An asset management company, as fund managers, invests money from investors in a mutual fund
, which is a collective investment plan that specializes in pooling money
from investors to invest in securities such as equities, bonds, money market
instruments, and other assets. One of the primary benefits of mutual funds is
that they provide small investors with access to professionally managed,
diversified portfolios of equities, debt instruments [such as Term Finance
Certificates (TFCs) and government securities], and other securities that would
otherwise be difficult (if not impossible) to create with a limited amount of
capital. The income generated by these assets, as well as the capital gains
obtained, are distributed to unitholders in proportion to the number of units
they own. Mutual funds are divided into two types: open-ended and closed-ended
funds.
Open-ended
These are
mutual funds that create new units on a regular basis or redeem issued units on
demand. Unit Trusts are another name for them. Unitholders can purchase the
fund's Units or redeem them at any time at the current Net Asset Value (NAV).
These units can be bought and sold through an Asset Management Company, which
publishes daily offer and redemption prices.
These funds
have a fixed number of shares like a public company and are floated through an
IPO. Once issued, they can be bought and sold at the market rates in the secondary
market (Stock Exchange). The market rate is announced daily by the stock
exchange.
Structure of
Asset Management Companies
Asset Management Companies (AMCs), which are public limited companies incorporated
under the Companies Ordinance of 1984, manage mutual funds. The AMC establishes
new funds by establishing a Trust Deed between the Asset Management Company and
the Trustee, with the SECP's approval under the Non-Banking Finance Companies
(Establishment and Regulation) Rules, 2003 (the "Rules"). The Trustee
is in charge of the Fund's assets and acts as a custodian. The trustee ensures
that the Fund Manager makes investment decisions that are consistent with the
mutual fund's investment philosophy. Banks and central depository corporations
approved by the SECP can function as trustees under Pakistani law. Most of the
monies in the business are currently held in trust by the Central Depository
Company of Pakistan (CDC). The Securities and Exchange Commission of Pakistan
(SECP) oversees the mutual fund business and is quite strict when it comes to
awarding licenses to fund management firms, particularly in the case of
Collective Investment Schemes (CIS). The SECP also monitors mutual funds on a
continual basis through reports that mutual funds are required to file with the
SECP on a regular basis. SECP also performs on-site inspections of the AMCs.
Asset
Allocation
The process of
putting together an institutional or individual portfolio with the best
possible mix of assets from various asset types. As markets fluctuate, or as
the conditions of an investor's personal and financial status change in the
case of an individual portfolio, the portfolio will be rebalanced over time.
How do Mutual
Funds determine their Unit Price?
The price per
unit of a fund is represented by its Net Asset Value (NAV). The NAV is
calculated by dividing the market value of assets held in a Fund's portfolio,
fewer liabilities, by the number of units outstanding.
NAV = Total
Number of Outstanding Units - Current Market Value of All Assets - Liabilities
The unit's sale price is determined by adding the sales load to the NAV. The
NAV will be the sale price as well as the redemption price if there is no sales
load. The sale and redemption prices are announced by the Funds on a daily
basis and are available on their websites.
Fees and
expenses
Fees and
expenses are paid by investors in all mutual funds. These expenses are
significant since they affect the investment return; as a result, investors
must assess their returns after deducting all such expenses. The fees and other
charges are normally stated in the offering paperwork and fund brochure
prepared by the Asset Management Company. Management fees and load charges are
the two types of fees that most people are familiar with. For providing office
space and professional management, including all accounting and administrative
services, management fees are established as a fixed percentage of the average
net assets handled by the business. The second group includes sales
commissions, which are referred to as "front-end loads" (sales
charges applied at the time of purchase) or "back-end loads" (sales
charges when you sell). As the name implies, "no-load" funds have no
front-end or back-end sales costs. These charges cover the costs of
distributing and selling the funds.
Taxation on
Unit Holders
Dividend income
received from a mutual fund (excluding the amount of dividend paid out of
capital gains on listed assets) is liable to Income Tax as follows:
- Public
Corporation and Insurance Corporation 5% of total
- If any other
person, including a non-resident, receive it, 10% of the total
- Capital gain on
the sale of mutual fund units is exempt from taxation until capital gain on the
sale of securities listed on stock exchanges is exempt from taxation.
Tax Credit
Unitholders of
mutual funds, other than companies, are entitled to a tax credit under section
62 of the Income Tax Ordinance, 2001, on the purchase of new units because the
funds are listed on stock exchanges. The tax credit amount is the lesser of (a)
the amount invested in the acquisition of new units, (b) 20% of the unit
holder's taxable income, or (c) Rupees One Million (PKR.1,000,000) and is
computed by applying the unit holder's average tax rate for the tax year. The
amount of tax payable for the tax year in which the units are disposed of is
raised by the amount of credit permitted if the units are disposed of within
twenty-four months.
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