banking presentation.ppt

MUTUAL FUNDS

There are two ways of investment:

1. Direct investment - the individuals invest on their own.

2. Indirect investment - the individuals give his/her money to some institutions.

The type of invest you chose depends upon three basic things:

1. Knowledge,2. Information, and 3. Expertise of investing the money

Mutual fund was introduced in 1962 by the government.

In 1966 the government established the Investment Corporation of Pakistan (ICP).

In 90’s there was a growing trend of launching new private mutual funds.

History in Pakistan

2001-2007 Tremendous growth

2008-2009 Declined to its lowest

2011-2012 Gained the required momentum

History in Pakistan

July 2011- Feb 2012

44% increase in industry

June 2011 Fund size

Rs. 250 Billion

Feb 2012 Fund size

Rs. 340 Billion

The mutual fund industry has the potential to grow further and provide the best opportunities for the investors.

25 Asset management

Companies

Offering different kinds of funds.

Transparency

High ethical conduct Responsible

for the growth of

the mutual fund

industry

The Mutual Fund Association of Pakistan (MUFAP)

MUTUAL FUNDS ASSOCIATION OF PAKISTAN

• Licensed by the Government of Pakistan.• It oversees the functions of mutual fund industry

in Pakistan. • All Asset Management Companies (AMCs) and

Investment Advisory Boards ( IAs ), are licensed under the SECP regulations

• They are eligible to launch Mutual Funds and perform Investment Advisory Services.

• They are required to register as the members of MUFAP under the provisions of NBFC Rules 2008.

MUTUAL FUNDS

• Pools the money of many investors and then invests them in different securities.

• Investments may be in: Stocks, Bonds,

Money market instruments and Similar assets or A combination of these.

PORTFOLIO

• The combined holdings, the mutual fund owns are known as its portfolio.

• A fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

WHAT IS AN INVESTMENT PORTFOLIO?

• An investment portfolio is a collection of investments all owned by the same individual or organization.

• These investments often include:Stocks which are investments in individual businesses;

Bonds which are designed to earn interest; Mutual funds which are essentially a pool of

money collected from many investors.

WHAT IS AN ASSET MANAGEMENT COMPANY?

• Investment management firm that invests the pooled funds (mutual funds) of retail investors in securities in line with the stated investment objectives.

• It is a fact that the investment company provides more diversification, liquidity, and professional management consulting service than is normally available to individual investors.

• The diversification of portfolio is achieved by investing in such securities which are inversely correlated to each other.

• Companies collect money from investors through introducing various mutual fund schemes.

• In general, an investment company is engaged primarily in the business of investing in, and managing, a portfolio of securities.

WHAT IS AN ASSET MANAGEMENT COMPANY?

TOP 8 ASSET MANAGEMENT COMPANIES

• ABL Asset Management• Al Meezan Investment Management Ltd• Js Investments• Lakson Investments• NATIONAL BONDS CORPORATION UAE

Emaan Financial Services – HIRC (Pakistan Facilitator)

• National Fullerton Asset Management Ltd• National Investment Trust Ltd• PICIC Asset Management Company Ltd

Characteristics of Mutual Funds1. Investors purchase mutual fund shares from the fund itself instead of from other investors on a secondary market.

2. The price that investors pay for mutual fund shares is the fund's per share net asset value (NAV) plus any shareholder fee that the fund imposes at the time of purchase (such as sales load).

Characteristics of Mutual Funds3. Mutual fund shares are redeemable.

4. Mutual funds generally offer new shares to accommodate new investors

5. The investment portfolios of mutual funds are generally managed by separate entities known as investment advisers or Asset management Company that are registered with the SECP.

TYPES OF MUTUAL FUNDS

• Mutual Funds can be divided into two categories:

1. By structure2. By objective

By Structure

Open ended

Closed ended

Open-ended Funds

Closed-ended Funds

By Objective

Stock Funds

Money Market Funds

Hybrid Funds

Pension Funds

Islamic Funds

Specialty Funds

Stock (Equity) Funds

A mutual fund which invests primarily in stocks (shares).

• Invests its assets only in the most liquid of money instruments.

• The portfolio seeks stability :by investing in very short-term, interest-bearing instruments issued by the state and local governments, banks, and large corporations.

• The money invested is a loan to these agencies• The length of the loan might range from overnight to

one week or, in some cases, as long as 90 days. • They are considered the equivalent of cash.

Money Market Funds

• Mutual fund that invests in stocks and bonds.• A hybrid fund offers investors the opportunity to

diversify their portfolio with a single investment vehicle.

• The ratio of stocks and bonds may remain fixed or vary over time.

Hybrid Funds

• A fund established by an employer to pay retirement benefits to employees.

• Pension Funds are major institutional investors.

Pension Funds

• The investment made in different instruments is to be in line with the Islamic Shariah Rules.

• The Fund is generally to be governed by an Islamic Shariah Board.

• There is a purification process that needs to be followed, as some of the money lying in reserve may gain interest, which is not desirable in case of Islamic investments

Islamic Funds

• A mutual fund investing primarily in the securities of a particular industry, sector, type of security or geographic region.

• Because of the lack of diversification, specialized or specialty funds are higher risk but potentially higher reward than most other types of mutual funds.

Specialty Funds

SNAPSHOT OF MUTUAL FUND SCHEMES

Mutual Fund Type

Objective Risk Investment Portfolio

Who should invest Investment horizon

Money Market

Liquidity + Moderate Income +

Reservation of Capital

Negligible

Treasury Bills, Certificate of

Deposits, Commercial

Papers, Call Money

Those who park their funds in current

accounts or short-term bank deposits

2 days - 3 weeks

Short-term Funds (Floating - short-term)

Liquidity + Moderate Income

Little Interest Rate

Call Money, Commercial

Papers, Treasury Bills, CDs, Short-

term Government securities.

Those with surplus short-term funds

3 weeks - 3 months

Bond Funds (Floating -

Long-term) Regular Income

Credit Risk & Interest Rate

Risk

Predominantly Debentures, Government securities,

Corporate Bonds

Salaried & conservative investors

More than 9 - 12 months

Gilt Funds Security & IncomeInterest Rate

RiskGovernment

securitiesSalaried &

conservative investors1 year and more

Equity Funds Long-term Capital

AppreciationHigh Risk Stocks

Aggressive investors with long term outlook

 > 5 years

Index Funds

To generate returns that are

commensurate with returns of

respective indices

NAV varies with index

performance

Portfolio indices like BSE, NIFTY etc

Aggressive investors > 5 years

Hybrid Funds (e.g. balanced

funds and MIPs)

Growth & Regular Income

Capital Market Risk and

Interest Rate Risk

Balanced ratio of equity and debt funds to ensure higher returns at

lower risk

Moderate & Aggressive

> 1-2 years

INVESTMENT PROCESS IN MUTUAL FUNDS

Determination of Share Value

• When you buy share:

You pay the current NAV per share plus any fee the fund assesses at the time of purchase, such as a purchase sales load or other type of purchase fee.

Determination of Share Value

• When you sell share:

The fund will pay you the NAV minus any fee the fund assesses at the time of redemption, such as a deferred (or back-end) sales load or redemption fee.

A fund's NAV goes up or down daily as its holdings change in value.

Net Asset Value

• The net asset value is calculated by subtracting the Fund liabilities from the total assets.

Net Asset Value = Total Assets– Liabilities / no. of shares outstanding

HOW FUNDS CAN EARN MONEY FOR YOU

Dividend Payments

• A fund may earn income in the form of dividends and interest on the securities in its portfolio.

• The fund then pays its shareholders nearly all of the income (minus disclosed expenses) it has earned in the form of dividends.

Capital Gains Distributions

• The price of the securities a fund owns may increase.

• When a fund sells a security that has increased in price, the fund has a capital gain.

• At the end of the year, most funds distribute these capital gains (minus any capital losses) to investors.

Increased NAV

• If the market value of a fund's portfolio increases after deduction of expenses and liabilities, then the value (NAV) of the fund and its shares increases.

• The higher NAV reflects the higher value of your investment.

FACTORS TO CONSIDER WHILE INVESTING IN MUTUAL FUNDS

TAX IMPLICATIONS OF DIFFERENT TYPES OF MUTUAL FUNDS

There are two forms of distribution:

1. Income Dividends2. Capital Gains

Both forms of distribution are subject to federal income tax and often state and local taxes.

Except if the distributions were received in a tax-deferred account, or if the income dividend

distributions are from municipal money market funds and municipal bond funds

ADVANTAGES OF MUTUAL FUNDS

• Professional Management - - Professional money managers research, select, and monitor the performance of the securities the fund purchases.

• Diversification - - Spreading your investments across a wide range of companies and industry sectors can help lower your risk if a company or sector fails.

• Affordability - - Some mutual funds accommodate investors who don't have a lot of money to invest by setting relatively low amounts for initial purchases

• Liquidity & Flexibility - - Mutual fund invertors can readily redeem their share at the current NAV. You can systematically invest or withdraw funds according to your needs and convenience.

• Easy Entry And Exit

• Transparency - - One get regular information on the value of the investment, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.

• Well Regulated - - The operations of Mutual Funds are regularly monitored by SECP.

DISADVANTAGES OF MUTUAL FUNDS

1. Costs Despite Negative Returns -- Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs.

Investors may also have to pay taxes on any capital gains distribution they receive even if the fund went on to perform poorly after they bought shares.

2. Lack Of Control - - Investors typically cannot determine the exact make-up of a fund's portfolio at any given time.

nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.

3. Price Uncertainty - - , the price at which shares are purchased or redeemed will typically depend on the fund's NAV.