A round-up on mutual funds

Despite interest rate volatility, political uncertainty and turbulent equity market, the mutual funds industry registered 16 percent growth, in terms of net assets in 1HFY12. Category wise largest growth was experienced by the Income funds category, whose average annualised return in 1HFY12 was 10.1 percent. According to a report published by InvestCap, the income funds grew by 41 percent in 1HFY12, over the same period last year. This phenomenal increase is owed to the declining interest rates. An industry expert while talking to BR Research said that unlike money market funds, income funds have the option to invest in long-term debt instruments, which essentially are the best investments when the rates are falling. The money market funds offered an average return of 12 percent in 1HFY12. The fund size surged from Rs.77billion to Rs.104billion by the end of 1HFY12 - growth of 36 percent. In the same period, the Islamic money market funds showed a growth of roughly 8 percent. The increase in this category is due to investors preference for short term, low risk investments. A slight reduction in growth was experienced by the money market in December as the SBPs decision to maintain the interest rate went against market expectations. The equity funds category posted a negative return of 7.7 percent in 1HFY12; however, it still outperformed the benchmark KSE-100 indexes by 1.5 percent. The equity fund category experienced a decline of 16 percent in 1HFY12, as the net assets fell from Rs.70 billion to Rs.59 billion in 1HFY12. Overall, 14 new funds were launched in CY11, out of which only one is a cash fund, which was launched by Habib Asset Management. Banks interest in Asset Management Companies (AMCs) continued, as they enjoy a favourable tax rate of mere 10 percent on income (dividends/ interest) from investments made through AMCs, instead of the 35 percent corporate tax rate that is applicable on investment income. In near future, the returns for money market funds are expected to mimic the discount rate. Industry experts believe that income funds with high quality assets would yield 12-15 percent. However, uncertainty about the performance of equity funds is expected to continue.

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Open-ended fund change in net assets and return
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(Rs bn)            1HFY11  1HFY12  change  return in
                                              1HFY12
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Equity funds           51      44    -13%     -7.70%
Income funds           52      62     19%     10.10%
Money market funds     50     104    107%        12%
Total Mutual funds    195     266     36%
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source: MUFAP