What Are Mutual Funds and How to Invest in Them?

Matual fund
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A simple yet effective way to grow one’s wealth is to invest in Mutual Funds. Having prior knowledge on the subject is not necessary hence it is one of the easier ways to invest money in Pakistan for new investors. Mutual funds are also part of the Capital Market where funds are exchanged between investors and suppliers of capital. To invest in Pakistan Stock Exchange, mutual funds, bonds and other securities are all effective ways of investing in the Capital Market.

What are Mutual Funds?

Mutual funds are a collection of securities such as bonds, stocks and other parallel assets. It can also be a collection of numerous stocks. It can be called a mutual fund as long as it is a group of assets or a group of the same type of security, linked in the form of a solo investment channel. Investors buy shares in mutual funds through Asset Management Companies (AMCs). They are managed by Money Managers or Fund Managers who then aim at managing the funds so as to earn a profit on them as a source of income for investors.

Why do people buy Mutual Funds?

Mutual funds provide them with an opportunity to cater to their financial needs in the long run if not in the short run. An investor chooses to invest in mutual funds also on the basis of their willingness to take risk or if they currently require the amount of money they were considering investing before.

Initial investment cost is low too. An investor can invest with an amount as low as Rs.5000.

An investor does not have to select stocks or bonds for themselves. This will be the job of the institution they choose to invest with.

It is recommended to invest in equity funds for people who want to invest for the long-term. Income funds are recommended for those who wish to invest anywhere between 1 to 5 years. An investor should pay close attention to the offering document. An offering document lists down the fee structure, objectives, restrictions and termination clauses of the fund.

Benefits of buying Mutual Funds

Unlike for a few other asset classes, a new investor does not require much knowledge on mutual funds when investing. Professionals will manage the investor’s funds, which reduces risk.

They conduct thorough research before investing the investor’s money. These professionals have specialized knowledge on the subject. The investor can diversify their portfolio in case their investment in a different sector is unsuccessful. Investors do not need to find a buyer to sell their funds. The fund exchanges the units at the current net asset value.

Non-resident Pakistanis are also eligible to invest in mutual funds.

Another benefit of investing in mutual funds in Pakistan is that they are quite liquid and so can be cashed out when needed. Unlike real estate which requires a hefty sum of money as initial capital, mutual funds can be purchased with relatively low capital.

Monthly additions can be made to the initial investment in increments.

A mutual fund may also receive dividends on the securities it owns. A certain percentage of these dividends is supposed to be distributed between investors.

Mutual funds are carefully monitored and regulated by authorized bodies which reduces chances of fraudulence. Asset Management Companies have routine inspections in order to ensure efficiency.

Tax benefits further incentivize investors to invest in mutual funds. Investors are eligible to avail tax credit which further increases the return on their investment.

Investors can also easily gauge the performance of the fund. They are given consistent updates on for example the fund’s holdings. This ensures transparency and safety for the investor.

What are the Types of Mutual Funds?

There are two types of mutual funds which include close-ended and open-ended mutual funds. Close-ended mutual funds are less liquid since liquidity is accessible after the fund has matured. Open-ended funds offer high liquidity. Closed-ended funds also have a fixed number of shares that are issued through an Initial Public Offering (IPO). Open-ended funds can be bought through Asset Management Companies based on their offer. They can further be classified into four main types of mutual funds.

Four Types of Mutual Funds

The four types of Mutual Funds include Money Market Funds, Income Funds, Stock Funds and Target Date Funds.  

  1. Money Market Fund: It is very liquid and has a lower risk factor attached to it. It includes investment in short-term fixed income securities. Examples include government bonds and certificates of deposits. These funds are also less volatile compared to other types of mutual funds. Hence, they are more suitable for inexperienced investors.
  2. Income Fund: It carries lower risk since they are aimed at yielding stable returns. A fixed rate of return is paid on these investments. Investors can invest in long-term and short-term instruments through this fund.

  3. Stock Fund: It deals with stocks, which also carries a higher potential of risk. It also has the potential to grow faster than the two funds mentioned above. Although these funds are more volatile, they can yield extreme long-term growth.

  4. Target Date Fund:  It is aimed at investors approaching retirement. They can also be referred to as Exchange-Traded Funds (ETFs). It is structured for investors considering a specific date in the future.

Shariah Compliant Funds 

Mutual Funds in Pakistan also include Shariah Compliant Funds. They are approved by Shariah Advisors to ensure they are backed by Islamic principles to invest money in Pakistan. Meezan Islamic Income Fund is Pakistan’s first Shariah compliant fund. Other Islamic funds include UBL Al Ameen Funds, Atlas Islamic Income Fund, Dawood Islamic Fund and many more.

How to invest in Mutual Funds in Pakistan?

Different ways to invest also have different mediums to do so. To invest in Pakistan Stock Exchange for example, an investor may use an online trading application such as KTrade. However, an investor can invest in mutual funds in Pakistan in two ways.

Two ways to Invest in Mutual Funds in Pakistan

  1. Bank: Once all document requirements have been successfully met, the bank then invests the deposited money on the investor’s behalf. It is a convenient way to have funds managed professionally and at a low cost. The bank will also send the investor statements concerning the mutual fund.
  2. Financial Advisors: They are another avenue through which an investor can invest in mutual funds in Pakistan. A reliable financial advisor, offers guidance to the investor that assists them in making financially informed decisions. These advisors are professionals and have a deep understanding of the instruments in the Capital Market.

In order to redeem units, an investor can file a request. The Asset Management Company will ensure that the payment is made to the investor within 6 working days.

Best Mutual funds in Pakistan

There are a few key indicators that help determine which mutual fund is the most suitable for an investor. An investor can choose, judging on the basis of performance data. The performance of one mutual fund can be compared to that of a competitor. Through this, an investor can gauge which mutual funds have been yielding higher returns throughout the years, based on the level of capital they are willing to invest. It is further advised to select a mutual fund that constantly betters its benchmark. A mutual fund that makes more returns against predicted risks consistently, is a better investment option.

It is imperative that an investor is well-researched on the mutual fund they are looking to invest in to ensure fruitful returns.


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