Pakistan offers an array of investment opportunities for businesses and individuals. Despite its volatile economic and political instabilities, the stock market and mutual funds stood the test of time over the years. Mutual funds are one of the most popular investment options as they offer steady returns with a diversified risk profile. Let's learn more about the different types of mutual funds in Pakistan

In a Nutshell

• Understanding Mutual Funds
• Types of Mutual Funds in Pakistan
• Role of Asset Management Companies
• Benefits of Investing in Mutual Funds in Pakistan
• Risks and Challenges Associated with Mutual Funds
• Mutual Funds Regulation in Pakistan
• How to Choose the Right Mutual Fund
• How to Invest in Mutual Fund
• FAQS

Mutual Funds in Pakistan: An Overview

“What is a mutual fund?” this is the first question that most people have when they come across the term for the first time. Simply put, a mutual fund is an investment where a group of people pool their money together to invest in a portfolio. The portfolio is highly diversified to reduce risk and it contains an array of financial instruments such as stocks, bonds, and other securities.

One of the most significant benefits of investing in mutual funds in Pakistan is that these funds are managed by experienced and highly trained fund managers with an aim to grow your investments in future. These professional fund managers make a decision about where to invest their capital after due diligence on tradable assets with the sole aim to increase the fund’s value over time.

When it comes to the benefits of a mutual fund investment in Pakistan, diversification tops the list. Other benefits of a mutual fund investment include affordability, professional management, and liquidity.

Types of Mutual Funds in Pakistan

In Pakistan, there are three main types of mutual funds:

• Open-ended funds
• Closed-ended funds
• Shariah-compliant funds

Open-Ended Funds

Open-ended funds are the most common type of mutual fund. They allow investors to buy and sell shares directly through the fund at any time. The value of these shares is based on the fund's net asset value (NAV), which is calculated daily. These funds are not traded on the stock market on a daily basis.

The main advantage of open-ended funds is their flexibility. It's easy for an investor to deposit or withdraw capital whenever required. There is no limit on the number of shares that can be issued for an open-end fund.

More shares are issued when an investor purchases more funds, these shares are referred to as “Unit Trusts”. One drawback of open-end funds is that they may sometimes incur higher fees compared with other types of funds.

Closed-Ended Funds

Alternative to the open-end mutual funds in Pakistan is the closed-end funds. These funds issue a fixed number of shares during an initial public offering (IPO). After that, investors can buy and sell these shares on a stock exchange, just like regular stocks.

Their price depends on market demand and supply, so it can be higher or lower than the fund's NAV. Closed-end funds offer a more stable investment strategy and may have lower fees, but they can be less liquid than open-end funds, making it harder to buy or sell shares quickly.

Shariah-Compliant Funds in Pakistan

For investors who want to adhere to Islamic principles in their investments, Shariah-compliant funds are an excellent option. These funds follow the guidelines of Islamic finance, avoiding investments in industries like alcohol, gambling, and interest-based conventional banking.

They also avoid earning interest (riba) and engage in ethical practices like profit-sharing and risk-sharing. By choosing a Shariah-compliant fund, you can invest in a diverse range of assets while staying true to your religious beliefs.

Mutual funds offer a good opportunity to start saving for the future

The Role of Asset Management Companies (AMCs)

Asset Management Companies (AMCs) in Pakistan play a pivotal role in the growth and development of the mutual fund market. They act as intermediaries between investors and the financial market, managing investments on behalf of their clients.

These companies offer diverse investment options with professional management to ensure compliance with guidelines issued by regulatory authorities. Here’s a rundown of the various roles of AMCs in the mutual funds market.

Creating and Managing Mutual Funds

AMCs create and manage multiple mutual fund schemes tailored to meet diverse investment requirements and risk appetites of investors. Asset Management Companies pool investments from multiple sources and allocate funds across various asset classes such as bonds, stocks, and other tradable assets.

Compliance and Regulatory Oversight

AMCs in Pakistan are regulated by the Securities and Exchange Commission of Pakistan (SECP). They must adhere to strict guidelines and regulations to ensure transparency, accountability, and the protection of investors' interests. AMCs are responsible for maintaining proper records, conducting regular audits, and submitting necessary reports to the regulatory authorities.

Educating Potential Investors

AMCs play a vital role in promoting investor education and awareness about mutual funds in Pakistan. They conduct seminars, workshops, and various marketing campaigns to help investors understand the benefits, risks, and potential returns associated with mutual fund investments.

Customer Service and Support

Lastly, AMCs provide essential customer service and support to their clients, addressing any queries or concerns related to their mutual fund investments. They assist investors in choosing the right mutual fund schemes, understanding the performance of their assets, and making any changes to their investment portfolios as needed.

Benefits of Investing in Mutual Funds

There are several advantages of investing in mutual funds. It's one of the surefire ways of generating passive income in Pakistan Apart from offering diversification, they are relatively less volatile as compared to investing in stocks. Here are some of the merits of mutual funds.

Diversification and Risk Management

Diversification involves spreading investments across various asset classes, such as stocks, bonds, and money market instruments. This strategy helps in reducing the overall risk factor and volatility of an investment portfolio, as the performance of different assets often has a low correlation.

Professional fund managers assess and manage risks associated with different securities in the portfolio. They employ various techniques, such as asset allocation, sector rotation, and security selection, to minimize the impact of market fluctuations and potential losses.

By investing in a diversified mutual fund, Pakistani investors can mitigate risks associated with individual securities and market sectors. This approach enables them to achieve more stable returns and protect their investments from the adverse effects of market volatility.

Professional Management

To keep your investment safe, AMCs employ experienced fund managers who have in-depth knowledge of the financial markets. These professionals analyze market trends, research potential investment opportunities, and make informed decisions to maximize returns while minimizing risks for the investors.

Liquidity and Easy to Invest

Liquidity is the quality of a tradable asset based on how quickly can you buy or sell an asset without causing a significant impact on its price. Mutual funds offer high liquidity, as they can be easily bought and sold at their net asset value (NAV) on any business day. This feature allows investors to access their funds promptly when needed, providing financial flexibility.

It's easy to invest in a mutual fund in Pakistan. Start with a small initial investment and add more through systematic investment plans (SIPs) or lump-sum contributions. The process of investing and redeeming mutual fund units is straightforward, often facilitated through online platforms and requires minimal paperwork.

The combination of liquidity and ease of investment makes mutual funds an appealing choice for both novice and experienced investors, enabling them to build and manage their investment portfolios with minimal hassle.

Mutual funds are professionally managed to give your a diversified portfolio

Challenges and Risks Associated with Mutual Funds

If you have plans to invest in a mutual fund in Pakistan, there are some challenges and critical risks that you need to be aware of. The perception of risk and return plays a significant role in investors’ behaviour towards mutual fund investments. We’ve briefly discussed some of the risks for the mutual fund market.

Market Risks and Fluctuations

One of the most significant challenges includes market risk and fluctuations. Mutual funds are subject to fluctuations in the financial markets, which can impact the performance of the fund. The Pakistani stock market has high volatility, which makes it challenging for investors to predict returns and manage risks effectively.

Liquidity Risk

If you are unable to sell your mutual fund units quickly at a fair price due to the lack of demand on the market, then you incur a liquidity risk. Companies that invest in less liquid assets or smaller companies may face higher liquidity risk. But, most mutual funds in Pakistan offer daily liquidity and most are invested in blue-chip stocks and large-cap companies which significantly reduces this type of risk.

Credit Risk

Another significant mutual fund risk is credit risk. It arises when the company or the bong issuer where the mutual fund has invested fails to meet its financial obligations and defaults on principal or interest payments. As a result, the mutual funds' value takes a nosedive which resultantly impacts its returns.

Interest Rate Risk

Fluctuations in the interest rate specifically within a short span can inversely affect mutual funds performance. This risk is particularly associated with fixed-income investments held by a fund. Higher interest rates reduce the prices of bonds and other fixed-income securities fall and reduce the value of the fund’s portfolio. Managerial performance

Regulation and Oversight in Pakistan

In Pakistan, the mutual fund industry is regulated and overseen by various government and industry bodies to ensure the protection of investors' interests and maintain a stable and transparent financial market.

The primary regulatory body responsible for the supervision and development of the mutual fund industry is the Securities and Exchange Commission of Pakistan (SECP). Additionally, the Mutual Funds Association of Pakistan (MUFAP) plays a crucial role in promoting best practices and ethical standards within the industry.

Securities and Exchange Commission of Pakistan (SECP)

The SECP is the apex regulatory authority responsible for the supervision and regulation of the capital markets, corporate sector, and non-banking financial institutions in Pakistan. The SECP's primary objectives include protecting investors, ensuring fair and efficient markets, and promoting transparency and good governance within the financial sector. In the context of mutual funds, the SECP is responsible for:

• Licensing and registration of Asset Management Companies (AMCs) and other market intermediaries
• Formulating and enforcing regulations, including the Non-Banking Finance Companies (NBFC) Rules and Regulations, and the Voluntary Pension System Rules
• Monitoring the activities of AMCs, mutual funds, and other market participants to ensure compliance with applicable laws and regulations
• Investigating and taking enforcement actions against market participants for any violations or misconduct

Mutual Funds Association of Pakistan (MUFAP)

MUFAP is a self-regulatory organization representing the mutual fund industry in Pakistan. Its primary objectives are to promote the growth and development of the mutual fund industry, protect the interests of investors, and advocate for the adoption of best practices and ethical standards by its members. MUFAP's key functions include:

• Representing the interests of its members and the mutual fund industry in discussions with regulatory authorities and other stakeholders
• Developing and promoting industry standards, guidelines, and codes of conduct for its members
• Providing training and educational programs to enhance the professional skills and knowledge of industry participants
• Facilitating the exchange of information and collaboration among its members to foster a competitive and transparent mutual fund market

Compliance and Transparency Requirements

Mutual funds in Pakistan are subject to strict compliance and transparency requirements to ensure the protection of investors and the integrity of the financial market. Some of the key compliance and transparency requirements include:

Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements

Mutual funds and their asset management companies must comply with AML and KYC regulations to prevent money laundering, terrorist financing, and other illegal activities.

Regular Reporting and Disclosure

Mutual funds are required to provide periodic financial statements, fund fact sheets, and other relevant information to the SECP and their investors. This includes the disclosure of the fund's investment objectives, portfolio holdings, fees, and performance data.

Compliance with Investment Restrictions and Guidelines

Mutual funds must adhere to specific investment restrictions and guidelines as prescribed by the SECP, such as limits on exposure to a single issuer, sector, or asset class.

Appointment of a Trustee

Each mutual fund is required to appoint an independent trustee to safeguard the interests of investors and ensure compliance with applicable laws and regulations.

How to Choose the Right Mutual Fund

Selecting the right mutual fund can be a critical step towards achieving your financial goals. To choose the best mutual fund that aligns with your investment objectives and risk tolerance, consider the following factors:

Setting clear investment goals and risk tolerance

Before you start researching mutual funds, it's essential to define your investment goals and understand your risk tolerance. Consider factors such as your investment horizon, financial objectives, and your ability to withstand market fluctuations. Having a clear understanding of your goals and risk tolerance will help you narrow down the types of mutual funds that are most suitable for your needs.

Analysing Fund Performance and Ratings

While past performance is not a guarantee of future results, analyzing a mutual fund's historical performance can provide insights into its consistency and potential for returns. Compare the fund's performance against relevant benchmarks and its peers to gauge its relative performance. Additionally, consider independent ratings from agencies like Morningstar, which evaluate mutual funds based on factors such as performance, risk-adjusted returns, and management quality.

Comparing Expense Ratios and Fees

Mutual funds charge fees and expenses to cover the costs of managing the fund, including management fees, administrative expenses, and marketing costs. The expense ratio is a key metric that represents the annual percentage of the fund's assets paid for these costs. A higher expense ratio can significantly impact your returns over time. Therefore, it's crucial to compare expense ratios and other fees among similar funds to ensure you're not paying excessive costs.

Assessing Fund Manager Experience and Expertise

The expertise and experience of the fund manager play a significant role in the performance of a mutual fund. Research the fund manager's track record, including their tenure, past performance, and investment philosophy. Look for fund managers with a consistent and disciplined approach to investing, as well as a proven ability to navigate different market conditions.

Evaluating Investment Strategies and Portfolio Composition

Understanding a mutual fund's investment strategy and portfolio composition is essential to ensure it aligns with your investment goals and risk tolerance. Analyze the fund's investment approach, asset allocation, sector exposure, and the types of securities it invests in. Consider factors such as the fund's focus on growth or value investing, its approach to risk management, and its diversification across different asset classes and sectors.

How to Invest in Mutual Funds in Pakistan

To choose the best mutual funds in Pakistan that align with your investment objectives and risk tolerance, consider the following factors.

Step 1: Set Clear Investment Goals and Risk Tolerance

Before you start investing in mutual funds, the first step is to define your investment goals and understand your risk tolerance. Some of the things to consider include your investment horizon, financial objectives, ability to understand market risk, risk tolerance and defining your financial goals for the future. To find out how much you need to invest for future gains, use the Return on Investment or ROI calculator to determine the future value of your capital.

Step 2: Analyse Fund Performance and Ratings

While past performance is not a guarantee of future results, analyzing a mutual fund's historical performance can provide insights into its consistency and potential for returns. Compare the fund's performance against relevant benchmarks and its peers to gauge its relative performance. Additionally, consider independent ratings from Mutual Funds Association in Pakistan (MUAP) to help you evaluate mutual funds based on factors such as performance, risk-adjusted returns, and management quality.

Furthermore, having a clear understanding of your goals and risk tolerance will help you narrow down the types of mutual funds that tick all the boxes for you. To help you find the right fund, your take a look at the overall fund performance in Pakistan over the years and choose the one that offers the highest return on your investment.

Step 3: Comparing Expense Ratios and Fees

Mutual funds charge fees and expenses to cover the costs of managing the fund, including management fees, administrative expenses, and marketing costs. The expense ratio is a key metric that represents the annual percentage of the fund's assets paid for these costs. A higher expense ratio can significantly impact your returns over time. Therefore, it's crucial to compare expense ratios and other fees among similar funds to ensure you're not paying excessive costs.

Step 4: Assessing Fund Manager Experience and Expertise

The expertise and experience of the fund manager play a significant role in the performance of a mutual fund. Research the fund manager's track record, including their tenure, past performance, and investment philosophy. Look for fund managers with a consistent and disciplined approach to investing, as well as a proven ability to navigate different market conditions.

Step 5: Evaluating Investment Strategies and Portfolio Composition

Understanding a mutual fund's investment strategy and portfolio composition is essential to ensure it aligns with your investment goals and risk tolerance. Analyze the fund's investment approach, asset allocation, sector exposure, and the types of securities it invests in. Consider factors such as the fund's focus on growth or value investing, its approach to risk management, and its diversification across different asset classes and sectors.

Top Mutual Funds in Pakistan

Once you have assessed your financial goals and investment strategies you can start your research and shortlist potential funds. The MUAP currently lists several Asset Management Companies that offer a wide range of mutual funds, these companies are:

• NBP Fund Management Limited (Formerly: NBP Fullerton Asset Management Limited)
• UBL Fund Managers Limited
• AKD Investment Management Limited
• AWT Investments Limited (Formerly: Primus Investment Management Limited)
• Lakson Investments Limited
• Al Meezan Investment Management Limited
• HBL Asset Management Limited
• Faysal Asset Management Limited
• ABL Asset Management Company Limited
• Alfalah GHP Investment Management Limited
• JS Investments Limited
• MCB-Arif Habib Savings and Investments Limited
• Atlas Asset Management Limited
• National Investment Trust Limited
• Al Habib Asset Management Limited
• Pak Oman Asset Management Company Limited
• BMA Asset Management Company Limited
• 786 Investments Limited (Formerly: Dawood Capital Management Limited)
• First Capital Investments Limited

The aforementioned AMCs offer a wide range of mutual fund categories including Shariah-compliant ones. The market leader for Shariat-complaint mutual funds is Al Meezan Investment Management Limited.

On the other hand, AKD, NBP Fund Management Limited, National Investment Trust Limited, Lackson Investments and MCB Arif Habib Savings and Investments Limited are the leading AMCs in the country that offer various types of funds. Use Sarmaaya.pk’s mutual fund comparison tool to find out which one is better suited to your personal requirements.

You can open an account with any of the mentioned companies depending on your investment goals and risk appetite. Make sure to complete all the paperwork associated with mutual funds. Once you’ve invested remember to periodically review and adjust your investments as your financial goals and market conditions evolve.

Frequently Asked Questions

What are the top-performing mutual funds in Pakistan?

There are several mutual funds in Pakistan with varying performances. The performance of each mutual fund is dependent on multiple factors and the ranking fluctuates daily due to the NAV of that particular day. But if you’re after an overview of the most popular ones, then AKD, MCB-Arif Habib Savings and Al Meezan Investment Management Limited are popular among investors.

Which mutual fund offers exposure to the US stock market in Pakistan?

The Lakson Asset Allocation Developed Markets Funds offer a chance for Pakistani citizens to get invest in foreign stocks abroad. For further details please visit the official website of Lakson Investments official website.

What are some of the most popular mutual fund categories in Pakistan?

Money market funds, equity-based funds, pension funds, and gold-based funds are some of the most popular mutual funds in Pakistan.

The Bottomline

This concludes our comprehensive guide to mutual funds in Pakistan. Mutual funds are a good option for those who require a safe investment and do not have sufficient knowledge about the stock market or the overall financial markets.

It is less volatile as compared to stock market investment. While it's not essential to have prior knowledge of the market for mutual fund investment in Pakistan but comprehensive knowledge about Capital Markets Fundamentals can go a long way in helping you pick the right mutual fund.

Professional training in Capital Markets will give you the upper hand in understanding the various factors that could determine the NAV and future value of your fund. But besides broadening your perspective about various funds, the training will go a long way in helping you move towards investing in the Pakistan Stock Market for higher returns.