Mutual funds industry in Pakistan

The mutual funds industry plays a vital role in the operations of the financial and equity markets and consequently contributes significantly to the economy of a country. In USA and other mature and developed economies, mutual funds are one of the main engines of the savings mobilisation and are therefore regarded as part and parcel of their national life. In neighbouring India and other emerging and developing economies, the mutual funds sector has also progressed significantly over the years. Unfortunately, mutual funds in Pakistan have though progressed over the years but at a very slow pace.
Only in recent years the mutual funds industry in the country has come out of the crawling age and started to grow to a reasonable level but there is till a long way to go.
Pakistan was the pioneer in the field of Mutual Funds in the South Asia Region, when it launched National Investment Trust - NIT, an open-ended mutual fund in 1962, and Investment Corporation of Pakistan - ICP, launched a series of close-ended mutual funds during 1966, both being in the public sector. However, it subsequently failed to maintain the tempo of the initiative taken in the field until early nineties mainly due to following reason:
-- Frequent changes in economic policies
-- High rates of alternative investment such as National Saving Schemes (NSS)
-- Capital outflow
-- Limited investment options
-- Profusion of risk free investment options in Government securities
-- Lack of awareness among the general public about collective investment schemes
-- Lack of aggressive marketing and distribution network.
In the early nineties, after the country's capital market witnessed an upsurge, the private sector mutual funds were first time launched in Pakistan. In the long and deep recession of 1996-2000, the mutual fund industry badly suffered due mainly to lack of investment philosophy and prudent decision making and as a result Net Asset Values (NAVs) dropped, growth got frozen and concept got badly hit.
However, by the turn of the century i.e. from the FY-02 onwards, Pakistan market witnessed an unprecedented growth spurned due to many factors, but mainly due to segregated divesture of ICP to private sector, remarkable improvements in country's economic and financial indicators, global trends and favourable regulatory environment.
As of March 31st 2005, there are thirty five mutual funds in Pakistan. Of them fourteen are open-end class and twenty one closed-end class. In the recent past, these funds have launched a number of new products such as Balanced Funds, Equity Funds, Money Market Funds and Islamic Funds. Many new and innovative products are in pipeline.
The new products, which include Stock Exchange Funds, Capital Guarantee Funds, Real Estate Infrastructure Funds, Offshore Funds, Pension and Annuity Funds etc. would be launched soon after the clearance from the regulatory body, Securities and Exchange Commission of Pakistan - SECP.
The all round performance as witnessed during the last three years improved net assets of the industry by approximately 400 percent from Rs. 25 billion in FY 2001-02 to Rs. 124 billion as on March 31st 2005.
The recent years have not only seen the revival of the mutual fund industry in Pakistan but also the activity shifting from the public sector to the private sector coupled with increased attractiveness of open-end funds as compared to close-end funds.
The future of mutual fund industry in Pakistan is very promising and encouraging. The industry holds several exciting opportunities for both corporate and individual inventors including the retired persons in view of the following factors:
-- At present, the mutual fund sector is set to attract growing public attention owing to better investment prospects and effective role in bringing about betterment in the national economy. An improvement in economic fundamentals particularly during the past three years and projected GDP growth of 7.1 percent for FY 2004-05 have provided a platform to mutual fund industry to grow exponentially.
-- Recently, mutual fund sector is becoming popular among the investors due to the fact that the sector is now focusing on specialised financial products aimed at niche markets with a view to cater to the requirement of all types of investors ranging from the ultra conservative to the risk seekers. These specialised products are expected to attract greater public attention towards market for investment in mutual fund sector in years ahead.
-- A market based interest rate structure has already been put in place. The high level of interest rates available on short term, risk free government papers and bank deposits in the past had acted as a disincentive for conservative investors. However, the recent rationalisation of interest rates has improved the prospects of investment by individual investors in mutual fund sector as an attractive mode of investment as compared to traditional NSS and bank deposits.
-- The equity market has been providing superior returns in recent years as compared to all other alternatives even on a risk adjusted basis. The performance of the mutual fund industry is generally kept pace with the performance of the stock market with returns that have out performed any other investment alternatives. Based on this relationship, the unprecedented performance of equity markets in Pakistan is a precursor for better future prospects of mutual fund industry in Pakistan.
-- The effective monitoring of the operations of mutual funds and other NBFCs' by Securities and Exchange Commission of Pakistan - SECP has improved the confidence of investors in Pakistan to a great extent. SECP has brought in a sea change in regulations under which mutual funds managers are vetted with a fine toothcomb, their responses and management staff have to meet stringent standards and there is a continuing monitoring of not only their performance but also of how they do business. The confidence thus created will pave the way for further investment in mutual fund sector.
Given the mix of superior performance of the sector in the past few years and the provision of attractive and specialised products, mutual funds in Pakistan will continue to experience healthy growth and in the not too distant future will make greater contribution towards the economy of the country.
(The writer is Senior Manager MUFAP)