How To Investment In Mutual Fund – If you have never invested before, have money in your pocket that you can save for at least three years, we want to introduce you to a simple investment method called “Mutual Funds”.
The name mutual fund may seem intimidating to most individuals who are not familiar with investment products. Mutual Funds have the following advantages:
How To Investment In Mutual Fund
A mutual fund is a collective investment scheme that collects money from many investors. An asset management company (AMC) licensed by the Securities and Exchange Commission of Pakistan (SECP) invests money on your behalf in securities or other financial assets for income/profit and income.
Mutual Fund Basics
In Pakistan, most mutual funds are open-ended funds. Each open-end unit represents an investor’s proportional ownership of the fund’s undivided portfolio; each unitholder shares equally with the other investors in the distributions. Investors buy mutual fund units from the fund itself or from banking/financial companies authorized to act as distributors/sales agents. Open-end mutual fund units are not traded on the secondary market such as the PSX.
Under the regulations, an independent trustee registered with the SECP has custody of all the assets of the mutual fund. The trustee is obliged to ensure that the AMC invests the assets of the fund in accordance with the approved investment policy and authorized investments of the mutual fund, and that all the assets of the mutual fund including money are registered in the name of, or in the name of -yeah. to the trustee.
Fund managers in asset management companies are supported by dedicated research teams responsible for monitoring the performance of a fund’s portfolio.
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You don’t have to worry about the day-to-day management of your portfolio. The diversification offered by mutual funds cannot be achieved by the small investor with limited investment funds.
Mutual funds can provide you regular income and an opportunity to increase your savings through reinvestment. Here are the benefits of investing in mutual funds:
An asset management company (AMC) evaluates investment opportunities by researching, selecting and monitoring the performance of securities purchased by the fund. AMCs employ qualified investment professionals who make calculated investment decisions for you. This is not an easy task for an individual without special knowledge.
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By spreading your investment across multiple securities and investment sectors, a mutual fund can help lower your risk if one company or sector fails. Diversity can be well formulated as “Don’t put all your eggs in one basket
Mutual funds accommodate investors who do not have a lot of money to invest by setting a relatively low Rupee value for initial purchases and subsequent monthly purchases. For example, you can add funds in fixed amount like PKR 1000- 5000 every month or other intervals. Mutual funds buy and sell many securities at once. Your costs for transactions and management fees are shared among fellow unit holders
Mutual fund unit holders can easily convert their units into cash on any working day. They will immediately receive the current value of their investment within six working days. Investors do not need to find a buyer, the fund buys (redeems) units at the current net asset value (NAV).
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The SECP conducts continuous monitoring of mutual funds through reports that mutual funds are required to file with the SECP on a regular basis. In addition, the SECP conducts on-site inspections of AMCs.
Mutual fund performance is carefully reviewed by various publications and rating agencies, making it easy for investors to compare the performance of a fund. As a unit holder, you are provided with regular updates, for example, daily NAVs, as well as information on fund holdings and the fund manager’s strategy.
Investing in mutual fund schemes entitles the investor to get a tax credit that increases the total return on their savings.
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In Pakistan, the SECP in consultation with the Mutual Fund Association of Pakistan (MUFAP) has developed criteria for categorizing open-end mutual funds with investment limits. In general, the higher the potential return, the higher the risk of loss. The SECP has approved the following categories for mutual funds:
An equity fund invests in equities better known as stocks/shares that are subject to the risk of volatility associated with the equity market. Although this fund is the riskiest, it provides the highest long-term growth through capital appreciation. An equity fund, by categorization, must invest at least 70% of its net assets in listed equity securities. The remaining net assets of an equity scheme may be invested in cash or near cash instruments.
These funds focus on providing investors with a steady stream of fixed income. They invest in short-term and long-term debt instruments such as Term Finance Certificates (TFCs) issued by corporations and government securities such as treasury bills and Pakistan Investment Bonds (PIBs). An income fund is considered less risky than an equity fund. Because of this, the opportunity for capital appreciation is limited. Income funds are required to maintain at least 25% of net assets in cash and/or near cash instruments to meet liquidity requirements.
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These funds invest in short-term fixed income securities, for example, treasury bills, government bonds, certificates of deposits and commercial paper. The goal of a money market fund is to maintain high liquidity by investing in low-risk short-term instruments and generally safer investments. The returns generated by a money market fund tend to be less volatile compared to other types of mutual funds. Money market funds are great for new investors because they are less complicated to follow and understand.
Balanced funds provide investment growth as well as regular income by investing in equities and fixed income securities. The regulatory framework dictates that balanced funds invest 30% to 70% of their net assets in listed equity securities. The remaining balance can be invested in other authorized investments.
The Fund of Funds invests in other mutual funds. Each fund of funds should categorize itself according to the investment objective, for example, equity fund of funds, income fund of funds and so on. These funds operate a diversified portfolio of equity, balance, fixed income and money market funds.
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Islamic funds invest in Shariah compliant securities i.e. shares, Sukuk (Islamic bonds), and GOP Ijara Sukuk etc. which may be approved by the Shariah Advisor of such funds. These funds can be offered under the same categories as for common funds.
This fund category may invest its net assets in certain types of securities and investment styles as specified in its offering document. Asset allocation funds are generally considered high-risk funds because of their potential to invest up to 90% of net assets in equities at any point in time.
Under a capital protected fund, the original investment amount is protected. This fund places a large portion of the investment amount with a bank in the form of a term deposit while investing the remaining net assets in accordance with the permitted investments stated in the offering document. Capital protected funds, unlike other funds, have an agreed maturity period.
Key To Mutual Fund Investments [infographic]
Index funds invest in securities to mirror a market index, such as the PSX KSE 100. An index fund buys and sells securities in a way that reflects the composition of the chosen index. The fund’s performance tracks the performance of the underlying index. Investment of at least 85% of net assets in securities comprising the selected index or its subset is required. Net assets balances are maintained in cash or near cash instruments such as bank deposits (excluding Term Deposit Receipts (TDR) and Treasury Bills not exceeding 90 days maturity.
The goal of an aggressive income fund is to generate high income by investing in fixed income securities while also taking exposure to medium to low quality assets. These Funds generally invest in a portfolio of various securities including government securities, fixed income bonds, deposits with bank(s), certificates of deposit and commercial paper etc. At least 10% of net assets are held in cash or near-cash instruments such as bank deposits and treasury bills with a maturity of no more than 90 days.
Commodity funds allow small investors to take advantage of returns on commodities and commodity futures contracts such as gold through pooled investments. During the year, at least 70% of the net assets must be invested in commodity contracts or commodity futures based on the average quarterly investment calculated daily.
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Mutual funds differ in terms of investment objectives, strategies, risks, and costs. Before choosing a suitable mutual fund category for your savings, you need to know your investment goals. Your financial goals are determined by your level of income and expenses, financial independence, age, lifestyle, family commitments and other factors. Here are some questions you should ask yourself and likely answers that will help you choose the right mutual fund.
Possible answers: I need a regular income; need to buy a house, finance a wedding; educate my children; or a combination of all these needs.
Possible answers: I can’t take any risks, or I’m willing to accept the fact that in order to make long-term profits there may be short-term losses.
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Likely answers: I need regular cash flow; or I want to grow mine