What are mutual funds?

A mutual fund is a pool of investor money invested by a professional fund management team in different types of securities based on the objective of the fund. Each mutual fund is managed according to a set of defined objectives, as stated in its Offering Document. This gives investors the freedom to choose a fund consistent with their goals.

What are the different types of mutual funds?

Open-end Fund
An open-end mutual fund issues its own units to investors continuously and then redeems the units as required. Thus, the total asset base of the fund grows and shrinks as money flows in and out of the fund. There's no limit to the number of units the fund can issue.

Close-end Fund
Close-end funds are a pooled investment fund that issues a limited or fixed number of shares and these shares are traded on the stock exchange. The number of shares or units in a close-end fund remains fixed. The prices of closed-end fund are based on market demand and supply.

Comparison between Open-ended & Closed-ended Funds

What are the advantages of investing in an open-ended mutual fund?

Major advantages of investing in mutual funds include:

• Professional Management: The fund manager is an investment specialist who manages the fund’s investment portfolio on a continuous basis. The fund manager’s job is to analyze the financial markets for the purpose of selecting those securities that best match a fund’s investment objectives.
• Diversification: Mutual funds provide investors exposure to a diversified portfolio of investment instruments, reducing the investors’ overall portfolio risk.
• Liquidity: Investors holding units of open-ended mutual funds will be able to invest and disinvest anytime to match their particular liquidity needs with little or no transaction cost as opposed to a bank’s term deposit scheme.
• Flexibility: As investment goals change, investors can transfer part or all of their investments from one fund to another to achieve different objectives.
• Tax Benefits: Under the current tax rules, capital gains on sale of units as well as bonus units are exempted from taxes. Cash dividends are taxed at a maximum of 10% depending on the category of investor.

How do mutual funds make money for investors?

There are two ways of earning returns on mutual funds; dividends declared by the management company or by the appreciation in price.

• Dividend Payments: On an annual basis fund’s management will declare dividends in either cash form or in the form of bonus units.
• Appreciation in Price: When the price of a fund increases due to appreciation in the overall portfolio of the fund, it results in capital gains for investors who can now redeem their units at a higher price.

What is Entry/ Front-end Load?

Entry/ Front-end load is the sales and processing charges payable by an investor upon purchase of units. This charge is added to the Net Asset Value in determining the Offer Price. This is a 1-time charge and is paid on investment.

What is Exit / Back-end Load?

Exit/ Back-end load is the sales and processing charges payable by an investor upon redemption of units. This charge is deducted from the Net Asset Value in determining the Redemption Price. This is a 1-time charge and is paid at the time of redemption of units.

What are the tax implications of investing in a mutual fund?

Returns from mutual funds can take the form of capital gains and/ or distribution in the form of cash dividends or bonus units. Capital gains on listed securities are exempted from income tax till June 2007. Moreover, cash dividend distributed by funds is subject to withholding tax at 5% for companies and 10% for all other investors. This withholding tax is the full and final tax liability for such dividend income.

What is the role of the Management Company?

The Management Company is responsible for the day-to-day running, promoting and marketing of the fund, attending to client queries, financial reporting to the Regulatory Bodies, etc. The Management Company will research, analyze and choose the investments that will benefit the Unitholders. It is also the Management Company’s job to make sure that Unitholders accounts are accurate and up to date, and that they are kept aware of how the fund’s investments are performing.

What is the role of the Trustee?

The Trustee will take into custody and hold under its control all the property of the Fund in trust for the Unitholders. The cash and registrable assets shall be deposited or registered in the name of or to the order of the Trustee. The Trustee will carry out the instructions of the Management Company in all matters including investment and disposition of the Fund Property, unless they are in conflict with the Deed, the Rules and the Offering Document(s) or applicable laws. It shall also ensure that all issues and cancellations of Units of the Fund and the method adopted by the Management Company in valuing Units for the purposes of determining the Offer and Redemption Prices are carried out in accordance with the provisions of the Deed and the Rules.

What is the role of the Government?

SECP not only regulates the Mutual Fund industry but all stock exchanges in Pakistan, all listed companies, the insurance industry, investment banking sector and the stock brokerage business. The SECP has established and continues to develop a stringent set of rules and requirements and an organization has to abide by them in order to operate as an Asset Management Company. The Management Company falls under the regulations of SECP, SBP, etc.