Mutual funds going strong

Greater appetite for money market funds, along with substantial rise in size of income funds, has been keeping the mutual fund industry up and running since the start of the current fiscal year. The mutual fund industry (open-ended) trekked to Rs367 billion at the end of May, 2012, marking a rise of 63 percent since the start of the current fiscal year, according to data compiled by InvestCap Research. With tide of money sloshing into money market funds, driven by strong demand for safer investment options, the size of the fund rose by 108 percent during the first 11 months of the current fiscal year to Rs161 billion at the end of May, 2012. The money market funds now account for nearly 44 percent of the total asset size (open-end funds). At the same time, the asset size of income funds glided higher by 127 percent to around Rs88 billion over the first 11 months of FY12. This is down to the launch of new funds and improved prospects of corporate TFCs on the heels of structuring of few major bonds which led to upward revision in value of bonds. While in the face of overwhelming performance of equity market, equity funds sank into despair as asset size of income funds dropped by four percent to around Rs50 billion in the first 11 months of the FY12. At the same time, KSE 100 Index recorded a growth of 11 percent. "Though the equity markets have depicted a bull run in the current financial year; equity funds have not been very successful in attracting substantial inflows", according to The Economic Survey of Pakistan. Above all, the market has warmly welcomed the new budgetary measures announced by the government to prop up the fund industry. A slew of key budgetary measures to incentivise the salaried class includes: increase in ratio of tax credit claim from 15 percent to 20 percent, increase in the limit of maximum tax credit and decline in minimum investment holding period to 24 months from 36 months to claim tax credit. Besides, to curtail tax arbitrage enjoyed by banks through investment in funds, the government has increased tax rates on dividends received from funds to 25 percent in FY13 and 35 percent in FY14 and onwards. "Amid dearth of other investment options, elimination in tax arbitrage would have a slight impact on the banks holding in mutual funds", according to one fund manager. However, the market presumes that savvy institutional investors would eye tax deferment options by opting for bonus units in lieu of cash dividends to realise tax alpha.