with the dramatic changes in the investment market. Nevertheless, the unique features of ETFs attracts many financial advisors and investors to opt for it as a trading vehicle over other available investment tools. ETFs essentially make it much easier to trade a big group of stocks at once and diversify the entire basket of securities whilst avoiding tax consequences. Thus, instead of hiring a full-time fund manager who would actively pick stocks to maximize profits, these ETF funds would simply replicate fund indices which gave a room for further slashing the overhead cost. Therefore, understanding the interaction between ETFs, cash equities and derivatives has become pivotal to comprehend the range of market participants. The rapid popularity of ETFs is going to enter the new arenas of success that will reshape the whole financial dynamics in the long run.

Investing 101:

Why You Shouldn’t Try to Time the Market

There are several reasons why you shouldn’t try to time the stock market. The overall reason is simply that you can’t do it. Nobody can! In a 2018 study conducted by the International Monetary Fund, 153 recessions were analysed across 63 countries from 1992 till 1994. It was found that only 5 of the recessions were predicted correctly by the economists in the preceding year. The rest of the recessions could not be predicted in the period preceding their onset, by the economists.

In other words, you can’t tell exactly when the market will start slumping or, for that matter, when it will start going up. Here are some basic reasons for this unpredictability:

  1. The human element: Even if you develop a computer program or line up some technical analysts, you cannot time the market, almost always, simply because of the human element. On any news, good or bad, rumoured or confirmed, the market might move up or down, depending on the decision of the investors, stock-brokers or other stakeholders. For example, a whole host of institutional investors may invest or divest in a company’s shares bringing a sea-change in the share-price of that company. The decision taken by these institutional investors (or a large number of individual investors, as the case may be) may be based on just unconfirmed reports which may well be fully incorrect. And even if the news is correct, yet the market movement may well have defied the technical analysis or an algorithm to predict/ analyse the market.
  2. You can’t always be right: When you try to time the market, you are not only trying to assess when to get in the market, but you are also trying to assess when to get out of the market. This is like predicting the unpredictable twice over! In the case of the (stock) market, certainly the idiom doesn’t apply: “First time is a success, second time is luck, and third time’s a charm!”. It may well never get beyond the first time!
  3. Waiting is losing:When you try to time the market, you wait for the right time to enter or exit it. This may result in a long wait. In this period of waiting, you lose out on buying stocks which may have offered dividends. In other words, you lose out on the income yield from those stocks while you wait for the “right time”. Also, the dividend income lowers the buy-price, conceptually, of those shares for you.

Furthermore, by waiting for the right time, you are losing the time period you may well be invested in the market, thereby lowering your annual returns percentage, if you have targeted investing in the market over a period of several years.

So in the face of the above three reasons, it is perhaps best not to time the market. But then again, the question arises, what should one do instead. Here’s what you can do:

  1. Cost-Averaging: If you enter the market now and buy a stock at a certain price after which the market takes a dip, then you can buy a larger number of the same stock(s) at a lower price with the same amount of money. Later on, if the market falls further, you can purchase more of these stocks to average your cost further on the downside. This cost averaging will result in your portfolio to be consolidated with a lower price, until the market resumes its upward movement and you are able to sell your stocks at a higher price.
  2. Diversifying: If you have bought a stock of a company A at a certain price after which the market takes a nose-dive, then you can purchase stock(s) of company B (which may belong to another sector) which offers greater chance of capital gain or dividend yield. This way you are not only mitigating your chances of incurring a loss but are in-fact positioning yourself to earn a profit even if you have to sell the stock(s) of company A at a price lower than your buy-price.
  3. Investing for the long term: It is always best to invest in the market for the long term. This will not only cushion you from the market fluctuations, but will also help you to earn dividends. You can avoid losses and earn good returns by way of compounding and reinvesting. The buy and hold strategy is a win-win situation for you because it helps you ride the wave of the market and its vacillations.

Furthermore, by buying and holding the stocks purchased for the long term allows you to save your money against costs that can be incurred against daily or frequent trades. These costs can be in the form of commissions/ fees and other charges.

Concludingly, we can say that it is best for you to not time the market or wait till you think you can now enter or exit the market because there really isn’t a particular time which is the best time to enter or exit the market. It pays to buy now and hold, it pays to ride the wave of market for the long term, and it pays to compound and reinvest over a period of time while staying put in the market.

Investing 101:

BC vs Investing – Which is better?

Ballot Committee, popularly known as ‘BC’, is very popular amongst the ladies in the sub-continent; but the fact is that BCs are popular in other cultures as well such as those of the west. In the U.S and Europe these are known as ‘Saving Circles’. Another fact of the matter is that BCs are more popular amongst men than amongst women, globally, as opposed to the general perception.

BCs are a preferred method for forced savings which are popular amongst a majority of women in Pakistan because it saves them from the hassle of paper-work and other legalities involved in engaging with financial institutions and their products. Lack of awareness about the financial industry, about the modes of saving and investment instruments available often cause hesitation amongst women in particular, and the public in general, to invest in mainstream financial products.

So while BCs may be a convenient way to save, there are some inherent factors which make them less than advisable as a saving instrument, specially for the recipients at the end of the list. This is because of the decline in the value of money on account of inflation. Inflation has been recorded at 9.4%* as of March 31, 2019. This means that if the BC participants were to get Rs 60,000/- at their turn, the recipients after the first two or three beneficiaries would actually be getting an amount worth Rs. 54,360/- on account of value of money lost due to inflation.

On the other hand, if the public were to invest their funds in the stock market, mutual funds, or other asset classes, they can get higher returns and beat the effects of inflation as well. The average annual returns on mutual funds has been 8 – 10% p.a. historically and PSX (KSE 100 Index stocks) has given returns of about 15.13%** CAGR over the 15-year period Dec 31, 2003 to Dec 31, 2018. Similiarly, investing in other asset classes may also be feasible as compared to saving in BCs. Historically, asset classes such as gold, NSS, PIBs, and T-bills have given returns of 11.30%, 11%, 11%, and 9.50%, respectively, over the period 2008-2017. These are substantial returns as compared to the saving scheme of BC which while inculcating a sense of savings discipline in the participants due to forced savings, does not result in profit for them whereas the beneficiaries (after the first two or three beneficiaries) of the scheme lose out due to the effects of inflation.

So if you save and invest wisely, you earn more than what you think you can and at the same time beat the hard hitting effects of inflation.

Listing:

The Final Step of Your Business’s Journey!

Running a business on any scale requires careful planning and the ability of its managers to capitalize on all opportunities presented, while also finding the best solutions to all the challenges that arise in the business landscape. Every economy in the world has its own unique characteristics and businesses must continuously strive to achieve higher profitability and returns for its shareholders. In Pakistan, specific industries experience their own unique sets of challenges, but one key aspect which requires extensive deliberation for every business throughout the world is finding the right mix of financing for the businesses’ short and long term success.

To remain competitive and gradually grow, capital is required for a host of reasons ranging from factory and capacity enhancements, increasing the workforce, research and development, product development, working capital, servicing debt and business and product diversification among others. Business managers may favor one of the several options available to meet these financial requirements such as bank loans, private equity, partnerships etc, but each option also carries its disadvantages. For example, in the case of bank loans, businesses must provide some sort of collateral to the banks, on top of the periodic repayments of the principle amount plus interest on the initial financing they received. In a high interest rate environment, this chokes the company’s ability to maintain its margins.

Pakistan Stock Exchange (PSX) offers an alternate solution, which is to raise funds by listing your company on the Exchange. Briefly, equity listings require a business to offer a small part of its ownership for sale to the general public.

This is a comparatively cost efficient measure, where businesses do not give off their management control to the new investors / shareholders leading to effective decision making. Management is able to raise funds without having to pay back costly loan repayments. Furthermore, one of the biggest advantages of listing are the tax benefits which companies receive for four consecutive years after listing, enhancing their bottom line.

Getting your company listed not only helps management raise funds but it has several other perks as well. PSX provides a diverse marketplace with investors from throughout the world which increases liquidity. Secondly, PSX maintains international indices, including the KSE 100, which represents the top companies of Pakistan. The KSE 100 Index is followed by investors nationally as well as internationally. Listing on the Exchange gives a chance for companies to gain international recognition by being included in said indices. Moreover, business owners are also able to identify the true worth of their organizations, as investors give premium to fundamentally strong companies leading to better price discovery. Publicly traded companies also possess higher credibility and transparent public perception increasing company’s publicity and outreach. It helps attract the best talent and enhance a company’s relationship with its stakeholders.

Pakistan Stock Exchange was established on 11 January 2016 after the merger of Karachi Stock Exchange (established in 1947), Lahore Stock Exchange (established in 1970) and Islamabad Stock Exchange (established in 1992). PSX constitutes of 40% shareholding by a consortium of Chinese Exchanges (Shanghai Stock Exchange, Shenzhen Stock Exchange, & China Financial Futures Exchange), and 60% by general public, which includes initial shareholders, local and foreign investors. PSX has had a record of being the best performing Stock Exchange in Asia. With functional and operational capabilities similar to those of any other stock exchange in the world, it aims to provide an efficient marketplace to facilitate capital formation and boost Pakistan’s economy.

PSX offers two equity listing products i.e. the Main Board and the Growth Enterprise Market (GEM) Board. Each board has its own specific criteria and requirements for listing. Among the requirements is the condition that all companies must be public limited and registered with the Securities and Exchange Commission of Pakistan (SECP).

Currently, 530 companies are listed at PSX representing 36 industrial sectors and having total market value of over PKR 5.9 Trillion. The local bourse is a key economic performance indicator for every country, where PSX enjoys the position of being one of the best performing markets in the region.

Keeping in mind the current pandemic, businesses face extreme challenges in the short to medium term, as reduced overall economic activity locally and abroad has led to the rare demand side and supply side shocks. The government and the general public have cut down substantially on non-essential expenditure leading to severe revenue drops. Supply chains throughout the globe have been negatively affected due to restricted travel and lockdowns. Companies will require cost efficient funding now more than ever. To help business thrive, PSX offers an avenue that no business can afford to overlook.

“Opportunities don’t happen, you create them”,

Visit the PSX website (www.psx.com.pk) or call the Exchange directly to start gathering vital information that can benefit your business substantially and help you overcome the hardships of today’s business environment.

Listing:

How & Where Should You Invest

There was a time when small to medium sized companies found it cumbersome to list on Pakistan Stock Exchange. The pre-requisites were tough and the post-listing requirements were not easy to follow. However, lately, a lot has changed for the better. The Securities and Exchange Commission of Pakistan (SECP) has approved listing regulations of the Growth Enterprise Market (GEM) Board to enable and facilitate small and medium enterprises (SMEs), greenfield projects, tech start-ups and other companies to conveniently get listed on the Stock Exchange and access capital thereupon.

Small to medium enterprises make up a big chunk of business enterprises in Pakistan. SMEs constitute nearly 90%* of all enterprises in Pakistan. They contribute about 40%* to the annual GDP and employ about 80%* of the non-agricultural labour force. The growth enterprises play a major role in a country’s economy. They provide a large number of jobs and contribute significantly to the GDP of a country. It is not only the government’s job to provide employment but also that of the private sector. Companies which are successful not only provide jobs but also provide diversified products, invest in R&D, create supply chains, increase market outreach and penetration, add to their infrastructure, and increase their production capacity. They also add value to their products and services so that their goods are exportable as well.

Such successful companies can be as diversified as service providers like media production houses & digital media houses, agro-based companies like fruit packagers & exporters, dairy-based companies such as packaged milk producers, and b2b companies such as textile units & IT companies etc. For such companies to succeed in their respective businesses, sufficient funding is necessary. However, the resources of funding while being diverse are costly at the same time.

This is one of the reasons that Pakistan Stock Exchange is incorporating the GEM Board as it not only helps such enterprises in expanding, diversifying and raising capital but also helps the development of the Capital Market of the country which is important for increasing trade, commerce and industry. This (GEM Board) platform will encourage investors to invest in strong, growing and successful companies. By investing in Growth Companies, investors will get the opportunity to benefit from their growth. Investors invest in these companies for capital gain and/ or dividends while the companies receive the much needed capital. In other words, this activity completes an important part of the economic cycle whereby investors get an opportunity to invest and companies get capital to grow.In order to facilitate companies for listing on the GEM board, Pakistan Stock Exchange has outlined regulations governing listing and trading of equity securities of SMEs. This step will specially pave the way for medium sized enterprises, growth enterprises and even start-ups to get listed on the Stock Exchange.

Before we explain how listing has become accessible for a Growth Company, it is essential to explain why it is beneficial for such companies to get listed or why should companies get listed at all. There are numerous advantages for a company to get listed. It is basically a source of raising long term low-cost capital. Capital is necessary for all companies, specially medium-sized and smaller ones, to set up, diversify their products, carry out growth & expansion, enhance their current capacity, increase their operational capabilities, invest in new projects, add value to their products, export their goods and meet working capital requirements.

The resources generated through listing has far-reaching and broad benefits for the listed companies. Not only can substantial funds be generated through listing, but also the said funds come at a low cost. This is specially true given the high price of borrowing from other sources of funding nowadays. The interest rate environment is not very conducive to borrowing from banks and financial institutions as that carries with it the onus of servicing debt at a high rate on a monthly basis. Furthermore, in most cases, the financing is collateralized in that the borrowing companies have to submit substantial collateral against the said financing. As against this, captial raised from the stock market is economical or reasonably-priced and can help the companies avoid the high cost of short term or long term borrowing from financial institutions in Pakistan.

The raising of capital from the Stock Exchange also allows for an enhanced image and profile for a company leading to its greater visibility amongst the public in general and the investors & portfolio managers in particular. This is all the more significant given that this increased visibility allows the public and investors outside the country, as well, to track, monitor, and invest in these listed enterprises. So even if it is a B2B type company and doesn’t have exposure in the consumer market, yet its listing on the Stock Exchange brings about increased noticeability and attracts investor interest locally as well as internationally.

Not only does a company attract public and investor interest by going public or getting listed, it also adds to a level of prestige for that company in that it follows the minimum requirements that make for a company that bears an international standard and follows international best practices of operations & performance. Listed companies are regarded as industry leaders in their respective sectors. Such companies adhere to the regulatory, compliance and corporate governance guidelines outlined for listing. Hence they enjoy a level of prestige amongst local investors, market analysts, researchers, and fund managers.

Furthermore, through prospective private placement and listing, such companies attract media attention and interest which brings them in the limelight engaging public and investor interest. This brings in added marketing for the said companies by default.

A major advantage of listing on the GEM Board of the Pakistan Stock Exchange is that companies will have tax benefit of 20% on tax payable in the first and second years of listing and 10% on tax payable on each of the subsequent two tax-years i.e the third and fourth year respectively. This is a key benefit that a company can derive in monetary terms by listing on PSX.

Another advantage that a company can have by listing is that the matter of legacy or succession becomes streamlined wherein the rules of smooth transfer of management powers are outlined beforehand. In family-owned companies and businesses, the transfer of management powers are usually not clearly defined, leading to much strife and discord amongst the subsequent generation(s) vying for control of the company. This is done away with by way of following the rules & regulations inherent in listing.

Last but not the least is that such enterprises can attract and retain the best available human resource from the talent pool of the country because individuals/ employees like to work for a company that enjoys high esteem, good reputation and is well known.

As mentioned earlier, we will now discuss why it has become easier for companies to list on the GEM Board. As per current regulations, in the GEM Board, all licensed security brokers are eligible to act as Advisors, allowing for a greater choice of advisors and consultants for SMEs to choose from. Currently, the minimum free float of shares requirement is 10% which is a nominal percentage of the shares to be listed. This allows for a strong majority of the shareholding to be retained by the owners and directors. At present, it is also possible to offer equity at premium. Also, there is no restriction of minimum number of shares, adding to greater liquidity for the shares trading of the SME. The fees for listing is also quite nominal. The initial listing fees is capped at a maximum of Rs 50,000 only which is a drop in the ocean compared to the benefits a company can reap by listing. The annual listing fees is Rs 50,000/- on Paid-Up Capital up to Rs. 50 Mn, Rs 100,000/- on Paid-Up Capital between Rs 50-100 Mn, and Rs 200,000/- on Paid Up Capital exceeding Rs 100 Mn. This shows that a maximum annual listing fee of Rs 200,000/- (against a Paid-Up Capital exceeding Rs 100 Mn) is a nominal amount that a company of such a size has to pay compared to the huge amounts of capital it can raise in the equity market.

There are a few mandatory requirements for listing on the GEM Board. The company must have audited financial statements of the last two preceding years (or of shorter period if it has been less than two years since commencement of business) wherein the financial accounts should be audited by Quality Control Review (QCR) rated agency. An Information Memorandum (IM) must be prepared in case of a private placement wherein the IM must be shared with interested institutional investors who would like to invest in the privately placed issue. The company must publish its financial statements on their website whereas the website must contain basic company information, Information Memorandum (IM), and half yearly progress providing status of commitments mentioned in the IM.It is pertinent to mention that the companies going public on the GEM Board have fewer compliance and regulatory bindings. Keeping this in view, only Institutional Buyers and NCCPL registered eligible investors will be able to invest in shares of GEM Board listed company.

There are a few pre-listing requirements regarding the Information Memorandum. The IM shall be circulated to institutional investors and eligible individual investors, they shall be placed on the website of the Growth Company, the Exchange and the Advisor/ Consultant to the Issue. The IM should contain the minimum information/ disclosures as contained in the Schedule I of Chapter 5A of PSX Rule Book.

For post-listing, there are a few compliance requirements such as the issuer is required to disclose and disseminate Price Sensitive Information, the CEO of the Issuer responsible for regulatory compliance must submit compliance report at the end of each half-year.

Briefly, the process for listing on the GEM Board of the Exchange is as follows:-

  • Your company chooses a consultant who does the initial due diligence with regards to financials, corporate structuring, legal and regulatory requirements etc., and formulates your company’s business plan moving forward.
  • The business case is evaluated by the consultant using different methodologies and its demand is gauged for the “Final Offer Structure” to get maximum value for the shares to be offered.
  • The Central Depository Company (CDC) checks for eligibility and induction into their virtual share depository system.
  • Submit requisite regulatory documents for PSX and obtain the necessary approvals.
  • Conduct road-shows, investor presentations and other marketing and sales events to create awareness about the upcoming private placement.
  • The company’s equity securities can be traded on the GEM Board.

The listing on the GEM Board of the Stock Exchange is an ideal way forward for Growth Companies to list on the Exchange in their efforts to secure long term low-cost financing.

Source:

How To’s:

What is an ETF and how it functions

An Exchange Traded Fund (ETF) is an investment instrument that combines the tradability of shares with the investment attributes of an open-ended mutual fund. In essence, an ETF is a tradable fund that has the risk and return characteristics of a portfolio of shares whilst having the diversity inherent in a mutual fund. An ETF holds a basket of securities (e.g. stocks) that generally tracks an underlying index. Globally, ETFs are a popular and accessible source of investment for investors, be it a savvy investor or a novice investor.

ETFs are a cost effective source of investment with lower management fees in comparison to mutual funds. ETFs can be bought and sold at current market prices over the course of a trading day and can also be bought or sold against limit orders and stop loss orders. For investors new to stock exchange, it is important to mention that ETFs trade just like shares. In order to invest in an ETF, a customer must engage a brokerage firm to open a brokerage account. Current stock market investors can readily buy/sell ETFs from their existing brokerage account. The process and transactions thereof for investing in an ETF are the same as in shares so much so that even short selling is possible in ETFs, as per Exchange rules. Indeed, brokerage costs and commission are also charged in ETFs as in shares trading. Capital gain and dividends is obviously possible in ETFs.

Pakistan Stock Exchange has launched its first two ETFs on March 24, 2020, namely the UBL Pakistan Enterprise ETF (UBLP-ETF) and the NIT Pakistan Gateway ETF (NITG-ETF). The former fund has been offered by UBL Fund Managers whereas the latter has been offered by NIT

The investment strategy of UBL Pakistan Enterprise ETF is to provide long term capital appreciation and dividend yield to investors. The fund aims to track 9 companies with highest free float market capitalization of KSE 100 Index (excluding Oil & Gas related sectors) constituting the Benchmark UPP9 Index (UBL PSX Pakistan Enterprise Index). UBLP-ETF is traded on PSX and it can be tracked on the PSX data portal at:The Term Sheet of the ETF is also available therein. The details of the underlying Benchmark Index UPP9 can be accessed here:

The UBLP-ETF is an investment instrument with high return and risk potential for investors. An advantage for investors in investing in this ETF is that the underlying basket of securities doesn’t contain the highly volatile oil & gas stocks and comprises of a diversified collection of stock picks with highest free float market capitalization of KSE 100 Index. The stock picks include those from the banking, fertilizer, cement, and power sectors. Further details of UBLP-ETF are available at its website*: www.ublfunds.com.pk/individual/products-services/ubl-pakistan-enterprise-etf/

The investment strategy of NIT Pakistan Gateway ETF (NITG-ETF) aims to track the underlying NIT Pakistan Gateway Index (NITPGI). The ETF includes the largest stocks forming part of the KSE 100 Index so as to cover atleast 50% of the total market capitalization of the KSE 100 Index at all times. The NITG-ETF is traded on PSX and it can be tracked on the PSX data portal at:Term Sheet of the ETF is also available therein. The underlying index (NITPGI) can be accessed here:

The NITG-ETF is an investment instrument with high return and risk potential for investors. Currently, it includes 12 stocks from the banking, fertilizer, oil & gas, cement, and power sectors. Further details of NITG-ETF are available at its website*:

The Indicative NAV (iNAV) of both the ETFs is updated every 15 seconds whereas the NAV (assets minus liabilities on a per unit basis) of the ETFs is also published daily after close of the stock market for investors to gauge the underlying value of their holdings.

Before investing in an ETF, it is important to read the Fund Document(s) namely the Offering Document and Trust Deed provided by the fund manager available at the website of the respective AMCs*. In order to invest in an ETF, it is necessary to have a brokerage account. The list of brokerage firms is available on the PSX website for investors to select the suitable brokerage firm for themselves. Once their brokerage account is opened, investors can invest in ETFs by calling their respective brokers to trade in ETFs for them or the investors can do so directly if the online trading software is provided to them by their selected brokerage firms

10,000/-, an investor can take an entry position in ETFs. This will allow the investor to have a risk mitigated diversified portfolio in the shape of an ETF which acts like a stock while having the characteristics of an open-ended mutual fund. An ETF can be purchased in a lot of 500 units in the regular market or even one unit can be purchased in the odd lot market. With this easy and cost-effective way of having a diversified portfolio of securities, Pakistan Stock Exchange wishes its investors all the best and happy investing in ETFs!

How To’s:

How & Where Should You Invest

One of the biggest question marks for an investor with some money to spare is where and how should he invest. An investor can invest in different types of asset classes. The age-old adage of “don’t put all your eggs in one basket” comes to mind here. If we graduate this a bit further, it means that as an investor you must invest in different asset classes and diversify your portfolio of investment. You need to decide what proportion of which asset class you would like to keep in your portfolio. This is what will constitute your target asset allocation. Another aspect of asset allocation is to rebalance your assets in your portfolio as with the passage of time one particular asset class can accrue greater value than another; therefore, in order to bring it in line with the original asset allocation target, you may want to sell some of the higher valued asset to rebalance the weightings of the assets in your portfolio of investment.

We will now discuss how to allocate assets in your portfolio; how much of which asset to invest in. A certain percentage of your portfolio may consist of stocks, while another may have bonds; yet, another part may consist of real estate investments. You have to decide based on your financial situation, risk tolerance threshold, holding power, and how much of each asset class you would like to have in your portfolio. For example, stocks may constitute 70%, bonds may make 20% of your portfolio, and real estate investments may make up 10% of your portfolio.

Decades ago, there was the ‘Rule of 100’ which helped determine the ideal asset allocation in stocks, while the remaining investment was to be done in bonds. For example, if you were 40 years old, then, as per Rule of 100, you were to subtract 40 from 100, the resulting number 60 would indicate an investment of 60% in stocks while the remaining balance would indicate 40% investment be done in bonds. But with the returns in bonds being static or smaller and with people living longer in present day & age, it was found that the Rule of 100 was too conservative for most investors. Hence, many financial advisors now recommend that investors subtract their age from 110 to 120 to determine a suitable stocks-bonds asset allocation.

But the Rule of 100 might not be an all-encompassing rule. It does not factor in other asset classes such as real estate, mutual funds or ETFs etc. At the same time, it might not be the best way forward for you because if your risk tolerance level is low, then you might want to invest more in bonds than in stocks. However, if you have a normal or above average risk tolerance level, then you might want to invest as per the latter-day Rule of 100 to determine the stocks-bonds asset allocation for your portfolio. This will allow for a suitable investment vehicle for you as well as provide well for you by the time you retire

Another aspect of discussion on asset allocation is diversification. Diversification can be done in many ways such as by Market Capitalisation, Dividend Yield or Yield (Bonds) etc. Market Capitalisation is the total number of shares of a company multiplied by the share price. The larger the Market Capitalisation, the bigger the company. Dividend Yield is the annual dividend per share divided by the stock’s price per share. The higher the Dividend Yield, the greater the payout given by a company. Yield is the annual return on a bond or debt instrument at that point in time. The higher the Yield, the greater the return from that debt instrument or bond. Based on your financial position, risk tolerance level, and holding power, you may decide on which stocks or bonds to invest in. If your risk tolerance level is low, you may want to invest in large cap companies, stocks with high dividend yield or bonds with high yields for a given period of time. If your holding power is also low, then you may want to invest in bonds with high yields and stocks with sufficient dividend yields to suit your financial situation and needs. It is these considerations which will help you decide the asset allocation of your suitability.

Apart from diversification, an aspect of asset allocation is maintenance of your target asset allocation through rebalancing of your portfolio. Suppose you have invested in stocks and bonds with a weightage of 60% stocks and 40% bonds over a period of ten years. It is possible that the stocks grow faster than the bonds over said time duration. In such a case, you may want to offload or sell some stocks and invest that money in bonds to rebalance your assets to the original proportion of your asset allocation (60%-40%).

On the other hand, if you want to reconfigure your asset allocation such that you now want to have different proportions of assets in your portfolio, then you may want to dispose-off more of the bonds or other asset classes and concentrate more on stocks or any other asset class. Basically it’s your call, your financial situation, your risk tolerance level and your holding power that should dictate the asset allocation at your desired levels.

These prime considerations of diversification and rebalancing based on your desired configuration of asset allocation will determine your satisfaction in terms of returns earned and risk profile maintained in keeping with your financial situation, risk/ return objectives, and holding power.

General:

Five Reasons you should Participate in a PSX Investor Awareness Session

No matter if you are an existing investor or one who is planning to invest in stocks for the first time, or even otherwise, it’s important that you keep yourself updated with the current economic situation. You must also learn about the best practices for investing money in stocks as well as about the dos & don’ts to steer clear from any pitfalls encountered in stock investments. That said, finding all sorts of relevant information online can sometimes be tedious, which is why PSX conducts Investor Awareness Sessions, both physically and online.

The investor awareness initiative covers students as well as corporations and takes them through the entire process of investing in stocks. You can sign up to be a part of Investor Awareness sessions through PSX website or by contacting PSX marketing team by emailing at info@psx.com.pk. But if you aren’t sure of whether you want to participate in a PSX Investor Awareness session yet, here are the top 5 reasons to look at:

Learn about Present Economic Situation

PSX Investor Awareness sessions are conducted by the Investor Awareness team that has the necessary experience and skills required to guide about investing in the Stock Exchange. By the same token, they are also able to give examples based on current local and global economic scenario to better inform and apprise you regarding investing in the stock market.

Learn How to Invest

The core objective of PSX Investor Awareness sessions is to teach new as well as existing investors how to invest in the stock market. While the new investors need all investment basics from scratch and are apprised about the same in these sessions, the experienced ones can always use advanced tips and tricks given in these sessions to seek out better ways to invest fruitfully & productively in the stock market.

Learn What to Avoid

While learning about the dos of investments is extremely vital, knowing about the don’ts is also critical. There are many mistakes that fresh investors make and it is part of the objective of PSX’s investor awareness drive to keep investors safe from making those errors. Various dos and don’ts are explained to the participants in PSX Investor Awareness sessions.

Get to know PSX Team

As a participant, you get the opportunity to meet the PSX team and learn a little about them as well. Students attending these sessions usually ask PSX officials about what they do at PSX, what’s their educational background and how did they apply to acquire the jobs they are employed in at PSX. Many students show interest in joining PSX as interns. On their part, PSX officials guide these students towards the Careers page of the PSX website where they can easily apply for MT Program aka Management Trainee Program or other sources of employment at PSX.

Get your Queries Answered to

Last but not the least, PSX Investor Awareness sessions brings an opportunity to the attendees to ask questions about their on-going session itself or anything else related to investments, economy or the stock exchange, against which they get answers on the go. This allows attendees to not only get their queries resolved but also get the most relevant and updated answers to their queries.

If you are interested in participating in PSX Investor Awareness sessions, head to the PSX Website to apply for your free spot in the upcoming session.

How To’s:

RDA: A Catalyst for Growth

In an amazing development for the economy and people of Pakistan, a new facility of services has been provided for overseas Pakistanis or Non-Resident Pakistanis (NRPs). This initiative of the State Bank of Pakistan allows millions of overseas Pakistanis to conduct banking transactions whether related to making payments or investing in Pakistan.

For the first time in the history of Pakistan, overseas Pakistanis are able to avail a facility which they have been seeking for a very long time. NRPs will be able to partake in the banking system of their homeland through an entirely digital and online platform. Previously, it was a complex and cumbersome process for overseas Pakistanis to open an account and transact therein. However, now, they will not be encumbered to visit any bank branches or consulates to open a bank account in Pakistan anymore.

This platform, the Roshan Digital Account (RDA), provides for overseas Pakistanis to open an account within 48 hours, subject to provision of soft copies of their documents and the necessary due diligence conducted by the banks/ relevant entities. Specifically, Roshan Digital Account will allow the Pakistanis residing abroad to integrate into the Pakistani banking and payment system.

The RDA is a huge improvement of services available to overseas Pakistanis who are a substantial source of remittances flowing into the country. In our culture, where family values rule supreme, the expatriates who go to foreign lands to settle or work there remit funds to their parents living in Pakistan. These funds can be used to pay utility bills, conduct e-commerce transactions, carry out transactions for investment in the capital market and undertake other useful transactions either directly through the account or by sending these funds to their family members in Pakistan. In other words, this platform provides for the crucial financial connectivity that the expatriates or overseas workers needed to have with their parents or other family members back home. As per our social norms and values, funds for philanthropic activities and Zakat remittances are also sent by overseas Pakistanis. The new digital platform is a safe and transparent conduit for sending funds for these purposes as well. It also provides a facility to parents of overseas Pakistanis who are residing with their children abroad, to access their bank accounts in Pakistan for their transferred monthly pension funds.

Through the RDA, overseas Pakistanis will also be able to invest in debt instruments issued by the Government of Pakistan such as Naya Pakistan Certificates (NPCs). The NPC is an annualised return debt instrument having different tenors and rate of returns. There is also the Shariah-compliant NPC available for those investors who want to invest according to Shariah rules and principles.

The RDA is an excellent platform through which overseas Pakistanis such as those settled in the Middle East, who may not have citizenship of their respective countries, can invest in Pakistan and make a solid foundation for themselves when they have to return to their homeland anytime in future. Similarly, for Pakistanis residing in other countries such as the UK and Canada, where they may well have permanent residency or citizenship thereof, the NRPs can invest in Pakistan, build homes for their parents or other family members residing in Pakistan, invest and build other assets in the country such as a stock portfolio and earn an additional source of income for themselves, taking advantage of the competitive returns offered by Pakistan’s capital market. Pakistan’s stock market has offered excellent returns of 15% (annual average returns) in the last 10 years.

The RDA has made it very convenient and transparent for overseas Pakistanis to transact in Pakistan or invest in Pakistan’s capital market. Previously, overseas Pakistanis had to send funds for investment or other purposes through their family members or agents which was not a very efficient or transparent way to do so. This also created an anomaly in terms of tracking and filing tax returns, etc. Now, through the RDA, the process of transferring funds has become much simpler and easier. Furthermore, it has become transparent and official with the result that all new investment from abroad is now channeled through RDAs keeping a record and trail of where the funds are coming from and where they are being directed, thereby pre-empting possibility of any hidden or illegal transactions.

Therefore, it is safe to say that Roshan Digital Account is not only a convenient, efficient and viable conduit to invest and transact in Pakistan and its capital market but is also a source of strengthening the economy of Pakistan. Overseas Pakistanis are highly encouraged to use this platform to make investment inroads in their native country and conduct transactions through the banking system of Pakistan via the RDA. As things stand today, more than 100,000 RDA accounts have been opened with more than 700 million USD (equivalent) amount remitted into Pakistan so far through RDAs. Of these, more than 3500 account holders have availed the option of investing in the stock market involving a total investment amount of USD 7.8 million USD (equivalent). This is a small proportion of the total amount remitted through RDA, but there is a huge potential for these numbers to grow and for more overseas Pakistanis to invest in Pakistan’s stock market through the RDA.

(The writer is Head of Marketing & Business Development, Pakistan Stock Exchange Limited).

Source: Daily Business Recorder dated April 7, 2021

How To’s:

The RDA Challenge

The Roshan Digital Account (RDA) is a new initiative by the State Bank of Pakistan (SBP) aimed at helping overseas Pakistanis build their wealth in their homeland.

Every Pakistani living abroad has some link to their homeland. Whether it is their parents they have left behind or just the plain thought of going back home and spending a comfortable retired life amongst family members, the homeland remains in focus due to one reason or the other.

With the RDA initiative, the SBP has provided Pakistanis with a channel to stay connected with the country’s growth potential. Foreign investors have long been investing in Pakistan and achieving good yields on their investments. Now Pakistanis living abroad can also make gains over time and build on their wealth. Whether it is to diversify their investments or achieve improved returns, Pakistan is the place to focus on.

Banks and brokerage houses must join hands to help overseas Pakistanis invest in capital markets

Statistics show that over 100,000 accounts have been opened. Approximately $700 million has come in so far. Only 3,500-plus accounts have invested in the stock market. Similarly, only $7.8m was invested in the stock market. This is merely 1pc of the total inflows.

This poses a challenge for banks as well as the government. The core objective of the initiative will be lost if non-resident Pakistanis are unable to invest in the capital market through the RDAs. Non-resident Pakistanis must be informed, educated and provided with all options to grow their wealth in Pakistan. The onus of responsibility falls on the banks as they are the main drivers of the initiative.

But what’s in it for the banks? They want to keep the inflows coming over a long period of time. Investment in NPCs is a one-time activity and, on top of it, the rates offered are high at the moment. This may not be a viable option for the banks or the SBP as such because profit payments may not be sustainable in the long run. It also tends to create a negative feeling among resident Pakistanis as their overseas counterparts are offered better returns than domestic accountholders.

On the other hand, banks need to keep these accounts active with increased inflows. It will be an uphill task to achieve this through utility bills payment only. They need to have more offerings. This is where the capital market investments come in handy. People will build portfolios, repatriate profits, trade and invest in the market and transfer money. This will ensure continued banking activity. Stock trading will generate cash flows. Dividend payments will also flow into these bank accounts. In short, stock market investments will ensure sustainable inflows into RDAs.

The banks need to not only increase the overall number of accounts but also keep the opened ones active. As per data from the Bureau of Emigration and Overseas Employment, there are over 8m Pakistanis residing overseas, which means there is a huge potential for RDAs.

It is a challenge for Pakistan’s financial sector to be able to leverage this initiative and get the best results. It must continue the momentum that has been achieved. In fact, it should ensure that non-resident Pakistanis are able to achieve the maximum benefit out of this initiative. It is imperative that information is shared with the existing accountholders about the available avenues for investments.

The benefit of compounding their profits over a long period as well as achieving dividends and capital gains is something they need to be aware of. RDAs can provide them with the access they need to the country’s capital markets.

It is also the responsibility of brokerage firms to educate their accountholders about how to maximise the opportunities to grow their portfolios and smartly manage their investments. The banks and capital market fraternity must join hands and seamlessly work together to devise and develop smooth processes for account opening, increase accessibility and ensure effective risk management.

Published in Dawn, The Business and Finance Weekly, April 12th, 2021

Investing 101:

PSX – A Platform for Debt Issuance and Listing

Companies can raise capital, essentially, in two main ways: through equity listing on the stock exchange or through debt issuance, i.e. by issuance of bonds independently or on the stock market or by securing loans from financial institutions such as banks.

Debt security refers to a debt instrument, such as a government or corporate bond that can be bought or sold between two parties. Publicly-placed debt instruments listed on Pakistan Stock Exchange (PSX) can be offered to the general public as well as institutional investors. Privately-placed debt instruments listed on PSX can only be offered to and transferred in the name of QIBs (Qualified Institutional Buyers). Listed debt securities include Corporate Bonds, Ijara and Government Debt Securities (GDS).

The Government of Pakistan issues debt in order to raise capital to relieve some of the circular debt owed to energy and power producing companies & distributors. The Pakistan Energy Sukuk I and II, under the aegis of Power Holding Limited (a fully owned entity of the Government of Pakistan), was issued to relieve some of the Rs 2.1 trillion* circular debt in the system. The Rs 200 billion Shariah compliant Pakistan Energy Sukuk I (PES I) was listed in October 2019 and the Rs 200 billion PES II in July 2020. Hence, raising capital through debt issuance was deemed the optimal way forward by the Government to curb and curtail the circular debt.

Here we will talk about raising capital through debt issuance through stock market and how advantageous it is for corporate organizations as well as governmental organizations & departments to raise capital in this way, particularly through the book building process. For debt issuance, companies, organizations, and government departments can issue debt on a stand-alone basis or through the stock exchange. For example, a corporate organization like Karachi Electric Limited issued Rs 25 billion KE Sukuk in August 2020 to raise capital for its capital expenditure and operational expenditure needs. Similarly, a corporate organization like BankIslami Pakistan Limited issued Rs 2 billion Ehad Sukuk Certificates to raise Additional Tier 1 (ADT 1) Capital. This Sukuk was listed on Pakistan Stock Exchange in May 2020.

Raising capital through debt issuance is one aspect of the whole story of creating capital through debt. But raising capital through debt issuance on the stock exchange is another aspect of the story having several positives. It means access to greater investors, greater transparency and more efficient price discovery, especially if the issuance is carried out through competitive book building.

A remarkable example of Competitive Book Building Process

Recently, Pakistan Stock Exchange held competitive book building for the issuance of Pakistan Holding Limited’s (PHL’s) Pakistan Energy Sukuk II (PES II) which is a Rs 200 billion Shariah compliant debt instrument with a 10-year maturity period having semi-annual profit payments for investors. The competitive book building process was the first-ever in the history of the Exchange and attracted a large number of investors which otherwise would not have been possible if this were a non-competitive process. This process led to an oversubscription by 70% or by about Rs 139 billion against the targeted amount of Rs 200 billion. Moreover, the book building through Pakistan Stock Exchange’s state of the art book building system led to a competitive price discovery for the debt security. PES II helped raised the targeted Rs 200 billion at less than the 6 month Kibor rate, effectively saving the GoP approximately Rs 1.8 billion annually in terms of the profit payments that will be paid to investors.

The case for debt issuance is further bolstered if investors take more interest in investing in bonds like PIBs which offer higher returns than other asset classes such as Bank Deposits. The Government issued bonds like PIBs and Pakistan Energy Sukuks help the government in raising much needed capital and, in case of PES, relieve some of the outstanding circular debt. In case of corporate organizations, raising capital through issuance of bonds can be for the purpose of meeting working capital needs, expansion or diversification.

Given that these bonds are listed on Pakistan Stock Exchange, it goes without saying that PSX is the ideal platform for debt securities not only from issuance and listing perspective but also from investors’ perspective. However, there is some room for improvement in developing the debt market of Pakistan further. Recently, the Government introduced reform in the National Savings Schemes and hopefully this will be followed by further improvement of the NSS structure to improve the pricing. This will go a long way in channelizing institutional funds towards the debt market of Pakistan, adding to its liquidity and efficiency.

Another milestone achieved to help develop the bond market are the amendments in PSX Regulations governing listing of publicly issued and privately placed debt securities and the market maker regulations as well (Chapter 5B, 5C and 12 of the PSX Rule Book).

Pakistan Stock Exchange can play a significant role in helping advance and develop the bond market further such as through competitive book building, as mentioned earlier. This step will help for a better price discovery, attract greater number of investors, and enhance transparency.

Potential market- PSX Participation in Primary market of GDS

Pakistan Stock Exchange can also act as a facilitator for non-competitive bidders in GDS auction market by collecting bids from them through the Exchange’s broker-members and submit the consolidated average bid to the State Bank of Pakistan for the GDS auction. PSX is also hopeful that BATS will become the premier trading system for bonds which will be commonly used and that GDS will also be active in BATS in the near future.

PSX can also play its role in marketing the bond market and can do so successfully, attracting much interest from investors, local and foreign. By marketing the higher rate of returns on offer by the bond market of Pakistan, Pakistan Stock Exchange can put forward the case of the Pakistani bond market to foreign investors, attracting much needed foreign investment into the country.

All these steps are important for the enhancement and development of the local bond market. It is important that the fixed income market functions smoothly to allow for better matching of saving and investment opportunities, facilitate capital formation for enterprises and critical infrastructure projects, and help governments and private sector issuers reduce reliance on foreign currency borrowing and bank financing.

Source:Daily Business Recorder dated December 17,2020

Investing 101:

Investing in ETFs

If you are someone who is new to investing or has little to no knowledge of the stock market, then you need an investment instrument which is in line with your risk and return objectives. If you don’t have the time to research, understand stocks, identify particular scrips, keep track of dividends or coupons & capital gains, then Exchange Traded Funds (ETFs) are the right instrument of investment for you. At the same time, if you want to save money by not investing in each & every scrip individually or avoid paying higher management fees (as in Mutual Funds), then ETF is indeed the way forward for you. Internationally, ETFs are much in demand because of the inherent ease of investing in these funds. While ETFs may be a cost-effective and attractive investment avenue, investors are advised to get informed about the inherent risks involved in investing in stocks and securities such as ETFs.

Now the question is, what is an Exchange Traded Fund? An ETF is a kind of security that constitutes a collection of securities – such as stocks – which tracks an underlying index. Because ETFs (composed of stocks) constitute a diversified group of stocks, the diversification benefit from investing in these instruments can be enjoyed by investors; however, it is important to mention that ETFs are not devoid of the inherent risk of the market. ETFs can be composed of stocks from different sectors and industries or from a single industry. ETFs may constitute one category of stocks or different ones. ETFs track underlying specific benchmark indices. Hence, ETFs are (generally) passive funds. When someone buys units of an ETF, he/ she is buying shares of a portfolio that tracks the yield and return of its index. The ETFs trade at a price close to their underlying basket price. However, because of demand/ supply forces in the market, there are times when the ETF will trade at a discount or premium to its Net Asset Value (NAV – assets minus liabilities on a per unit basis). The NAV of an ETF is calculated by the ETF fund manager at close of trading day for investors to gauge the underlying value of their holdings. On the other hand, the Indicative NAV (iNAV) is available at different periods of time during trading hours to help investors make the right decision for investing in ETFs

You may feel confused between ETFs and mutual funds because of their similiarities. However, while there are similiarities, ETFs are a different product altogether. Unlike mutual funds, ETFs have the liquidity and trading flexibility of stocks. ETFs can be bought and sold anytime during the trading hours like stocks and shares. On the other hand, mutual funds are purchased or redeemed based on the end of day Net Asset Value. Also, the underlying stocks constituting the ETF are disclosed every trading day whereas in mutual funds they are disclosed monthly by their respective Asset Management Companies (AMCs). In terms of fees and charges, ETFs have lower management fees as compared to mutual funds which have higher management fees and have a sales load/ sales charge as well. However, broker’s commission is charged against ETF trades.

There are many advantages of investing in ETFs. ETFs are easy to invest in. They can be bought and sold on the stock market through a brokerage account. For investing in ETFs, a brokerage account with a PSX TREC holder or brokerage firm needs to be opened. The orders to purchase and sell ETFs can be placed just like in shares’ purchase & sale. Limit orders and stop orders are also possible in ETFs. ETFs provide an easy way to diversify across different sectors, industries or securities and can constitute stocks, commodities, bonds, or other securities. In many markets of the world, there are several types of ETFs on offer which are composed of a combination of securities varying across different asset classes.

ETFs are a popular investment instrument in many countries around the world. More than 50 countries have ETFs listed on their markets. At present, ETFs can boast of Assets Under Management (AUM) of more than $ 7 trillion* globally.

In Pakistan, presently, there are four Exchange Traded Funds listed on the Exchange. These are NIT Pakistan Gateway ETF offered by NIT, UBL Pakistan Enterprise ETF offered by UBL Fund Managers Limited, Meezan Pakistan ETF offered by Al Meezan Investment Management Limited and NBP Pakistan Growth ETF offered by NBP Fund Management Limited. While we have a few ETFs of the conventional type, there is also a Shariah-compliant ETF (Meezan Pakistan ETF) available for those investors who want to invest according to Islamic principles of finance. It is expected that more such instruments will be listed on Pakistan Stock Exchange with the passage of time.

Conclusively, we can say that the ETF is a complete package of an investment instrument addressing your concerns as an investor from all aspects, may it be ease of account opening, transparency with regards to underlying stocks, periodic announcement of iNAV, cost effectiveness, and diversification.

By Raeda Latif – Head of Marketing & Business Development

Pakistan Stock Exchange Limited

Source:Daily Express Tribune dated December 13,2020

General:

PSX Webinar: Raising Capital Through Listing on PSX

Pakistan Stock Exchange continues the trend it has set of holding successful webinars with yet another session taking place recently. The latest webinar’s topic was ‘Raising Capital through Listing on PSX’ and it was carried out on April 30, 2020. The subject of the webinar discussed raising capital through listing on PSX, its advantages and processes. The webinar was the 17th of its series and was conducted through the Zoom platform. It was free to attend for anyone and everyone who wanted to learn about the PSX Listing basics, benefits and processes thereof

The webinar was conducted by PSX General Manager, Marketing & Business Development, Ms. Raeda Latif. She has previously been part of webinar on Covid-19 impact and disaster recovery management, along with the PSX MD. She holds 20 years of experience in the areas of Strategic Marketing, Brand Building, Corporate Communications and Digital Strategy. Ms. Latif has held senior positions at various corporates including Faysal Bank Ltd, UBL Fund Managers, PMEX, IGI Financial Services, Union Bank, Cyber Internet Services and Habib Oil Mills.

The webinar lasted more than an hour and covered a lot of important aspects of listing. Following is the outline of the webinar:

  1. Importance of capital for businesses
  2. Methods to raise capital
  3. Pakistan Stock Exchange – platform to raise capital through listing
  4. Benefits of listing on PSX
  5. Busting the myths regarding listing
  6. Instruments on PSX for raising capital
  7. Stakeholders in the listing process
  8. Q&A

As mentioned above in the outline, the webinar also included a thorough Q&A session. Ms. Latif answered all the queries regarding the topic using her experience and expertise.

About PSX Webinars

PSX Webinars are designed to create investment awareness among potential investors residing in Pakistan as well as overseas Pakistanis. These webinars are created keeping the most commonly asked questions in mind for each investment related area. Team PSX notes the questions they commonly receive on how to choose a brokerage firm to opening an investor’s account, what forms to fill, which avenues to invest in and so on.

The recording of PSX Webinar#17: Raising Capital Through Listing on PSX has been made available on the PSX YouTube channel as well as on the website. The PPT presentation of the same can be acquired by emailing at info@psx.com.pk as well.

How To’s:

How to Select your Brokerage Firm

There are many brokerage firms available in the market to choose from. It is the brokerage firm which helps you open your account and makes it possible for you to invest and transact on Pakistan Stock Exchange (PSX). There are more than 200 brokerage firms active in Pakistan who can help you invest on the Stock Exchange.

But the question arises: how to select the right brokerage firm for yourself amongst the many firms available to choose from? The first and foremost rule is to keep your perspective in sight; what is it that you want from a brokerage firm? You can shortlist a number of firms from the list of stock-brokers/ TREC holders available on PSX website

(https://www.psx.com.pk/psx/resources-and-tools/TREC-Holders)based on your preferences and then select the firm that most suits your needs. The criteria you may use to select your brokerage firm could be based upon:

Ease of communication & understanding of your defined investment objectives.

  • Quality of investment advice.
  • Availability of research for choosing stocks and sectors.
  • Availability of online trading facility.
  • Provision of trade confirmations.
  • Brokerage charges levied.
  • Physical proximity to your work-place or residence.
  • Possibility to courier your account related documents to your address by the brokerage firm.
  • Possibility to pick up your account related documents by the brokerage firm.

These and other value-added functions provided by the firms may be the deciding factors weighing in on your selection of the right firm for yourself. Keep in mind that the nature of your relationship with your stock-broker is of utmost importance as it covers the aspects of trust, understanding, and sensitivity to your investment needs. It involves money matters, so the basic element of trust and understanding is of undeniable significance.

You may want to explore the websites of your shortlisted firms to help you make a decision, apart from, ofcourse, the necessity to talk to the stock-brokers personally. See if they provide any brochures or other literature to help you gain a better understanding of the work ethic and operational style of the stock-broker. Read through the list of the brokerage firms and their branches and see which is more suitable to you in terms of accessibility and proximity to your residence or place of work. The list of these companies and their branches is available on the PSX website

(https://www.psx.com.pk/psx/themes/psx/uploads/Download-list-of-branches-of-brokerage-firms-09.04.2019.pdf)

Another criterion that can help you select your brokerage firm is the Credit Rating that they hold from Rating Agencies such as JCR-VIS and PACRA. The list of companies and their rating is available on the PSX website for your reference

It is also important to see whether the brokerage firms are clear of any regulatory issues or suspension notices issued against them based on any operational oversights or offences on their part in the past or present. The status of these firms can be checked by the available list of brokerage firms as mentioned earlier*. Furthermore, their past activity with regard to investors can be gauged by any Investors Complaints lodged against them. This information is available on the PSX website

How To’s:

How to open an Investor Account with a Brokerage House

You may be well aware that a brokerage account is required in order to invest in the stock market. A brokerage account allows you to invest in the stock market. A brokerage account is opened with your selected stock-broker. Your stock-broker is the ‘middleman’ that connects you to the stock exchange and provides you access to investing and transacting on the Stock Exchange.

You can select your stock-broker by first shortlisting some brokerage firms, available on PSX website, based on your individual preferences and requirements. After shortlisting, you can select your brokerage firm depending on:

Ease of communication & understanding of your defined investment objectives.

  • Quality of investment advice.
  • Availability of research material.
  • Availability of online trading facility.
  • Provision of trade confirmations.
  • Brokerage charges levied.
  • Physical proximity to your work-place or residence.

Once you select your stock-broker, you will have to fill out a Standardised Account Opening Form (SAOF) for your Brokerage Account. This will also enable your CDC Sub-Account. The CDC Sub-Account is an account where your shares are placed for transaction purpose. When you buy shares, the account is credited by the same and when you sell shares, the opposite takes place. A brokerage firm may have many sub-accounts whereas its main account or participant account may only be one. As an investor, you can check the veracity of the account opening form (and its terms & conditions) provided by your brokerage firm by comparing it with the available SAOF on the PSX website

Published in Dawn, The Business and Finance Weekly, April 12th, 2021

What is CDC: CDC stands for Central Depository Company (Limited) which is the depository of shares. It is that part of the stock exchange eco-system which allows for the exchange of shares to take place through it when a trade is executed in the stock market.

If you wish to authorise someone else to operate your account, then you need to provide a letter of authorisation or power of attorney for that person to be able to operate your account.You are also well advised to open a CDC Investor Account with the CDC. A CDC Investor account provides for safe-keeping of your shares in your custody. (http://cdcpakistan.com/businesses/investor-account-services/)

After filling out your Account Opening Form and signing the same, you will be required to deposit a minimum amount to start investing in the stock market. Make sure that the same is deposited through cheque. You are also advised to keep yourself informed about the taxes and charges levied by the Stock Exchange, Central Depository Company Limited, National Clearing Company of Pakistan Limited, Securities & Exchange Commission of Pakistan, and the Federal Board of Revenue against the transactions you will carry out at the Stock Exchange.

Once you open your account and deposit your initial payment, you can invest in the stock market. Make sure that you get your Trade Confirmations from your stock-broker against your buy and sell order instructions. You are also entitled to receive your account ledgers and statements against your account activity from your stock-broker periodically.

These are the basic steps that you would require in order to open an account to start investing on PSX. We at Pakistan Stock Exchange wish you happy and prosperous investments!

How To’s:

How the Stock Market Works

The stock market is a place where companies list themselves to make their shares available to a broad range of investors to purchase these shares. You, as an investor, have the option to choose from multiple stocks of different companies to buy in order to build your investment portfolio. The share prices of the shares listed on the Stock Exchange fluctuate according to the buy & sell transactions taking place.

WHAT CAN THE STOCK MARKET DO FOR YOU

By purchasing shares of the selected companies, you build your portfolio of stock investments.

This portfolio is formed and selected on the basis of:

  • Company.
  • Sector.
  • Returns you are expecting.
  • Risk capacity. (How much can you invest in spite of market volatility?)
  • Risk tolerance. (How much market downturn and volatility can you sustain?)
  • Payouts (dividends or bonus shares).
  • Any other considerations you may have according to your stock investment preferences. By purchasing the shares of a company, you become a shareholder of that company and are entitled to dividends and other payouts such as bonus or right shares issued by the said company, along with the advantage you can have of capital gain from increase in price of the shares.

If you have decided to invest in the Stock Market, then it is a decision well worth taking. Consider this that Pakistan Stock Exchange has performed better over the last several years, above and beyond other investment vehicles available in the country. Returns earned from the Stock Exchange as compared to other asset classes over the last ten years, Jan 2009 to Dec 2018,

is illustrated below:

KSE 100 Index stocks provided compounded annual returns of 15.13%* over the last 15 years Dec 2003 to Dec 2018. These figures compare fairly well with other avenues of investment in Pakistan. Given the fact that the Pakistan Stock Exchange has given good returns historically, it is safe to say that investment in stocks in Pakistan Stock Exchange may well be worthwhile for the long run.

WHERE TO INVEST

It is always a good idea to invest your money where you get competitive returns. The stock market is one such avenue where there is good upside potential, historically, and where the returns have been higher than those from other investment avenues. Investing for the long term is a better option than investing for the short term in the stock market. It will not only allow you to compound your earnings but will also enable you to earn dividends which can be re-invested in the market, thereby increasing your earnings. So you must focus on It is always a good idea to invest your compounding your earnings, reinvesting your dividends and achieving capital gain.

How To’s:

How & Where Should You Invest

One of the biggest question marks for an investor with some money to spare is where and how should he invest. An investor can invest in different types of asset classes. The age-old adage of “don’t put all your eggs in one basket” comes to mind here. If we graduate this a bit further, it means that as an investor you must invest in different asset classes and diversify your portfolio of investment. You need to decide what proportion of which asset class you would like to keep in your portfolio. This is what will constitute your target asset allocation. Another aspect of asset allocation is to rebalance your assets in your portfolio as with the passage of time one particular asset class can accrue greater value than another; therefore, in order to bring it in line with the original asset allocation target, you may want to sell some of the higher valued asset to rebalance the weightings of the assets in your portfolio of investment.

We will now discuss how to allocate assets in your portfolio; how much of which asset to invest in. A certain percentage of your portfolio may consist of stocks, while another may have bonds; yet, another part may consist of real estate investments. You have to decide based on your financial situation, risk tolerance threshold, holding power, and how much of each asset class you would like to have in your portfolio. For example, stocks may constitute 70%, bonds may make 20% of your portfolio, and real estate investments may make up 10% of your portfolio.

Decades ago, there was the ‘Rule of 100’ which helped determine the ideal asset allocation in stocks, while the remaining investment was to be done in bonds. For example, if you were 40 years old, then, as per Rule of 100, you were to subtract 40 from 100, the resulting number 60 would indicate an investment of 60% in stocks while the remaining balance would indicate 40% investment be done in bonds. But with the returns in bonds being static or smaller and with people living longer in present day & age, it was found that the Rule of 100 was too conservative for most investors. Hence, many financial advisors now recommend that investors subtract their age from 110 to 120 to determine a suitable stocks-bonds asset allocation.

But the Rule of 100 might not be an all-encompassing rule. It does not factor in other asset classes such as real estate, mutual funds or ETFs etc. At the same time, it might not be the best way forward for you because if your risk tolerance level is low, then you might want to invest more in bonds than in stocks. However, if you have a normal or above average risk tolerance level, then you might want to invest as per the latter-day Rule of 100 to determine the stocks-bonds asset allocation for your portfolio. This will allow for a suitable investment vehicle for you as well as provide well for you by the time you retire.

Another aspect of discussion on asset allocation is diversification. Diversification can be done in many ways such as by Market Capitalisation, Dividend Yield or Yield (Bonds) etc. Market Capitalisation is the total number of shares of a company multiplied by the share price. The larger the Market Capitalisation, the bigger the company. Dividend Yield is the annual dividend per share divided by the stock’s price per

share. The higher the Dividend Yield, the greater the payout given by a company. Yield is the annual return on a bond or debt instrument at that point in time. The higher the Yield, the greater the return from that debt instrument or bond. Based on your financial position, risk tolerance level, and holding power, you may decide on which stocks or bonds to invest in. If your risk tolerance level is low, you may want to invest in large cap companies, stocks with high dividend yield or bonds with high yields for a given period of time. If your holding power is also low, then you may want to invest in bonds with high yields and stocks with sufficient dividend yields to suit your financial situation and needs. It is these considerations which will help you decide the asset allocation of your suitability.

Apart from diversification, an aspect of asset allocation is maintenance of your target asset allocation through rebalancing of your portfolio. Suppose you have invested in stocks and bonds with a weightage of 60% stocks and 40% bonds over a period of ten years. It is possible that the stocks grow faster than the bonds over said time duration. In such a case, you may want to offload or sell some stocks and invest that money in bonds to rebalance your assets to the original proportion of your asset allocation (60%-40%).

On the other hand, if you want to reconfigure your asset allocation such that you now want to have different proportions of assets in your portfolio, then you may want to dispose-off more of the bonds or other asset classes and concentrate more on stocks or any other asset class. Basically it’s your call, your financial situation, your risk tolerance level and your holding power that should dictate the asset allocation at your desired levels.

These prime considerations of diversification and rebalancing based on your desired configuration of asset allocation will determine your satisfaction in terms of returns earned and risk profile maintained in keeping with your financial situation, risk/ return objectives, and holding power.

How To’s:

Getting Listed at PSX

In the course of your company’s growth continuum, you may be faced with situations whereby you need to decide to scale, expand or diversify. It only makes business sense to scale or diversify to increase the profitability of your company by making its products popular amongst the general public. What could be better than to do the same while increasing your company’s visibility & market image amongst the general public, investors, corporate analysts, and market stakeholders

The way to do this is through listing. By listing your company on the Pakistan Stock Exchange (PSX), you are not only raising capital for your company in order to expand, scale, or diversify your product range, but you are also creating a positive image of your company. This positive image is one which commands respect and admiration amongst the stakeholders of the Capital Market, the investors (local and foreign), and the general public.

By listing your company on the stock market, you are raising capital without having to go the route of taking a bank loan or raising private equity. Paying for a bank loan can be quite costly and getting private equity means diluting your shareholding in your company. Therefore, raising capital by floating 12.5% shares of your company in an Initial Public Offering and (at least) 25% shares in the subsequent four years to the end investor will bring in necessary funds for your company. You can then go the way of scaling, expanding, or diversifying your company and its product range.

Listing has many advantages for your company, not just the basic advantage of raising capital. Through listing, your company attracts the attention of investors, local as well as foreign. By listing on Pakistan Stock Exchange, you get a chance to be included in the top companies such as the KSE 100 Index. This will bring about exposure of your company to local and foreign investors who will take interest in your company’s growth story and will want to be a part of it through shareholding.

By way of listing, your company also gets its books organised and transparent, thus making your company’s financial activities and operations more streamlined and lawful. This will also help your company in organising or laying the roadmap for succession of leadership for the next generation. Whereas before listing it may just be a family concern managed by the head of the family, with no clear pathway laid out for successful transfer of leadership powers to the next generation.

To sum it up, listing is a long term, low cost solution to raising capital where there is no time bound or financing-cost limitations to the funds raised while propagating a positive and transparent brand image of your company. It is the right way forward for your company to grow, expand and diversify.