Mutual Funds are a good option for new investors because of the following advantages:

• Mutual funds are designed to make investing low-cost and straightforward. You can begin investing with as little as Rs. 5,000.
• Investors are not burdened with the decision and research involved in selecting the stocks and bonds to be purchased in the funds or the daily management and safekeeping of the chosen investments.

What are Mutual Funds

A mutual fund is a selection of stocks, bonds, money market instruments, or any similar assets bought by the investors’ money. A mutual fund can be different combinations of stocks, stocks & bonds, or any other variety of securities combined under the mutual fund as a single investment pool.

This combination is specified in the mandate of the mutual fund, and they cannot deviate from the set mandate.

Mutual fund investments are managed by Money or Fund Managers, who make the investment decisions and manage the funds to ensure that capital gains are maximized for investors.

Mutual funds are run by Asset Management Companies (AMCs), usually public limited companies. A Trust (and Trust Deed) is established by the Asset Management Company under which a mutual fund is launched. The Trustee acts as the custodian of the fund’s assets while the Fund Manager makes the investment and related operational decisions regarding the fund. Asset Management Companies can launch and manage multiple mutual funds with different or overlapping, or entirely distinct mandates.

Why Invest in Mutual Funds:

Mutual funds offer an optimized investment option to yield competitive returns to meet long-term or short-term financial goals. The investor can invest with the long-term financial goals of arranging funds for their child’s higher education or retirement savings or child’s marriage etc. An investor can also have short-term financial goals like saving for a vacation or buying a new car or a new home.

Before investing in mutual funds, all investors need to know their investment objectives. This will help determine the risk and return profile, investment timeline, and target goals. Understanding these questions will allow an investor to make more effective investment decisions.

By investing in mutual funds, the investor gets the advantage of exposure to different securities under a single investment package. They allow the investor to develop a diversified portfolio of assets while enjoying financial management by professionals.

Another key advantage of investing in mutual funds is that the investor can avail tax credit.

Types of Mutual Funds:
There are two primary forms of mutual funds. These are

1. Closed-Ended Mutual Fund:  These funds are traded on the Secondary Market after their launch through an Initial Public Offering.
2. Open-Ended Mutual Funds: These funds are issued in the form of Units to investors, which can be redeemed (sold back) based on their Net Asset Value (NAV) at any time. These funds can be purchased and redeemed through the Fund Management Company, which daily announces their offer and redemption prices. These funds can also be listed on the Stock Market.

Categories of Mutual Funds:

Mutual Funds are of different categories. These categories are based on where the fund invests, its risk profile, and the investment strategy. In Pakistan, the following mutual fund categories are approved by the SECP.

1.     Money Market Fund

These funds invest in short-term fixed-income securities like government bonds and certificates of deposits, and commercial paper. Their aim is to maintain high liquidity by investing in low-risk instruments that are generally safer.

2.     Income Fund

These funds generally invest in market securities, term finance certificates/sukuks, commercial paper, and spread transactions. They aim to generate a regular stream of income for their unitholders.

An income fund is generally seen as less risky compared to an equity fund as it is not likely to be affected by market volatility. The probability of capital appreciation is also limited.

3.     Equity Fund

These funds invest in stocks and grow faster than money market or fixed-income funds. This means they carry a higher risk as they are exposed to market volatility.  An equity fund aims to provide exposure to listed equity securities and capital appreciation over the medium to long­ term.

4.     Balanced Fund

A balanced fund offers exposure to both growth and regular income by investing in equities and fixed income securities. Regulations require that balanced funds keep 30% to 70% of their net investments in listed equity securities.

The other remaining can be invested in other certified investments. Balanced funds are exposed to both risks of fluctuations in equity markets and interest rate variations. Balanced funds can be risky like equity funds but are less risky than equity funds based on asset allocation.

5.     Asset Allocation Fund

These funds can invest in any type of securities subject to conditions to diversify their assets across different types of securities and investment styles as written in their offering document. Asset allocation funds are generally considered high-risk funds due to their potential to be fully invested in equities at any point in time.

6.     Capital Protected Fund

This type of fund makes investments in such a way that the original amount of investment is safe to ensure positive investment returns. This fund keeps a significant part of its net amount in a bank in the form of a term deposit. At the same time, the remaining is invested in accordance with the authorized investments stated in the offering document. Unlike other funds, the capital-protected fund has a fixed maturity period specified under the investment period or tenure.

7.     Index Tracker Fund

This type of fund is designed to carry out the activities of a particular index and show the probable tracking in the offering document. Investment of at least 85% of net assets is required in the securities that constitute the selected index or subset.

8.     Fund of Funds

This fund holds other mutual funds in its portfolio rather than investing directly in any security. However, each fund of funds will have its own category, for instance, equity fund of funds, income fund of funds, etc.

An investor can invest in the fund that suits his investment strategy, the investment time horizon, how much risk he can tolerate, his cash flow requirements, or any other investment objectives/ requirements.

The Mutual Funds Association of Pakistan has a very helpful website http://www.mufap.com/ with comprehensive details and comparisons of fund performance.

Key Terms:

Some key terms used in mutual funds investment that you should know are as follows:

Net Asset Value (NAV): 

Net Asset Value is the market value of a mutual fund’s assets after deducting its expenses and liabilities on a particular day. The per unit NAV is the Net Asset Value of the funds divided by the number of units/ certificates outstanding on the Valuation Date. The NAV shows the performance of a mutual fund.

NAV = (Current Market Value of all Assets – Expenses – Liabilities) / (Total Number of Units Outstanding)

Expense Ratio: 

Expense Ratio is the fund’s annual fund operating expenses, expressed as a percentage of its average net assets. An Expense Ratio of 1% p.a. means that 1% of the fund’s total assets will be used to cover expenses each year. Expense Ratios are essential to consider when choosing a category of mutual fund as they can significantly affect returns.

Redemption: 

The units of open-end mutual funds can be partially or fully redeemed at any time from the Asset Management Company that manages the funds.

Fund Manager Report

This is a monthly report produced by an asset management company in which information on the composition and performance of the mutual funds is presented.

How to Invest in Mutual Funds:
The documents needed for opening a mutual fund account are as follows:

1. CNIC Copy
2. Application/ Account Opening Form/ Purchase of Units Form
3. Zakat Affidavit (Optional)
4. KYC Form/ FATCA Form
5. Cheque/ Pay Order/ Demand Draft (payable to the respective Trustee)

Fees & Charges:

You must keep in mind that there are charges involved with investing in mutual funds. Some of these charges are as follows:

1. One-time Fee: This fee is paid for investment/ divestment in an open-end fund. Details of these fees are disclosed in the offering documents.
2. Front-end Load: This is charged on the purchase of units of the fund.
3. Back–end Load: This is charged when an investor redeems his investment in the mutual fund.
4. Contingent or Deferred Sales Load: This is charged only when there is no front-end load. This load ischarged on redemption of investment. However, funds can reduce it progressively if an investor holds an investment for a more extended period.
5. Management Fee: This is the fee charged by the AMC for the management of a fund.
6. Trustee Fee: This is the fee charged by the Trustee to provide trusteeship and other services for the fund’s assets.

Benefits Of Investing In Mutual Funds:

Asset management companies manage mutual funds. They evaluate investment opportunities by researching, selecting, and monitoring the performance of the securities purchased by the fund. These tasks are done by qualified financial professionals who make calculated investment decisions on your behalf.

Diversification

A mutual fund can help reduce investment risk if a company or sector fails by spreading its investments over other securities and investment sectors.

Affordability

Mutual funds are ideal for investors without a lot of money to invest. They have relatively low Rupee amounts for initial purchases and subsequent monthly purchases. For example, you can add funds at set amounts of, say, PKR 1,000 to 5,000 per month or other intervals. This is not difficult to set aside for savings or investment purposes.

Liquidity

Mutual fund unit holders can easily redeem their units into cash on any working day. They will receive the applicable value (NAV) of their investment within six working days. Investors do not need to look or wait for a buyer. The fund buys back (redeems) the units at the current net asset value (NAV).

Well regulated

The SECP continuously monitors all mutual funds through reports that the mutual funds are required to file with the SECP regularly.

Transparency

a mutual fund’s performance is reviewed by different publications, rating agencies, and the SECP. This makes it convenient for investors to compare the performances of different funds. Unit holders also receive regular updates, like daily NAVs, fund’s holdings, and the fund manager’s monthly strategy report.

Tax benefits

Investment in mutual fund schemes entitles the investor to avail tax credit that enhances the overall return on their savings

Things to Know Before Investing In A Mutual Fund

Before selecting an appropriate mutual fund for your savings, you must identify your investment objectives. Your financial goals are determined by your income, expenses, financial independence, age, lifestyle, family stage, etc.

Here are some questions that you should ask yourself and likely answers that will help you select an appropriate mutual fund.

• Why am I investing?

I need some side income, need to save up to buy a home, fund a wedding, save for higher education, or a combination of all these needs.

• What is my risk tolerance?

I am unwilling to take any risk, or I accept that to earn long-term gains, I may book short-term losses.

• What are my cash flow requirements?

I want to multiply my assets for the future and do not need periodic cash flow; I need a regular cash flow, or I need X amount to meet a need in X years.

• What is my time horizon?
• I need some money in under a year (short term), or one to five years (medium-term), or five years or more (long time)

If you answer these questions honestly, you will have clarity of what to expect from your investment.

This will help you determine an appropriate mutual fund investment strategy.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post All you need to know about Investing In Pakistani Mutual Funds appeared first on Smartchoice.pk.

What Kind of Investor Are You?

Before you decide to invest money someplace, you need to know what type of investor you are. This means that you figure out how much risk you’re willing to take. This is because most investment choices have some risk. Risk can be seen as the chance of losing your original money, which is also known as your capital. Some people are not willing to have their capital at risk at all. This is known as being risk averse. Others are very comfortable with risking their money if there is a prospect that they can gain more in time. Most of us have risk preferences that fall in some range between these two extremes.

Most investment choices are categorized according to their risk level. For example, many people see Defence and Special Saving Certificates as safe investment avenues in Pakistan. Similarly, the stock market is riskier and more prone to manipulation.

As a new investor, it is up to you to decide what risk levels you are more comfortable with. standard options through which you can invest are as follows:

1. Investing through your employer

One of the safest options for investment can be to simply ask your employer to deduct an extra percentage of your salary into the retirement plan offered by your employer. This is an effortless and safe way of investing money with minimal hassle. Once you get used to this extra deduction, you won’t even feel its absence.

Most work-based retirement plans deduct your contribution before taxes, making it even more convenient. The charm is that you can continue to increase this deduction as your salary increases through promotions and annual raises.

2. Investing in stocks

A stock is an ownership unit in a business that gives the person ownership rights. Stocks are also called shares. A person holding stock in a company is the shareholder of that company. Most companies issue stocks to generate money for their businesses. Investors can buy and sell shares on stock exchanges or markets to earn profit from price fluctuation or dividends.

· What is a Stock Exchange?

A Stock Exchange is a specific market where you can buy or sell stocks. Units of stock are called “shares.” You can buy shares from companies, use them for investment and sell them again, in turn making a profit. A Stock Exchange allows complete anonymity of the person on the other end of the trade.

· How does it work?

Stock Exchanges work the same way globally. A business raises money (known as capital) by issuing shares. The people who buy these shares usually plan to sell them someday. This selling (and buying) will be done through the Stock Exchange. Others buy shares to earn dividends from the shares.

The Federal Board of Revenue claims that there are roughly 300,000 registered stock traders under the Sales Tax Act. in comparison, the National Clearing Company of Pakistan (NCCPL) stated in April 2021 that about 250,000 are listed as earning from their trading activities.

· What are Dividends?

The company issues dividends to its shareholders. It is a part of the company’s profits given to the shareholders as payments. Most companies do not guarantee dividends, and they can vary year to year.

· Types of Investments in the Stock Market

Two types of investments can be made on any Pakistani Stock Exchange:

i. Short Term Investment:

In short-term investment, the investors buy and sell shares frequently based on the market price. They do so by their skill of analyzing the pricing projections of stock prices. The principle is to buy at low prices and sell as soon as the price rises.

ii. Long Term Investment:

In long-term investments, the investors keep their shares for an extended period. Ideally, they earn dividends and hold the share until the prices reach their peak to maximize profit.

Things to Remember when investing in Shares

When we buy a product, we usually have a list or know what we want to buy, where to go, and which shops to browse. The same applies to investing in the stock market.

You have to do a lot of research into sectors, companies, and their performance history to know which stock performance and valuation fits into your investment preference or risk appetite.

The main factors that influence the pricing for stocks are the financial data related to the company, the state of the industry in which the company is working, the interest rates offered by banks, and investor sentiments.

Financial information is available in financial statements issued by the company every quarter. They give investors insight into the financial situation of the company. However, understanding financial statements can be tough for even experienced investors.

Investing in stocks can be rewarding, but not everyone is fortunate enough to pick performing stocks and earn good returns. There are other options for people who find the stock market too complicated for their comfort.

3. Mutual Funds

Mutual Funds are a form of stock investment that is less risky and more convenient. A mutual fund collects money from multiple investors to invest in securities like stocks, bonds, money market instruments, and other assets. The investment options for a mutual fund are predefined and available for everyone.

Mutual funds offer an edge to investors as they offer a diversified portfolio, which professionals manage for a specific price. This price is known as the management fee.

Assets under management (AUM) is the market value of all investments that the fund handles on behalf of investors. AUM shows the fund’s size, and generally, higher AUMs mean higher trading volumes and imply better liquidity.

Mutual funds are considered more advanced and less risky than stocks as they place the investors’ capital in a combination of shares, bonds, and even real estate. They are less risky because of this.

How It works

As an investor, you buy the mutual fund in units and earn a profit or grow your investment, depending on the type of mutual fund you invest in. You can shop around for a fund that you find suitable.

You can also invest in multiple funds covering foreign securities or industries. Mutual funds give returns in dividends, coupons, or even profits, depending on the type of assets they invest in.

The mix of investment choices is known as asset allocation. For an individual, asset allocation involves splitting the investment funds among various assets, like stocks, bonds, and cash.

4. An Exchange-Traded Fund (ETF)

An exchange-traded fund (ETF) is a form of mutual fund that invests in a group of securities linked to an index. The stocks are selected based on the ETFs investment criteria.

ETFs can have different investments like stocks, commodities, bonds, or a mix of these types. ETFs are separate from mutual funds as they are listed on exchanges and can be traded there like ordinary shares.

Investing in an ETF gives exposure to a group of stocks. Instead of dealing with individual stocks, you can get multiple shares through a single ETF investment.

For an ETF, assets under management (AUM) are the market value of all investments that it handles on behalf of investors. AUM shows the fund’s size, and generally, higher AUMs mean higher trading volumes and imply better liquidity.

The process of settling on a mix of assets to invest in is a very personal one and usually depends on your investment goals and your age when you start investing. Opting for a mutual fund or an ETF simplifies the decision-making process.

Investment Strategy

An investment strategy is used to select what securities you will invest in. These strategies are made according to your risk appetite and saving preferences. This means the amount of risk you are willing to take on your money when you want your capital back and an estimate of how much you want to increase it.

In theory, your investment strategy determines which securities and investment avenues you will place your funds. Many younger investors, who have the funds and can take risks, invest in riskier investments since they can afford to gamble with their funds, as they have less responsibility and can take the shock of losing (some of) their capital.

Ultimately, you have to assess yourself to see why you are investing. Are you looking to get a secondary source of income through investing? Or do you want to build another house for rental income? Do you want to save up money for your children’s future? The reasons can be diverse.

Sadia Zaheer

Sadia Zaheer holds a Masters in Business Administration from IBA, Karachi. After working in several financial institutions in Client Management, Corporate Lending, Islamic Banking and Product Management she jumped careers to pursue a career in writing.
She is a Finance, Business and HR Development writer with four years of experience. She reads a lot and takes care of her multiple cats to remain calm.

The post Invest Money in Pakistan: An Ultimate Beginners Guide appeared first on Smartchoice.pk.

Read also: How to Know If an Investment Scheme is a Scam?

Investing in Fixed Deposit

Fixed deposits are believed to be the safest form of investment and give you guaranteed results after the specified time duration. It will not only develop your habit to save but will also give you higher interest rates as compared to normal saving accounts. Another benefit of a fixed deposit is that it can serve you as a rescuer in your tough times or when you need a big amount of cash for an uncertain situation. If you are a salaried person, you must invest in a fixed deposit and ensure liquidity for any painful situation or hard times in your life.

Prize Bonds

Prize bonds are the easiest and a hassle-free way to invest with a limited amount in your hands. In this case, you are not only risk-free, the bonds guaranteed by the government and being an owner of the bond you can claim your money back whenever you want to.

The prize bonds in Pakistan come with various values starting from PKR 100 up to PKR 40,000. With this variation, you are not bound to invest a large amount or any specific amount of money in the market. You can start with a very small amount as well.

You can buy these bonds from the State Bank of Pakistan or any designated branch of a commercial bank operating in Pakistan. Your bond will have a specific serial number based on which the draws will be held every three months and if your number wins the draw you will be rich overnight. If not, your money is secure with the government, better luck next time.

Read also: How to Prepare Yourself Against Uncertainties in Life?

Mutual Funds

If you are not much interested in doing research and deal with the ups and downs of a business, a mutual fund is the best idea. You can keep your attention to whatever you are doing in your life and leave the hassle of business and market strategies to the expert who will be managing your funds.

Mutual funds are a pool of money where your assets are managed by the professional aided finance management companies. This is a professionally run business with the saving collected from the general public like you and invests that amount in a different business like real estate and stock etc. You will get the profit on your invested money after a specific time. If you are willing to invest your money is something but the savings are lower than what is required, you can invest in a mutual fund and make you money from it. In mutual funds, the risk is shared and it also offers a tax rebate in your investment.

Mutual funds are of many different types including; open-end, closed-end, low-risk, high-risk, equity or fixed income funds. It depends on you which of these you are willing to invest your amount in.

Become a Silent Business Partner

Do you know active businessmen in your circle that need some capital to expand? Investing your saved amount in that business will make you an angel investor for the business and that capital will help the business grow, giving you some extra profit in the invested amount.

Rather than thinking about it as a loan to the business owner, become his business partner. Let him manage everything that way he was doing in the past but the profit will be shared with you for any further deal made in the past. Being a silent partner to that business you will need to put efforts but just keep a check on the profit and loss sheet of the business.

Read also: Want to Know How to File Tax Returns in Pakistan? Read this Guide

Investing in Foreign Exchange

The term forex is used for foreign exchange trading and currency trading. It is the biggest market around the globe and is equally appreciated and operational. The market is highly liquid and makes a massive amount of trading on a daily basis. Although there are risks in investing in forex you can also make a lot of money if you are taking the assistance of the experts who are trained professionals in making a deal in the forex market.

The forex market works round the clock and you can surely find an open market anywhere in the world. The high volume of liquidity offers you the opportunity to take your money out of the market anytime you want to. The forex market does not implement any restrictions and you can earn profit from rising and falling prices and you are completely open to make a deal anytime you want to.

Insurance Policies

Despite many arguments, the life insurance is advocated as a handsome investment plan. You can find many people referring you to the cash-value component of permanent life insurance and the options which can be considered as an investment idea. There are life insurance plans that can earn you tax-deferred growth which means that you do not need to pay taxes on any interest or to any dividends or a capital gain from the life insurance plan.

You can keep a policy till age 100 or as long as you can pay the premium. There are some life insurance policies in which you will not lose your coverage after set years or defined time. You can also put this money in savings accounts or in an account on which you do not pay fees or any kind of commission. A permanent life insurance can offer you accelerated benefits and help you in case you get seriously ill.

Read also: How to Manage your Expenses when you get Unemployed in Pakistan

Investing in Stocks

Most of us know that investment in stocks is something that can make you rich overnight. But it can also leave you with a massive loss if you are not working on the deals properly and the reason is that few of the new investors have the idea about how to make money from their shares in the stock market. However, if you are able to deal with the stock market dealing effectively you can earn a capital growth in your stocks and share prices. It will also help you to build a worthy financial portfolio to earn a profit in the future. The stock market offers you higher returns as compared to bonds or cash deposits and also offers some protection against inflation and in any such case, the corporate profiles increase in cash terms so that the dividends and the share prices can go up.

Every person aims big in his or her life and if planned accordingly from the very first day, they could get success in achieving their goals. The advance technology aided lifestyle of this century have brought a wide range of opportunities to get your goals perfectly. However, a worthy financial portfolio can be of great help to you to achieve your goals. The above-mentioned ideas do not need a huge amount to invest but can lead you to greater benefits in your future.

Khurram Zahid

The post How to Start Your Investment Portfolio Right from Your Salary? appeared first on Smartchoice.pk.