The country’s mutual funds industry holds over Rs613bn under its management, representing growth of roughly over Rs100bn since this time last year.

By the end of Feb 2017 the size of open-end funds was Rs566bn, closed-end Rs24bn and pension funds held Rs24bn.

Open-end funds, which take the biggest piece of the pie, are mainly constituted by Equity funds amounting to Rs187bn. A total of 19 asset management companies in 219 mutual funds hold all this public money.

Impressive as it looks, the Pakistan mutual fund industry is still a toddler compared to regional and developed markets. In India for instance, 14tr Indian rupees are vested by millions of investors in mutual funds, while in the United States, one out of every three households invest in mutual funds.

For investors short on time, required skills and knowledge about investment avenues — mainly the stock market — equity strategists have continued to suggest entering through mutual funds that are managed by professional fund managers who command the necessary knowledge and expertise.

But apart from the lack of awareness, many investors are reluctant to vest their savings with asset managers.

The chief regulator, the Securities and Exchange Commission of Pakistan has been keeping a watchful eye on the workings of some mutual funds. Last year, knowledgeable market players suggested that at least four funds be probed to detect ‘insider trading’ by asset managers.

Since it is relatively easy for those with decision-making powers and the authority to allocate mutual fund assets to indulge in ‘front running’ and ‘insider trading’, many analysts affirm that monitoring and surveillance by regulators is appropriate to create investor confidence, particularly fund managers are custodians of public money.

Equity strategists have continued to suggest entering the stock market through mutual funds…But many investors are reluctant to vest their savings with asset managers

The move also generated a heated debate on whether a representative of a mutual fund should be allowed to sit on the board of directors of listed companies.

Those against argued that it reflected a ‘conflict of interest’ for mutual fund managers. “Representatives such as those of National Investment Trust (NIT) which occupy a director’s seat on scores of companies could use ‘material information’ discussed in board meetings for their own good, rather than that of unit-holders” said one.

But a former managing director of NIT disagrees. He contends that keeping mutual funds out of the boardroom would be against ‘corporate democracy’.

“Anyone who has sufficient votes to wrest a seat on a company’s board should have the right to enter the boardroom”, he contends. Another fund manager concurred, saying such coercion to push mutual fund representatives out of boardrooms would amount to reinforcing investors’ distrust on funds and their asset managers.

Over recent years, many investors have been in search of Shariah compliant investment products, which have encouraged most conventional banks to branch out into Islamic banking.

Similarly in the local mutual fund industry, Shariah Compliant Equity funds are quickly catching up with conventional Equity Funds. Shariah Compliant Equity Funds already have over Rs121bn under their management.

Most small investors who invest in mutual funds do so as they are generally risk-averse.

“Price volatility in the stock market can unnerve even the most steadfast high net worth individuals, which is why such investors entrust their savings with mutual funds that are managed by professional asset managers,” said the vice chairman of one of the top five open-end funds.

New investors who made their first foray into Pakistan’s equity market in 2017 have come to grief. Lured by the 2016 performance of the Pakistan Stock Exchange (PSX) when it was declared the best performing market in Asia giving out a return of 46pc, small investors with precious little to invest — who entered the treacherous equity market to try their luck on ‘rumours’ and ‘recommendations’ by self-serving ‘pundits’ — have already lost a substantial sum.

Though off to a strong start, the PSX has all but languished this year.

Last Wednesday the market conceded all gains made in the first quarter of 2017 and the benchmark KSE-100 index entered in the red by about half a per cent.

The trend this year for the Pakistan equities market is diametric to the regional and developed markets. MSCI Asia Pacific (ex-Japan) has gained 13pc in the quarter ended March; while the PSX is still bearing the weight of heavy foreign selling, which continued for the fifth consecutive month in March.

“While inflows to Emerging Markets already hit $6.5bn in March — the highest since 2013 — Pakistan is witnessing relentless foreign selling”, laments an equity analyst.

In this depressing scenario, mutual funds have come to the rescue.

In the eight months of FY17 (July-Feb 2016-17), foreign investors have sold stocks worth $438bn. ”Foreign selling was majorly absorbed by mutual funds which cumulatively bought $399m worth shares in those eight months”, says an analysts at brokerage Spectrum Securities (Pvt) Limited.

Published in Dawn, Economic & Business, April 10th, 2017