KARACHI, Feb 14: Individual investors need to diversify their investment to minimize investment risk in the absence of hedging devices like derivatives.

“Even if derivatives make a debut here small investors would have to rely on diversification as it is too difficult for them to make use of derivatives,” said a source close to State Bank.

The State Bank has reportedly agreed with some foreign banks on the need for introducing derivatives as hedging instrument for minimizing investment risk in Pakistan. The foreign banks under the umbrella of Pakistan Banks Association have been working on this concept for some time and SBP is examining the possibility of its introduction.

But the problem is derivatives such as options and futures are regarded as un-Islamic and introducing such instruments at a time when the central bank is promoting Islamic banking may be a bit difficult.

That is why investment experts including seasoned bankers feel that diversification of investment may continue to retain its utility for minimizing investment risk. But here again there is a problem: small investors with limited funds cannot even diversify their investment efficiently for want of technical expertise.

That is why bankers and investment experts believe that this class of investors would continue to invest money in low-risk government bonds and national saving schemes despite the falling yield on them. The institutional investors can also do the same. But generally their average return on investment may be higher than that of individual investors given their higher ability to take risks.

Individual investors in Pakistan generally invest money in (i) national saving schemes and other government securities (ii) deposit schemes and certificates of investments of banks or non-bank financial institutions (iii) stock market (iv) term finance certificates (v) real estate (vi) gold; and (vii) foreign currencies.

As the local currency has been stable most of the time since September 11, 2001 the trend to invest in foreign currencies has been on the decline. Instead, people have shifted focus onto the stock market, real estate and gold.

Investment experts say whereas stock market and real estate may continue to attract larger investment—gold may not. “The time for investment in gold is almost over because prices may remain a bit stable in near future—and may even fall,” says a leading bullion dealer in Karachi.