As PSX descends into bear market again – Why you should consider Mutual Funds?

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The Volatility of PSX and Investor Confidence

The opening of Pakistan Stock Exchange (PSX) on Monday, 9th March brought with it a bearish trend in the recently improved market index. PSX had moved passed its bearish trend after first half of 2019, from index level of 28,000 in August 2019 to 40,000 in February 2020 (Investor Lounge, 2020). Despite the global meltdown of stock markets around the globe, Pakistan stock exchange maintained its growth based on expectations regarding inflation and discount rates under new monetary policy, that is to be announced.

Update: The current index level of PSX has dropped to 28,000 as of March 27, 2020.

Announcement of Corona-Virus as Pandemic

Since WHO has announced Corona-virus as a global pandemic, the fear of global turmoil, low demand for goods and services and trade disruptions translated into investors’ pull from PSX. The recent upward revisions in market caps and floors for stocks (7%) has allowed increased margin of buying of a stock but it also allows sharp drop in prices in a single trading day as well (Tribune, 2020). This volatility has shaken the trust of investors in stock market and made them pull out money in fear of market crash. As an individual investor, this is high time that people start looking for alternative investment instruments to place their savings and avoid the shocks of economic disruption under the current crisis.

We are looking at Mutual Funds as the best alternative in current situation as they provide several benefits to investors that are not available with direct investment in stock market.

What is a Mutual Fund?

While corporate sector in Pakistan has been investing with mutual funds for years, individual investors still have little knowledge on this instrument. Mutual Fund is a central fund managed by a group of expert individuals who take investments from individuals and invest them in best possible instruments including stocks, bonds, money market instruments like T-bills, Term Finance Certificates (TFCs), Sukuks and International Bonds. Individuals in Pakistan are generally familiar with only stocks and that too, due to their limited money, fail to protect in case of market’s bearish trends. Mutual funds on the other hand deal in several instruments and have large funds to support or hedge their returns in case of market downturns.  Moreover, unlike stock market, mutual fund companies offer a variety of funds with varying risk levels for investors based on their personal preference.

Types of Mutual Funds

There are four main categories of Mutual Funds: Equity fund (Stocks), Fixed Income Funds (Bonds), Money Market Funds (Short-term debts, T-bills, Certificates of Deposit CDs, Repos) and Hybrid Funds (Mix of equity, fixed-income and money market instruments). The equity funds are considered high risk funds, hybrid funds are medium risk funds and fixed-income and money market funds are low risk funds.

Benefits of Mutual Funds

In ever volatile economy of Pakistan, there are several benefits that mutual funds offer to individual investors.

  • Professional Fund Managers

An average Pakistani investor does not have sufficient knowledge regarding investment instruments even when it is in stock market, which requires extensive study of companies’ results, government policies and market trends. The knowledge of money market and fixed income instruments is even difficult to grasp for common people and thus, the professionals from financial fields work in mutual fund organizations to manage large portfolios for investors. In Pakistani mutual fund industry, Fund managers are highly qualified employees who have a minimum of 5 to 6 years of experience in primary and secondary markets and thus, are more reliable than common investors.

  • Higher returns

Some alternatives to mutual funds are the National Saving Schemes (NSS) and Bank Deposits where NSS’s returns are fixed and vary between 8% to 9%, and return for bank deposits is also around 9% to 10% and is usually on lower side. Mutual funds on the other hand offer greater short term and long term returns to investors, varying in range of 9% to 23% (Spectrum Securities, 2020). The returns for mutual funds vary on daily basis however, a risk averse person can invest in fixed-income, money market instruments or capital protected income funds for competitive returns on low to medium risk funds.

  • Tax benefits

One of the greatest benefits of investing in a mutual fund in Pakistan is the tax return that is available to investors under Income Tax Ordinance of “Investments in Mutual Funds and Voluntary Pension Schemes (VPS)” (HBL Asset, 2020). The ordinance allows investor to claim around 20% of his taxable income from Mutual Fund Investment, a facility not available on bank deposits.

  • Easy Redemption

While bank deposits and saving schemes have restricted time periods to withdraw initial investment, mutual funds provide a flexible redemption facility where investors can withdraw their profits or initial investments at any point in time from the funds. The redemption process is very simple in mutual funds as not only physical forms are available but several asset management companies have online applications that allow investors to withdraw required amount from home using the app.

  • Strict Regulations

The mutual funds in Pakistan are safe investments that are heavily regulated by several regulatory bodies such as Securities and Exchange Commission of Pakistan (SECP), Sharia Board Advisors, PSX, trustee and auditors. Under the regulations, monthly and yearly fund manager reports are published to inform investors regarding the exposure of funds in each type of instrument. This regulation restricts mutual funds from taking higher risks than prescribed limits and safeguards investors against huge losses.

Top Performing Mutual Funds of Pakistan

Based on Year-to-date returns of mutual funds, these are the best performing funds in 2019

  • HBL-IFCB
  • HBL-GFCA
  • Alfalah-GHPAF
  • UBL-SAF
  • ABL-IF
  • ABL-ISF
  • Atlas-ISF
  • ABL-ISF
  • NAFA-ISF

Other factors to consider before investing in mutual funds, apart from returns on funds, is the fund size, its structure, risk credit rating by rating agencies and group profile.

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