02 February 2004	Monday	10 Zilhaj 1424

Every one knows that almost everything goes in cycles, fashions, the weather, luck and money. When good times are rolling and stock markets are blooming, everyone has the opportunity to celebrate.

But only the large institutional investors with the power to hold, may be able to ride out the bear cycles at the stock exchanges. At such times, hundreds of small investors who dabble in shares, sometime come to grief. This happened at the end of the bull run in 1994.

The small investor is at a disadvantage: He does not posses the knowledge, time or desire to undertake the research necessary to assess the worth of a security. And much of the stock research available, anyway, is in the English language, which is as alien to the majority of small investors who flock to our stock market, as is Gujrati to the Englishman! The stock picks of such retail investors is, therefore, largely based on tips and rumours.

Around the world, millions of investors put their money in mutual funds. These provide a vehicle whereby investors can put their funds in securities under the direction of investment adviser. It is much cheaper to hire one investment manager to manage a mutual fund for thousands of investors with a common goal then for each investor to hire a stock broker and incur heavy transaction costs. More than 50 million people, or one out of every three households in America, invest in mutual funds; In the US alone, over four trillion dollar is invested in the industry.

Compared to developed markets, the mutual fund industry in Pakistan is still in its nascent stage. At the start of December last year, there were 37 closed-end mutual funds listed on the Karachi Stock Exchange with paid-up capital of Rs9.3 billion and market capitalization of Rs12.5 million. That worked out to 3 per cent of all of the market's paid-up capital amounting to Rs 311 billion and just about 1.4 per cent of the aggregate market capitalisation, whichat the time stood at Rs 868 billion. That hardly cuts a pretty picture when Pakistan's mutual fund industry, on average, still provides a double-digit dividend yield.

But thanks to the prolonged bull run at the KSE that began in January 2002, the state of the sector is now not as bad as before. Mutual funds have been able to attract growing number of investors. Compared to other investment avenues, such as in currency, bank deposits and the slipping returns on national saving schemes (NSS), small investors have been tempted to dabble in stocks. Growing number of investors appear to be putting their trust and money in mutual funds. An indicator that suggests the increasing interest of investors in the sector is the average daily turnover of closed-end mutual fund, which had reached 4.1 million shares in 2003, from 1.8 million shares in 2002.

For most part in the past, private sector mutual funds did bad, due to their poor entry points. They accumulated expensive portfolios just at the end of the stock boom of 1994. Moreover, in most of the private sector mutual funds, professional expertise in equity research and portfolio management was generally lacking, resulting in low quality portfolio compositions. These funds were known to have taken huge stakes in such laggards as the textile, spinning and modaraba sectors.

The choice for investors in mutual funds is now widening. There are closed-end mutual funds, open-ended mutual funds, as well as money market and Islamic funds. The entry of Crosby Dragon Fund-the first multinational-managed foreign fund in Pakistan's financial markets early this year has provided new dimensions to the industry. Chairman Securities and Exchange Commission of Pakistan Tariq Hassan says that the entry of Crosby Dragon Fund has marked a new beginning in the development of mutual fund industry in Pakistan.

At a recent event, the finance minister urged mutual fund industry, banks and insurance companies to look at the possibility of designing products to cater to the needs of retiring people by offering retirement pension schemes. Shaukat Aziz observed that in Pakistan, mutual funds had thus far, not catered to the retirement market assets and that potential for growth in assets of mutual funds, when they provided effective products to tap that market, was enormous.

The Minister also promised the industry that Government would 'go the extra mile' and provide whatever tax benefits that were needed in that field. The goal of a mutual fund should be long term capital appreciation, current stable/regular stream of income and preservation of capital. A mutual fund, by its very nature, ought to be diversified-its assets should be invested in many different securities. Beyond that, where the industry is in its developed stage, there are series or family of mutual funds that differ from each other, based on their objectives, risk-level, growth potential, maturity horizon and cash flow requirements that they offer to the investors. Such family of funds further investors' chances to diversify and to switch over, say from equity to fixed income fund, in uncertain times, rather than go for redemption.

Investors in mutual funds today are no longer content with the old wisdom: "Invest-wait-pray and leave it all to the investment adviser". In developed markets, the switching from stocks to bond to the money market is now used by the prudent investor as his most versatile tool in the struggle to safely navigate his savings through the inflationary/ disinflationary tides and fluctuating interest rates ahead.

Finally an interesting observation. In both bull and the bear market, mutual funds in Pakistan tend to run ahead of other stocks. That happened post the 12 per cent drop in the KSE-100 index, after it had peaked to 4,604 points on September 12, last year.

Between February and September 2003, the market capitalisation of the KSE rose by 89 per cent, but that of the mutual fund sector, paced ahead by surging 118 per cent. And after touching the magical figure of trillion rupees in market capitalisation , when it slipped back by 22 per cent till November 22, the market capitalisation of mutual funds took to their heals faster to the south and lost 42 per cent! It is difficult to conclude whether that reflects good or bad upon the management's of mutual funds in the country.