Savings and investments are two key factors which can play a significant role in economic growth, especially in the context of a developing country like Pakistan. National savings are critically important to help maintain a higher level of investment, which is a key determinant for economic uplift. Pakistan's financial sector is banking centric which is holding 95 % of the financial sector's total assets.Accordingly, the saving rate in Pakistan is low relative to other regional economies. According to Pakistan Economic Survey, domestic savings were 8.4 percent of GDP in 2014-15 as compared to 8 percent of GDP in 2013-14.
To promotea saving culture in Pakistan, it is essential to increase the range of financial products available to potential investors..Mutual funds are financial intermediaries which pool the savings of investors and invest them in a large and well diversified portfolio of securities. Mutual funds through their wide range of products can play a significant role in mobilizing domestic savings for the growth of our economy.Advantages of investing in mutual funds include reduction in asset specific (non-market) risk of securities, expert professional management, diversified portfolio and taxcredit. Different categories of mutual funds allow investors, to take exposurein various asset classes such as stocks, bank deposits, government securities, T-bills, TFCs and commodity based futures contracts etc.
Mutual Funds are regulated by the Securities and Exchange Commission of Pakistan and were introduced in Pakistan in 1962, with the public offering of National Investment (UNIT) Trust (NIT), which is an open-ended mutual fund in the public sector. All mutual funds launched by an asset management company (AMC) are required to be registered as a notified entity with SECP. SECP has issued a set of rules under the Non-Banking Finance Companies Rules, 2003 and Non-Banking Finance Companies and Notified Entities Regulations, 2008 for the smooth conduct and regulation of mutual funds and AMCs.
As of May 31, 2015, there were 23 asset management companies inPakistan managing 171 mutual funds with total assets of Rs 518 billion.The mutual funds industry in Pakistan has yet to find mass acceptance due to lack of awareness among retail investors about mutual funds as an efficient investment product. Due to inadequate marketing and distribution effort, there is minimal presence of asset management companies' network acrossthe country.It may be noted that total assets of banks as percentage of GDP are 43.8%, whereas mutual fund assets to GDP ratio is only 1.6%, which is much lower than other regional markets such as Malaysia (32%), India (8.3%), and Turkey (2.33%).
The SECP regulations' primary focus is the protection of rights and interests of investors,particularly small investors, who have limited knowledge, experience and information with regards to working of capital market, stock exchanges and the operations of mutual funds.
The SECP considerstransparency and disclosures as essential for investors to make informed investment decisions and made mandatory for the AMCs tokeep the investors informed about the way their monies are being managed.Further, SECP Regulations require the custody of assets of the mutual funds with an independent trustee whichis registered after meeting stringent criteria and a due diligence process.SECP inspects the books of accounts, records and documents of mutual funds,AMCs and the trustees and mayimpose penalty in case of violations of regulations.
In collaboration with other industry stakeholders, the SECP has implemented various measures aimed at strengthening the mutual funds industry and safeguarding investors which include, permitting flexibility to AMCs to delegate non-core functions to a third party service provider, detailed norms for selling of units of mutual funds to ensure that unit holders are treated fairly by AMCs and their representatives, and detailed requirements for AMCs to advertise open end mutual funds to ensure transparency.In order to provide small investors with ample investment opportunities across various asset classes, SECP encourages product innovation and has approved anew category of mutual funds ie commodity funds and further allowed balanced funds and asset allocation funds to take exposure in commodity future contracts. Furthermore, equity oriented mutual funds have been allowed to invest in units of Real Estate Investment Trusts. Further, SECP has introduced guidelines for Constant Proportion Portfolio Insurance based mutual funds. These guidelines are aimed at risk mitigation, investor protectionand e sustainable growth of this category.
The SECP has recently proposed certain amendments in the regulatory framework for mutual funds in accordance with international best practices, on which public consultation has been completed.These amendments are aimed at encouraging sustainable growth of the mutual funds by improving access by retail investors. To protect investors requirements relating to fiduciary responsibilities, corporate governance, proxy voting, employee's trading, internal control and risk management have also been strengthened.
It isan opportunetime for the mutual funds industry participants to focus on distribution channels, provide easy access to financial instruments through setting up of capital market hubs across major cities of Pakistan, and instill confidence in the minds of people. Investor perception about mutual fundsas a tool to achieve their financial goals is a pre-requisite for making them a destination of choice for retail investors. .
With the objective of providing access to retail investors/individuals about information relating to mutual funds and AMCs, SECP has launched a dedicated web portal , under the brand name, JamaPunji, which is expected to enable investors take informed decisions regarding mutual funds.