KARACHI: For all its recent remarkable growth, the mutual fund industry in Pakistan is still in its infancy. One open-end Mutual Fund in the public sector (NIT) and just about two dozen open and close-end mutual funds sit on the Pakistan's capital market.
Last year, the number of Mutual Funds worldwide stood at 53,532. And even the neighbouring India had 1,024 Funds. Around the world, millions of investors put their money in Mutual Funds. These provide a vehicle whereby investors can invest 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. Mutual funds provide professional management, more in- depth research and management of investment. They are suited to the small saver.
More than 40 million people, or one out of every three households in America, invest in mutual funds. In comparison with those, the Pakistani numbers may seem depressingly low, but the industry is growing. Numerous funds have been launched recently and many others are in the pipeline.
According to the April 2004 market report by the stock brokerage firm, Taurus Securities, the mutual funds listed on the Karachi Stock Exchange were trading on price-to-earnings ratio of attractive 3 times, which was the lowest among the 34 sectors on the KSE. This was in spite of the fact that mutual funds produced return on equity (ROE) of 51.85 per cent, which was the highest except for the food & personal care sector's ROE at 65.92 per cent. The listed capital of all closed-end funds combined stood at Rs12,376 million with the aggregate market capitalization at Rs18 billion.
Every one knows that almost everything goes in cycles- fashions, the weather, money. Large institutional investors with the power to hold, may be able to ride out the stock market bear cycle, when one comes along. But at such dismal times, 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.
The Annual Report 2003 of the Securities and Exchange Commission of Pakistan (SECP) noted that the mutual funds industry, in its initial years, had failed to take off due to frequent changes in economic policies, limited investment options in the corporate sector, low savings rate, profusion of risk-free investment options in the government securities and lack of awareness among the general public about collective investment schemes. "However, over the years, the situation has significantly improved leading to a growing use of this vehicle for mobilizing and pooling resources," says the SECP report, adding that the performance of mutual funds industry during financial year 2003 had shown significant improvement over the previous years.
A wind of change is blowing across the mutual fund industry. Besides the equity investment, in recent years, several kinds of funds have sprouted, such as income funds, growth funds; Islamic funds and money market funds. All that offers the small saver variety of choice to invest according to his inclination.