Mutual funds allow individuals to pool money in shared investments. They are one of the easiest ways to park your savings in Pakistan. Various fund management companies offer mutual fund accounts for individuals, with each company having different sets of fund portfolios, with low risk to high risk. Let’s take a broader look into the mechanism of mutual funds and list some popular mutual funds of Pakistan.
What is a Mutual Fund?
A mutual fund is an investment vehicle where multiple people pool their money, and a professional fund manager invests this money in various assets — such as stocks, bonds, or other financial instruments. Its goal is to generate returns in a structured and relatively secure manner.
For example, if you want to travel from Islamabad to Lahore, you could either drive your own car and bear all the expenses yourself, or use a shared service like a bus/train, where an expert driver manages the journey and the cost is shared among all.
Similarly, in a mutual fund, investors’ money is pooled together and managed by an expert manager.
Benefits of Mutual Funds
Your investment in mutual funds is managed by expert and qualified fund managers. These individuals possess financial education and experience and invest your money in the right places.
Key Benefits:
- Diversification: Capital is invested across different sectors to reduce the risk of loss.
- Professional Management: Trained experts monitor the investment and make necessary adjustments.
- Affordability: Due to the pooling of money from multiple investors, the cost per investor is reduced.
- Highly Regulated: Institutions such as the SECP and others closely monitor the funds, ensuring the money remains safe.
If you are investing for the first time, it is better to choose a fund with a strong track record and satisfactory performance.
What is an Asset Management Company (AMC)?
Mutual funds are operated by licensed institutions called Asset Management Companies (AMCs). These companies handle investors’ money, conduct analysis, and invest in various funds.
Some Major AMCs in Pakistan:
- HBL Asset Management
- Al Meezan Investment Management
- UBL Fund Managers
- ABL Asset Management
- NIT (National Investment Trust)
- Lakson Investment
- Mahana Wealth Limited
- MCB
- Arif Habib Savings
The Securities and Exchange Commission of Pakistan (SECP) licenses these mutual fund companies to ensure investors’ money is managed safely and in a regulated manner.
Role of an AMC
- Identifying funds according to the investor’s goals.
- Conducting research and analysis to identify the best-performing funds.
- Providing monthly reports including profit, risk, and performance.
- Maintaining portfolio balance.
How to Invest in a Mutual Fund?
Investing in a mutual fund is similar to depositing money in a bank. Just as you cannot deposit money directly with the State Bank but must use licensed banks, similarly, you cannot invest directly in a mutual fund.
The SECP allows investment through licensed AMCs. Most AMCs are affiliated with banks, such as HBL Asset Management or Al Meezan Investment, but some are independent, like Lakson Investment or Mahana Mutual Fund.
What are NAV and AUM?
- AUM (Assets Under Management):
AUM is the total capital that all investors contribute to a mutual fund. It indicates the fund’s overall size and its significance in the market. - NAV (Net Asset Value):
NAV is the current price per unit, which fluctuates daily based on market conditions.
For example, suppose five people each invest 1,000 rupees, making the total capital 5,000 rupees.
If this is divided into five units, then the price per unit would be = 1,000 rupees.
NAV changes daily based on the market value and the fund’s underlying assets, which determine the investor’s profit or loss.
Types of Mutual Funds
Mutual funds are divided into three basic categories:
1. Low-Risk Funds:
- Primarily Debt Funds, meaning investment in loans or government bonds.
- Benefits: Stable returns, low risk.
- Two types of Debt:
- Conventional Debt: Lending without an asset base.
- Islamic Debt: Asset-based, Shariah-compliant.
- Example: An Islamic low-risk mutual fund can potentially yield returns of up to around 20%.
2. Medium-Risk Funds:
- Income Funds: Primarily invest in bonds and other debt instruments, with some risk adjusted according to market conditions.
- Funds of Funds: A mix of various low-risk and high-risk funds, maintaining a balance between risk and return.
- Strategy: When interest rates peak out, Income Funds can offer better returns.
3. High-Risk Funds:
- Primarily invest in the stock market and equities.
- Expectation of higher returns, but also higher risk.
- Suitable for those who can tolerate market fluctuations for potentially higher returns.
Fund Performance and Monitoring:
Each mutual fund publishes monthly performance reports that provide detailed insights into the fund’s activities. Along with NAV and AUM, these reports include sector-wise investment allocations, giving investors a clear view of where their money is invested. For example: If a large portion of a fund is invested in the Nifty 50 or favorable companies, you will receive return information accordingly.
Summary
Mutual funds offer professional, regulated, low-cost, and diversified investment opportunities.
Select low, medium, or high-risk funds based on your investment goals, risk tolerance, and time horizon. Start investing through a reliable AMC to ensure secure, transparent, and well-managed returns.
