MUTUAL FUNDS

Assignment
“MUTUAL FUNDS”

INTERNATIONAL ISLAMIC UNIVERSITY ISLAMABAD

(Graduate school of management sciences)

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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................4
HISTORY OF MUTUAL FUNDS IN PAKISTAN:................................................................4
THE DOMESTIC SCENE.............................................................................................4
KEY PLAYERS..............................................................................................................6
MUTUAL FUND INDUSTRY IN PAKISTAN......................................................................7
CATEGORIES OF MUTUAL FUNDS................................................................................8
OPEN-END FUNDS....................................................................................................8
CLOSED-END FUNDS ..............................................................................................8
Net Asset Value (NAV)..........................................................................................8
Public Offering Price (POP) ..................................................................................9
OVERVIEW OF EXISTING SCHEMES EXISTED IN MUTUAL FUND CATEGORY: BY
NATURE...................................................................................................................... 9
1. Equity fund: ........................................................................................................ 9
2. Debt funds:..........................................................................................................9
3. Balanced funds:.................................................................................................10
TYPES OF RETURNS.................................................................................................. 10
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.....................................................10
QUALIFICATION FOR A DISTRIBUTION....................................................................11
TAX PAYMENT........................................................................................................11
MUTUAL FUND FAMILY..............................................................................................11
SHARE CLASSES ................................................................................................... 11
DUAL-PURPOSE FUND ...........................................................................................12
PRO’S OF INVESTING IN MUTUAL FUNDS:.................................................................12
CON’S OF INVESTING IN MUTUAL FUNDS..................................................................14
REGULATIONS...........................................................................................................15
THE ACTS AND REGULATIONS OF MUTUAL FUNDS................................................16
RESEARCHING THE RULES AND REGULATIONS OF MUTUAL FUNDS......................16
MUTUAL FUND REGULATION..................................................................................16
VARIETY OF MUTUAL FUNDS.....................................................................................17
MONEY MARKET FUND ..........................................................................................17
INCOME FUNDS......................................................................................................18

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INCOME AND GROWTH FUNDS .............................................................................19

GROWTH AND INCOME FUNDS .............................................................................19
BALANCED FUNDS ................................................................................................19
GROWTH FUNDS ...................................................................................................19
INDEX FUNDS .......................................................................................................19
SECTOR FUNDS .................................................................................................... 20
SPECIALIZED FUNDS .............................................................................................20
ISLAMIC FUNDS .....................................................................................................21
MUTUAL FUND COMPANIES.......................................................................................21
REFERENCES:............................................................................................................22

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INTRODUCTION

M
utual funds have been around for a long time, dating back to the early 19th
century. It was only in the 1990's that mutual funds became mainstream
investments, as the number of households owning them nearly tripled during
that decade. With recent surveys showing that over 88% of all investors participates in mutual
funds.
A mutual fund is a special type of company that pools together money from many investors
and invests it on behalf of the group, in accordance with a stated set of objectives. Mutual
funds raise the money by selling shares of the fund to the public; much like any other company
can sell stock in itself to the public. Funds then take the money they receive from the sale of their
shares (along with any money made from previous investments) and use it to purchase various
investment vehicles, such as stocks, bonds and money market instruments. In return for the
money they give to the fund when purchasing shares, shareholders receive an equity position in
the fund and, in effect, in each of its underlying securities. For most mutual funds, shareholders
are free to sell their shares at any time, although the price of a share in a mutual fund will
fluctuate daily, depending upon the performance of the securities held by the fund.

HISTORY OF MUTUAL FUNDS IN PAKISTAN:

THE DOMESTIC SCENE

In Pakistan and the rest of the developed/developing world, investment in equity funds represents
the largest category of mutual funds. This is largely because extraordinary gains can be made off
these investments. These funds however constitute a significantly high risk which is highlighted
considerably by the media and therefore are popular only amongst risk takers. On the other hand
for risk-averse investors, the popular choice in Pakistan are cash funds, a term used generally to
denote fixed income/money market funds in Pakistan, as very low risk investments.

In Pakistan Mutual Funds were introduced in 1962, when the public offering of National
Investment (Unit) Trust (NIT) was introduced which is an open-end mutual fund. In 1966
another fund that is Investment Corporation of Pakistan (ICP) was establishment. ICP
subsequently offered a series of closed-end mutual funds. Up to early 1990s, twenty six (26)
closed-end ICP mutual funds had been floated by Investment Corporation of Pakistan. After
considering the option of restructuring the corporation, government decided to wind up ICP in
June, 2000. In 2002, the Government started Privatization of the Investment Corporation of
Pakistan. 25 Out of 26 closed-end funds of ICP were split into two lots. There had been a
competitive bidding for the privatization of funds. Management Right of Lot-A comprising 12
funds was acquired by ABAMCO Limited. Out of these 12, the first 9 funds were merged into a
single closed-end fund and that was named as ABAMCO Capital Fund, except 4th ICP mutual

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fund as the certificate holders of the 4th ICP fund had not approved the scheme of arrangement
of Amalgamation into ABAMCO capital fund in their extra ordinary general meeting held on
December 20, 2003. The fund has therefore been reorganized as a separate closed-end trust and
named as ABAMCO Growth Fund. Rest of the three funds were merged into another single and
named as ABAMCO Stock Market Fund. So far as the Lot-B is concerned, it comprised of 13
ICP funds, for all of these thirteen funds, the Management Right was acquired by PICIC Asset
Management Company Limited. All of these thirteen funds were merged into a single closed-end
fund which was named as “PICIC Investment Fund”. Later on the 26th fund of ICP (ICP-SEMF)
was also acquired by PICIC Asset Management Company Limited.

Initially there was both public and private sector participation in the management of these funds,
but with the nationalization in the seventies, the government role become more dominant. Later,
the government also allowed the private sector to establish mutual funds. Currently there exist
Thirty-three funds by the end of Financial Year 2005.
[

Twelve open-ended mutual funds are:

• Public sector, 01;

• Private sector, 11;

[

Twenty-one close-end mutual funds in Pakistan are:

• Public sector, 0;

• Private sector, 21

This growth is strongly reflected in the returns of the economy’s capital markets that are
additionally supported by the dynamic economic and investment policies executed by the
Government of Pakistan. These proactive policies have boosted the investor sentiment both
internally and externally, as the economy witnessed increased local and international interest in
its assets as well as in its capital markets. Today the Pakistani capital markets are one of the best
performing markets among the emerging countries around the globe and are expected to continue
their growth momentum in the near future.

Within the developing capital markets, a relatively new industry that has come under the
limelight is the mutual funds industry. Though the origin of this industry dates back to the 60’s,
the private Asset Management industry is relatively new in Pakistan. The first open-end mutual
fund was introduced in 1962 with the public offering of National Investment (Unit) Trust. This
was followed by the establishment of the Investment Corporation of Pakistan in 1966, which
subsequently offered a series of closed-end mutual funds.

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Despite tremendous interest in mutual funds worldwide, mutual funds did not manage to catch
the fancy of Pakistani investors until recently. The investments with the Mutual Funds stand at
approximately PKR 176 billion, less than 6% of the total deposits of the domestic banks that as
of Feb 2007 are recorded at PKR 3.034 trillion. Though this reflects a significant increase from
the previous ratios, it is rather a small number when compared to the neighboring economy of
India. In India investments in mutual funds stand at 15% of the banking sector deposits while in
the United States the mutual funds have 150% more deposits than banks. This essentially means
that the mutual funds industry of Pakistan has a huge growth potential

KEY PLAYERS

At present a number of closed-end as well as open-end mutual funds are operating in Pakistan.
Among the oldest are NIT and the various funds managed by Investment Corporation of Pakistan
(ICP). The largest number of listed mutual funds, twenty six, are managed by the ICP. There are
11 closed-end mutual funds operating in private sector. Whereas NIT and ICP operates in public
sector. The GoP intends to privatize both the entities. The total paid-up capital of 37 mutual
funds listed at Karachi Stock Exchange is over Rs 4,751 million. However, a number of these are
being quoted below face value.

According to some sector analysts the number of mutual funds, their paid-up capital and number
of investors in mutual funds is too small. They attribute this to a number of factors, worst being
the GoP policies. NIT in Pakistan and UTP in India were established around the same time.
While the value of portfolio of UTP India exceeds US$ 44 million the portfolio of NIT is too
small compared to that of its Indian counter part. The same is also true about the number of unit
holders. Even if one keep the population of India and Pakistan in mind, the ratio is still dismal.

They say that one of the major reasons for growth of mutual funds has been the GoP insistence
on not allowing establishment of open-end funds in the private sector. At present only one such
fund is operating in private sector in Pakistan, BSJS Balanced Fund. The apprehensions of the
regulators were that private sector could not manage an open-end fund efficiently and prudently.
This impression was mainly due to the poor performance of closed-end funds managed by the
private sector.

Most of the private sector closed-end funds were established in early nineties, when there was a
boom in equities market, prices of scrips were high and investment in equities only was possible
— corporate debt and money market instruments were not common at that time. Therefore, when
equities market plunged most of the funds posted huge losses. Some analysts say, "While a lot of
blame goes to sponsors and managers of private sector funds, the market conditions were also
responsible for the fiasco."

However, some analysts say, "It is true that market sentiments led to huge losses, but the blame
should also go to sponsors for managing funds in imprudent manner. Some of the funds were
used for 'parking' of bad transactions. If one may recall, a number of mutual funds were
sponsored by brokerage house or those who used the funds for trading of equities. Most of these

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sponsors indulged in speculative trading rather than taking long positions or making long-term
investment. The concept of parking of bad transaction in mutual fund account was used to avoid
immediate loss, in the hope of recovery.

The recent announcement of results by Arif Habib Securities, BSJS Balanced Fund and NIT
indicate that all those funds which are managed prudently and efficiently have the potential to
earn substantial profit. The year ending on June 30, 2002 was a difficult year but these funds
managed to earn good profit. Some of the ICP managed funds have been posting good
performance but are being traded below the NAV.

NIT has announced 12 per cent dividend for the year 2002. NIT was established in 1962 and has
over 60 per cent share of market share of mutual funds sector. At present it has over 60,000 unit
holders who collectively hold 1.6 billion NIT units. The total value of funds invested in the
market by NIT is estimated around Rs 19.5 billion, at current market prices. This is
approximately 5 per cent of the total market capitalization at Karachi Stock Exchange, making
NIT the single largest investor at the exchange.

BSJS Balanced Fund has posted over Rs 56 million profit and announced 15 per cent dividend
for the year 2002. During the year it also acquired Security Stock Fund. As a result of merger the
paid-up capital of fund increased to Rs 340 million. To increase the capital, the fund intends to
issue Redeemable Preference shares subject to the approval from the SECP. The fund is called a
balance fund because of its investment in equities, debt instruments, money market and COT.

Arif Habib Securities, the main sponsors of Arif Habib Investment (AHI), has posted Rs 253.6
million profit for the year 2002 and announced 50 per cent dividend as well 20 per cent bonus
shares. AHI manages Pakistan Stock Market Fund and Pakistan Income Fund.
[

MUTUAL FUND INDUSTRY IN PAKISTAN

as on 30th September 1997

Company Name Paid up NAV Mkt Prem/Dis

Capital (Rs. Rs./shr. Price (% age)
M) (Rs.)
Al-Meezan Mutual Fund 250.00 10.91 8.22 -25
Asian Stock Fund 100.00 7.38 4.00 -46
BSJS Balanced Fund 150.00 12.42 7.50 -40
Confidence Mutual Fund 100.00 11.59 4.50 -61
Dominion Stock Fund 50.00 8.38 1.35 -84
First Capital Mutual Fund 150.00 7.89 2.00 -75

Golden Arrow 81.50` 4.13 1.95 -53

Growth Mutual Fund 100.00 4.18 1.20 -71
KASB Premier Fund 400.00 8.26 2.50 -70
Prudential Stock Fund 60.00 4.60 1.55 -66

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Safeway Mutual Fund 30.00 4.50 4.90 9

Security Stock fund 100.00 10.55 4.65 -56
Tri-Star Mutual Fund 50.00 3.53 1.90 -46
1,621.50

Source: Mutual Fund Association of Pakistan.

CATEGORIES OF MUTUAL FUNDS

All mutual funds fall into one of two broad categories

 open-end funds

 Closed-end funds.

OPEN-END FUNDS

Most mutual funds are open-end. The reason why these funds are called "open-end" is because
there is no limit to the number of new shares that they can issue. New and existing shareholders
may add as much money to the fund as they want and the fund will simply issue new shares to
them. Open-end funds also redeem, or buy back, shares from shareholders. In order to determine
the value of a share in an open-end fund at any time, a number called the Net Asset Value is
used.

CLOSED-END FUNDS

Closed-end funds behave more like stock than open-end funds; that is to say, closed-end funds
issue a fixed number of shares to the public in an initial public offering, after which time shares
in the fund are bought and sold on a stock exchange. Unlike open-end funds, closed-end funds
are not obligated to issue new shares or redeem outstanding shares. The price of a share in a
closed-end fund is determined entirely by market demand, so shares can either trade below their
net asset value ("at a discount") or above it ("at a premium"). Since you must take into
consideration not only the fund's net asset value but also the discount or premium at which the
fund is trading, closed-end funds are considered to be more suitable for experienced investors.
Closed-end funds can be purchased through a broker.

Net Asset Value (NAV)

Open-end mutual funds price their shares in terms of a Net Asset Value (NAV) (note that you
can calculate NAV for a closed-end fund too, but it will not necessarily be the price at which you
buy or sell closed-end shares). NAV is calculated by adding up the market value of all the fund's

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underlying securities, subtracting all of the fund's liabilities, and then dividing by the number of
outstanding shares in the fund. The resulting NAV per share is the price at which shares in the
fund are bought and sold (plus or minus any sales fees). Mutual funds only calculate their NAVs
once per trading day, at the close of the trading session.

Public Offering Price (POP)

The public offering price (POP) is the price at which shares are sold to the public. For funds that
don't charge a sales commission (or "load"), the POP is simply equal to the Net Asset Value
(NAV). For a load fund, the POP is equal to the NAV plus the sales charge. As with the NAV,
the POP will typically change on a day to day basis.

OVERVIEW OF EXISTING SCHEMES EXISTED IN MUTUAL

FUND CATEGORY: BY NATURE
1. Equity fund:

These funds invest a maximum part of their corpus into equities holdings. The structure of the
fund may vary different for different schemes and the fund manager’s outlook on different
stocks. The Equity Funds are sub-classified depending upon their investment objective, as
follows:
• Diversified Equity Funds
• Mid-Cap Funds
• Sector Specific Funds
• Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-
return matrix.

2. Debt funds:

The objective of these Funds is to invest in debt papers. Government authorities, private
companies, banks and financial institutions are some of the major issuers of debt papers. By
investing in debt instruments, these funds ensure low risk and provide stable income to the
investors. Debt funds are further classified as:
• Gilt Funds: Invest their corpus in securities issued by Government, popularly known as
Government of India debt papers. These Funds carry zero Default risk but are associated with
Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
• Income Funds: Invest a major portion into various debt instruments such as bonds,
corporate debentures and Government securities.

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• MIPs: Invests maximum of their total corpus in debt instruments while they take
minimum exposure in equities. It gets benefit of both equity and debt market. These scheme
ranks slightly high on the risk-return matrix when compared with other debt schemes.
• Short Term Plans (STPs): Meant for investment horizon for three to six months. These
funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial
Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
• Liquid Funds: Also known as Money Market Schemes, These funds provides easy
liquidity and preservation of capital. These schemes invest in short-term instruments like
Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-
term cash management of corporate houses and are meant for an investment horizon of 1day to 3
months. These schemes rank low on risk-return matrix and are considered to be the safest
amongst all categories of mutual funds.

3. Balanced funds:

As the name suggest they, are a mix of both equity and debt funds. They invest in both equities
and fixed income securities, which are in line with pre-defined investment objective of the
scheme. These schemes aim to provide investors with the best of both the worlds. Equity part
provides growth and the debt part provides stability in returns.
Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the
objectives of the fund. The investor can align his own investment needs with the funds objective
and invest accordingly.

TYPES OF RETURNS
There are three ways, where the total returns provided by mutual funds can be enjoyed by
investors:
• Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly
all income it receives over the year to fund owners in the form of a distribution.
• If the fund sells securities that have increased in price, the fund has a capital gain. Most
funds also pass on these gains to investors in a distribution.
• If fund holdings increase in price but are not sold by the fund manager, the fund's shares
increase in price. You can then sell your mutual fund shares for a profit. Funds will also usually
give you a choice either to receive a check for distributions or to reinvest the earnings and get
more shares.

DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS

Mutual funds earn money on their investments through one of two ways

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 dividend income

 capital appreciation
In other words, a mutual fund makes money on one of the fund's assets when that asset pays the
mutual fund dividends or interest, or when the mutual fund sells the asset for more than what it
initially paid (if it sells the asset for less than what it initially paid, then that is called a capital
loss).
The federal government mandates that all mutual funds distribute these dividends and capital
gains to the fund's shareholders at least once per year. Most mutual funds choose to distribute
their investment income on a quarterly, semi-annual or annual basis.

QUALIFICATION FOR A DISTRIBUTION

In order to determine which shareholders qualify for distribution payments, mutual funds specify
a day during each distribution period that is known as the record day. If you own shares in a fund
on or before the record day you qualify for a distribution.
The day after the record day is known as the ex-dividend date. If you purchase shares on the ex-
dividend date then the amount of the distribution is subtracted from the fund's net asset value
(NAV) per share.

TAX PAYMENT

If you receive distributions from a mutual fund then you must pay taxes on them, regardless of
how long you have owned shares in the fund and regardless of whether or not you received the
distributions in the form of cash or in the form of new shares.

MUTUAL FUND FAMILY

A mutual fund family is a group of mutual funds that is managed by the same company. It is
usually easy to switch money between mutual funds that are part of the same family.
Additionally, most fund families make monitoring multiple investments easier, and make tax
time easier, by aggregating the information from the various funds.

SHARE CLASSES

Mutual funds shares are sometimes broken down into lettered "classes" that have different
characteristics. Following is the brief rundown of some commonly used designations:

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• A: Shares that have a front-end load.

• B: Shares that have a back-end load.
• Y: Shares for institutional investors; no front-end load.
• Z: Shares for employees of the mutual fund.

DUAL-PURPOSE FUND

As with some stocks, certain closed-end funds distinguish between common shareholders
and preferred shareholders -- these funds are called dual-purpose funds. As the name
suggests, common shareholders receive all distributions from capital gains, while preferred
shareholders receive all dividend and interest income. These funds have a set expiration date, at
which time all preferred shares in the fund are redeemed, giving the common shareholders sole
ownership of the fund. Those shareholders then decide whether to liquidate the fund and divide
up the proceeds or to convert the fund into an open-end mutual fund.

PRO’S OF INVESTING IN MUTUAL FUNDS:

It may not be obvious at first why to purchase shares in different securities through a mutual
fund "middleman" instead of simply purchasing the securities on your own. There are, however,
some very good reasons why people opt to invest in mutual funds instead of, or in addition to,
buying securities directly. Mutual funds can offer you the following benefits:

• Diversification can reduce your overall investment risk by spreading your risk across
many different assets. With a mutual fund you can diversify your holdings both across
companies (e.g. by buying a mutual fund that owns stock in 100 different companies) and across
asset classes (e.g. by buying a mutual fund that owns stocks, bonds, and other securities). When
some assets are falling in price, others are likely to be rising, so diversification results in less risk
than if you purchased just one or two investments.

• Choice: Mutual funds come in a wide variety of types. Some mutual funds invest
exclusively in a particular sector (e.g. energy funds), while others might target growth
opportunities in general. There are thousands of funds, and each has its own objectives and
focus. The key is for you to find the mutual funds that most closely match your own particular
investment objectives.

• Liquidity is the ease with which you can convert your assets--with relatively low
depreciation in value--into cash. In the case of mutual funds, it's as easy to sell a share of a
mutual fund as it is to sell a share of stock (although some funds charge a fee for redemptions
and others you can only redeem at the end of the trading day, after the current value of the fund's
holdings has been calculated).

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• Low Investment Minimums: Most mutual funds will allow you to buy into the fund
with as little $1,000 or $2,000, and some funds even allow a "no minimum" initial investment, if
you agree to make regular monthly contributions of $50 or $100. Whatever the case may be, you
do not need to be exceptionally wealthy in order to invest in a mutual fund.

• Convenience: When you own a mutual fund, you don't need to worry about tracking the
dozens of different securities in which the fund invests; rather, all you need to do is to keep track
of the fund's performance. It's also quite easy to make monthly contributions to mutual funds and
to buy and sell shares in them.

• Low Transaction Costs: Mutual funds are able to keep transaction costs -- that is, the
costs associated with buying and selling securities -- at a minimum because they benefit from
reduced brokerage commissions for buying and selling large quantities of investments at a single
time. Of course, this benefit is reduced somewhat by the fact that they are buying and selling a
large number of different stocks. Annual fees of 1.0% to 1.5% of the investment amount are
typical.

• Regulation: Mutual funds are regulated by the government under the Investment
Company Act of 1940. This act requires that mutual funds register their securities with the
Securities and Exchange Commission. The act also regulates the way that mutual funds approach
new investors and the way that they conduct their internal operations. This provides some level
of safety to you, although you should be aware that the investments are not guaranteed by
anyone and that they can (and often do) decline in value.

• Additional Services: Some mutual funds offer additional services to their shareholders,
such as tax reports, reinvestment programs, and automatic withdrawal and contribution plans.

• Professional Management: Mutual funds are managed by a team of professionals,

which usually includes one mutual fund manager and several analysts. Presumably, professionals
have more experience, knowledge, and information than the average investor when it comes to
deciding which securities to buy and sell. They also have the ability to focus on just a single area
of expertise.
• Lower Risks Higher Returns: Mutual funds are low risk investments which result in
very high returns, as shown in the following Risk-Return Matrix;

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CON’S OF INVESTING IN MUTUAL FUNDS

Just as there are many benefits to investing your hard earned dollars in mutual funds there are a
few drawbacks to this decision as well. In order to make a truly informed investment decision
you need to be aware of both the pros and cons of mutual fund investing before you make the
decision as to whether or not this style of investing is suitable to meet your financial needs now
and in the future. Keep reading for a little bit of enlightening information on the downside of
investing in mutual funds.

1) Low return on investment. While you can make a comfortable retirement for yourself by
investing in mutual funds you won’t find the swift and bold flips, turns, and swings that
you might find in the sales of certain high yield stocks. In fact, mutual funds are more the
slow and steady wins the race sorts of investment methods, which are effective in their
own right but, while providing comfort, will not bring copious amounts of wealth.

2) Dubious management. While this isn’t true of all mutual funds you need to check the
fund manager out thoroughly before buying into the fund. You never really know whom
to trust in this day and age and many people have complained that they would have done
better making the decisions on their own rather than relying on the fund manager in order
to do so. Of course, when you are making your own decisions you will have other worries
on your mind at all times. So professional management can be a benefit or a downside
depending on the manager you get for your fund.

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3) Too much of a good thing isn’t really good. The problem with mutual funds is that the
funds that are doing well and netting high returns for its investors are often quickly
inundated with new investors wanting the same results and there is only so much the
manager can do to make good on the money that has been invested. There is another
issue in which the fact that funds purchase such a small portion of so many stocks that
when one or a handful of the companies that the fund is invested in do extremely well,
the pool sharing the profits is so large that the impact is often negligible.

4) The big killer for many investors is that the fund manager takes actions that are right
for the fund and those actions may not be what is best for your individual situation. A
broker or financial planner that you deal with personally is much more likely to make
financial decisions for you that are geared towards your individual needs and not the
needs of a much larger group. If you want individual advice and guidance then a mutual
fund is definitely not the way to go. You should also avoid them if you are in a precarious
situation when it comes to things such as capital gains taxes, which can significantly
impact your actual profits.

5) Personal control. Are you a control freak? Many of us are and when you go with a
mutual fund you are giving someone else control of something that is often very personal.
No one likes the idea of being at another person’s mercy when it comes to retirement or
planning for the future and you are essentially putting your retirement, your vacation
home, or your child’s college education in someone else’s hands. This is a frightening
situation for someone who is typically in control of these investment decisions/It really
doesn’t matter whether or not you ultimately decide to include mutual funds in your
investment portfolio. The important thing is that when the time to decide presents itself
you are in a position to make an informed decision about whether or not you want them
included and to act upon the decision you make for better or for worse.

REGULATIONS
Regulation of mutual funds, compared to other pooled investment options (think: hedge funds) is
extensive. Mutual funds must comply with a strict set of rules that are monitored by the
Securities and Exchange Commission.

The SEC monitors the fund’s compliance with the Investment Company Act of 1940, as well as
its adherence to other federal rules and regulations. Since their development, the regulation of
mutual funds has provided investors with confidence in terms of the investment structure and
offered a number of benefits, such as:

• Transparency: The holdings of mutual funds are publicly available (with some delays in
reporting), which ensures that investors are getting what they pay for.

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• Liquidity: Shares of mutual funds are redeemed by the fund company on the trade date,
which assures daily liquidity for investors.
• Audited Track Records: Funds must maintain their performance track records and have
them audited for accuracy, which ensures that investors can trust the fund’s stated returns.
• Safety: If a mutual fund company goes out of business, fund shareholders receive an
amount of cash that equals their portion of ownership in the fund. Alternatively, the fund’s
Board of Directors might elect a new investment advisor to manage the funds.

THE ACTS AND REGULATIONS OF MUTUAL FUNDS

The rules and regulations of mutual funds are extensive. The key regulations of mutual funds are:

The Investment Company Act of 1940 -- The Act regulates mutual funds (as well as other
companies). The Act focuses on disclosures and information about investment objectives,
investment company structure and operations.

The Securities Act of 1933 -- The Act has the objective of requiring that investors receive certain
significant information pertaining to securities being offered for sale in the public markets. The
Act also prohibits fraud and misrepresentations in the sale of securities.

The Securities Act of 1934 -- The Act created the SEC and empowers the SEC with authority
over the securities industry.

RESEARCHING THE RULES AND REGULATIONS OF MUTUAL FUNDS

The SEC website offers many useful links helping to research the regulations of mutual funds as
well as other securities laws.

MUTUAL FUND REGULATION

Investment companies (mutual funds) are regulated by the Investment Company Act of 1940.
The roots of government regulation of investment companies are found in the great stock market
crash of 1929, which caused Congress to begin an extensive investigation of the U.S. securities
industry. The bulk of federal powers over the activities of investment companies is contained in
the Investment Company Act of 1940, which provides for the registration and regulation of
companies primarily engaged in the business of investing in securities. The major provisions of
the Act are summarized as follows:

The Act provides for registration, "full" disclosure and regulation of investment companies to
prevent fraudulent abuses.

Generally, not more than 60 percent of the board of directors may be affiliated with the fund, its
banks or brokers.

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Management (advisor) contracts must be approved by shareholders and the fund's outside
directors.

A company must redeem shares duly offered by shareholders within seven calendar days at per
share net asset value.

Open-end companies (mutual funds) may borrow from a bank and use the proceeds for
investment purposes (leverage); such debt must be collateralized three to one.

Shareholders must be sent complete financial reports at least semiannually, and the SEC must
see such reports.

To qualify as a regulated investment company, the fund must have at least 75 percent of its total
assets invested in securities, with not more than 5 percent of its assets invested in the securities
of any one issuer and not holding more than 10 percent of the voting securities of any one
corporation.

A prospectus must be given to a prospective fund investor before sales can be solicited.

Securities and cash must be kept by either a bank or a broker who is a member of a national
securities exchange.

In addition to federal registration, a mutual fund must register in and abide by the laws and
regulations of each state in which its shares are sold. In other words, unless a fund is registered in
your state of residence, it cannot legally sell its shares to you.

VARIETY OF MUTUAL FUNDS

Previously, mutual funds were simply broad-based investment instruments created to simplify
the intricacies involved in investing in separate securities; they also provided a greater measure
of safety through broad diversification and the kind of top notch professional management that is
usually out of reach for the small investor.
Today, however, mutual funds are highly specialized and offer almost unlimited diversity. The
types of mutual fund portfolios available run the gamut from conservative to aggressive, from
stocks to bonds, from domestic to international portfolios, from taxable to tax-free and from
virtually no-risk money market funds to high-risk options funds.
The great variety of mutual funds available makes it possible to select a fund, or several funds,
which precisely various types of funds and their primary objectives are described below

MONEY MARKET FUND

1. They are the safest for the novice investor.

2. They are the easiest, least complicated to follow and understand.

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3. Almost without exception, every mutual fund investment company offers money market
funds.
4. Money market funds represent an indispensable investment tool for the beginning
investor.
5. They are the most basic and conservative of all the mutual funds available.

Money market funds should be considered by investors seeking stability of principal, total
liquidity and earnings that are as high, or higher, than those available through bank certificates of
deposit. And unlike bank cash deposits, money market funds have no early withdrawal penalties.

Specifically, a money market fund is a mutual fund that invests its assets only in the most liquid
of money instruments. The portfolio seeks stability by investing in very short-term, interest-
bearing instruments issued by the state and local governments, banks, and large corporations.
The money invested is a loan to these agencies, and the length of the loan might range from
overnight to one week or, in some cases, as long as 90 days. These debt certificates are called
"money market instruments"; because they can be converted into cash so readily, they are
considered the equivalent of cash.

To understand why money market mutual funds is recommended as an ideal investment, let me
reemphasize just seven of the advantages they offer:

1. Safety of principal, through diversification and stability of the short-term portfolio

investments
2. Total and immediate liquidity, by telephone or letter
3. Better yields than offered by banks, 1% to 3% higher

4. Low minimum investment, some as low as $100

5. Professional management, proven expertise

6. Generally, no purchase or redemption fees, no-load funds

INCOME FUNDS

The objective of income mutual funds is to seek a high level of current income commensurate
with each portfolio's risk potential. In other words, the greater the risk, the greater the potential
for generous income yields; but the greater the risk of principal loss as well.
The risk / reward potential is low to high, depending upon the type of securities that make up the
fund's portfolio. The risk is very low when the fund is invested in government obligations, blue
chip corporations, and short-term agency securities. The risk is high when a fund seeks higher
yields by investing in long-term corporate bonds, offered by new, undercapitalized, risky
companies.

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MUTUAL FUNDS

INCOME AND GROWTH FUNDS

The primary purposes of income and growth funds are to provide a steady source of income and
moderate growth. Such funds are ideal for retirees needing a supplement source of income
without forsaking growth entirely.

GROWTH AND INCOME FUNDS

The primary objectives of growth and income funds are to seek long-term growth of principal
and reasonable current income. By investing in a portfolio of stocks believed to offer growth
potential plus market or above - market dividend income, the fund expects to investors seeking
growth of capital and moderate income over the long term (at least five years) would consider
growth and income funds. Such funds require that the investor be willing to accepts some share-
price volatility, but less than found in pure growth funds.

BALANCED FUNDS

The basic objectives of balanced funds are to generate income as well as long-term growth of
principal. These funds generally have portfolios consisting of bonds, preferred stocks, and
common stocks. They have fairly limited price rise potential, but do have a high degree of safety,
and moderate to high income potential.

Investors who desire a fund with a combination of securities in a single portfolio, and who seek
some current income and moderate growth with low-level risk, would do well to invest in
balanced mutual funds. Balanced funds, by and large, do not differ greatly from the growth and
income funds described above.

GROWTH FUNDS

Growth funds are offered by every investment company. The primary objective of such funds is
to seek long-term appreciation (growth of capital). The secondary objective is to make one's
capital investment grow faster than the rate of inflation. Dividend income is considered an
incidental objective of growth funds.
Growth funds are best suited for investors interested primarily in seeing their principal grow and
are therefore to be considered as long-term investments - held for at least three to five years.
Jumping in and out of growth funds tends to defeat their purpose. However, if the fund has not
shown substantial growth over a three - to five-year period, sell it (redeem your shares) and seek
a growth fund with another investment company.
Candidates likely to participate in growth funds are those willing to accept moderate to high risk
in order to attain growth of their capital and those investors who characterize their investment
temperament as "fairly aggressive."

INDEX FUNDS

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The intent of an index fund is basically to track the performance of the stock market. If the
overall market advances, a good index fund follows the rise. When the market declines, so will
the index fund. Index funds' portfolios consist of securities listed on the popular stock market
indices.

It is also the intent of an index fund to materially reduce expenses by eliminating the fund
portfolio manager. Instead, the fund merely purchases a group of stocks that make up the
particular index it deems the best to follow. The stocks in an index fund portfolio rarely change
and are weighted the same way as its particular market index. Thus, there is no need for a
portfolio manager. The securities in an index mutual fund are identical to those listed by the
index it tracks, thus, there is little or no need for any great turnover of the portfolio of securities.
The funds Index Funds
The intent of an index fund is basically to track the performance of the stock market. If the
overall market advances, a good index fund follows the rise. When the market declines, so will
the index fund. Index funds' portfolios consist of securities listed on the popular stock market
indices.
It is also the intent of an index fund to materially reduce expenses by eliminating the fund
portfolio manager. Instead, the fund merely purchases a group of stocks that make up the
particular index it deems the best to follow. The stocks in an index fund portfolio rarely change
and are weighted the same way as its particular market index. Thus, there is no need for a
portfolio manager. The securities in an index mutual fund are identical to those listed by the
index it tracks, thus, there is little or no need for any great turnover of the portfolio of securities.
The funds are "passively managed" in a fairly static portfolio. An index fund is always fully
invested in the securities of the index it tracks.
An index mutual fund may never outperform the market but it should not lag far behind it either.
The reduction of administrative cost in the management of an index fund also adds to its
profitability.

SECTOR FUNDS

As was noted earlier, most mutual funds have fairly broad-based, diversified portfolios. In the
case of sector funds, however, the portfolios consist of investment from only one sector of the
economy. Sector funds concentrate in one specific market segment; for example, energy,
transportation, precious metals, health sciences, utilities, leisure industries, etc. In other words,
they are very narrowly based.
Investors in sector funds must be prepared to accept the rather high level of risk inherent in funds
that are not particularly diversified. Any measure of diversification that may exist in sector funds
is attained through a variety of securities, albeit in the same market sector. Substantial profits are
attainable by investors astute enough to identify which market sector is ripe for growth - not
always an easy task!

SPECIALIZED FUNDS

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MUTUAL FUNDS

Specialized funds resemble sector funds in most respects. The major difference is the type of
securities that make up the fund's portfolio. For example, the portfolio may consist of common
stocks only, foreign securities only, bonds only, new stock issues only, over - the - counter
securities only, and so on.
Those who are still novices in the investment arena should avoid both specialized and sector
funds or the time being and concentrate on the more traditional, diversified mutual funds instead.

ISLAMIC FUNDS

In case of Islamic Funds, the investment made in different instruments is to be in line with the
Islamic Shairah Rules. The Fund is generally to be governed by an Islamic Shariah Board. And
then there is a purification process that needs to be followed, as some of the money lying in
reserve may gain interest, which is not desirable in case of Islamic investments.

MUTUAL FUND COMPANIES

 ABAMCO LIMITED

 AKD INVESTMENT MANAGEMENT LTD.

 AL FALAH GHP INVESTMENT MANAGEMENT

 AL-MEEZAN INVESTMENT MANAGEMENT LIMITED

 AMZ ASSET MANAGEMENT LTD.

 ARIF HABIB INVESTMENT MANAGEMENT LTD.

 ASIAN CAPITAL MANAGEMENT (PVT.) LTD

 ASKARI ASSET MANAGEMENT LTD.

 ATLAS ASSET MANAGEMENT LTD.

 BMA ASSET MANAGEMENT LTD.

 CROSBY ASSET MANAGEMENT LTD.

 DAWOOD CAPITAL MANAGEMENT LTD.

 FAYSAL ASSET MANAGEMENT LIMITED

 FIRST CAPITAL INVESTMENTS LTD.

 HABIB ASSETS MANAGEMENT LTD.

 HBL ASSET MANAGEMENT LTD

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MUTUAL FUNDS

 KASB FUND LIMITED

 NATIONAL ASSET MANAGEMENT COMPANY LIMITED

 NATIONAL FULLERTON ASSET MANAGEMENT LIMITED – NAFA

 NATIONAL IINVESTMENT TRUST LTD.

 NBP CAPITAL LIMITED

 NOMAN ABID INVESTMENT MANAGEMENT LIMITED

 PICIC ASSET MANAGEMENT COMPANY LTD.

 PRUDENTIAL FUND MANAGEMENT LTD

 SAFEWAY MANAGEMENT LTD.

 UBL FUND MANAGERS LTD.

 WE INVESTMENT MANAGEMENT LIMITED

REFERENCES:
(1) http://www.collectfund.com/

(2) http://www.mutualfundsindia.com/mfbasic.asp

(3) http://en.wikipedia.org/wiki/Mutual_funds

(4) http://en.wikipedia.org/wiki/Mutual_fund_fees_and_expenses

(5) http://www.mutual-funds-advisor.com/mutual-fund-basics/benefits-of-mutual-funds.html

(6) http://www.mcb.com.pk/quick_links/pdf/Quid%20Pro%20Quo%2036%20Cash
%20Cows%20Spoilt%20Milk.pdf
(7) http://www.mutualfundspakistan.com/amc.aspx

(8) http://www.mutualfundspakistan.com/fundtype.aspx

(9) http://www.mutualfundspakistan.com/pakreg.aspx

(10) http://www.mutualfundspakistan.com/useful.aspx
(1!) http://www.mufap.com.pk/investor.php?tab=link3
(12) http://www.svtuition.org/2010/04/list-of-mutual-funds-in-pakistan.html

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