"The future outlook of the mutual funds industry is very promising and encouraging"

Money recently interviewed Najam Ali, Chairman, Mufap & CEO, JSABAMCO and discussed about mutual funds in Pakistan.

Money: Would you like to give an introduction about funds management from capital market perspective?

Najam Ali: Funds management is a process whereby you try to maximize gains for the investors while minimizing the risk exposure. You select those securities (equity and fixed income) in your portfolio which gives you a desired level of return both in terms of capital appreciation and/or dividend income, depending upon your investment criteria.
Mutual fund manage funds by pooling together money provided by various investors for investment into equity and fixed income markets with the objective to provide better relative returns to investors compared to other savings and investment alternatives. The pool of funds is managed on behalf of the investors by a team of specialized individuals, commonly known as fund managers or investment advisors.

Money: How can you differentiate conventional investments in banks from investments in mutual funds?

Najam Ali: One of the main differences is that Mutual Fund returns are tax-free returns whereas conventional investments in banks are subject to 10% withholding tax which means in real terms you get less than the quoted returns.
Other main advantages offered to Mutual Fund Open-End Fund holders is that they can redeem their funds anytime they want too except for certain specialized funds (at the prevailing Redemption price of the fund which is quoted on the daily basis), whereas in Banking Sector you can’t withdraw your invested money before maturity without paying a penalty.
Moreover, investment banks generally offer fixed rates on Certificate of Deposits or Investments; whereas mutual fund returns are variable; thus giving the investor the opportunity to earn beyond expected returns.

Money: How can we encourage general public to invest in mutual funds?

Najam Ali: The general public can be encouraged to invest in mutual funds through investor education and awareness campaigns through electronic and print media as well as through seminars, workshops and conferences for wide scale public dissemination of information on mutual funds. Once the public is aware of the advantages of investing in mutual funds compared to the other types of conventional investments such as bank deposits they would undoubtedly invest in mutual funds.

Money: Money: What is the impact of volatile stock market on Fund Managers?

Najam Ali: Fund managers backed by strong research and risk management function uses various tools and strategies to mitigate volatility in returns and provide better returns to investors even in time of market volatility. The fund managers generally hold a medium to long term perspective of the market and therefore may be subject to temporary fluctuations in prices of stocks which tend to stabilize over the medium to long term.

Money: Money: Would you also like to highlight on portfolio management?

Najam Ali: Portfolio management is the art and science of making decisions about investment (asset) mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk vs. performance. Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and numerous other tradeoffs encountered in the attempt to maximize return at a given appetite for risk.

Money: What is the size of Mutual Funds Sector in terms of investments in rupees and number of funds?

Najam Ali: Mutual Funds As of September – 06 (source MUFAP):



Money: What steps are taken by MUFAP to protect interests of its members?

Najam Ali: MUFAP has developed guidelines in the area of advertising and communications for Asset Management, Investment Advisory Services & Mutual Funds in Pakistan to promote fair competition among investment firms. The Standards are aimed at promoting a self regulatory structure within the Mutual Fund Industry of Pakistan, which in turn, will ensure clarity, honesty & integrity in all matters of advertising, marketing and promotions.
MUFAP has also adopted the CFA Institute Asset Manager Code of Professional Conduct. This Code sets forth minimum ethical and professional standards for providing asset management (including investment advisory) services to clients. The goal of this Code is to provide a useful framework for all asset managers to provide services in a fair and professional manner and to adequately disclose key elements of these services to clients
MUFAP is striving to achieve inter alia the following:
· To promote a cadre of well trained Agents and distributors and to implement a programme of training and certification for all intermediaries and other engaged in the industry
· To promote best practices in the mutual fund industry
· To interact with the Government, Securities and Exchange Commission of Pakistan (SECP), State Bank of Pakistan and other bodies on all matters relating to the Mutual Fund industry.

Money: Is there any impact of global funds sector on the Pakistani industry?

Najam Ali: Not much because international funds who come to Pakistan don’t exactly invest in mutual funds, rather they invest in stocks directly, therefore I don’t see any direct link between the two, however Pakistani mutual fund industry can not remain isolated from developments taking place internationally and is adapting the international trends and best practices.

Money: What are the current issues of funds management?

Najam Ali: 1. Inadequate regulatory framework to cater for new products and growing needs of investors.
2. Limited investment options.
3. Lack of awareness among the general public.

Money: How do you foresee the future of mutual fund sector in next ten years?

Najam Ali: The future outlook of the mutual funds industry is very promising and encouraging. The industry holds several exciting opportunities for both corporate and individual investors including the retired persons. These days, the mutual fund industry is generating keen interest among a growing number of investors. It is attracting fund managers and leading players of industrial and corporate sector as sponsors. Moreover, it has been providing versatile and attractive investment avenues to the general public while paying comparatively better returns based on dividend yields and capital gains. In the recent years, SECP has also taken a number of steps to promote the development of mutual funds industry.
These measures envisage multifaceted reforms to help the industry in managing its risks prudently, give operational autonomy, and reduce fragmentation as well as to protect investors’ interest. Comprehensive disclosure requirements at the time of public offering and subsequent reporting on the affairs of funds have been prescribed and enforced. In addition, managers have been given flexibility to establish their trusts or companies as well as to float equity, debt or hybrid funds. The steps taken by the Securities and Exchange Commission of Pakistan (SECP) to promote equity markets in general and mutual funds industry in particular are in line with overall macro-economic policies of the government and will help boost investment in mutual fund sector in years ahead.
I see the future bright ahead however there are challenges facing the industry such as stiff competition among mutual funds, limited investment avenues and effective management of risk due to the recently increased volatility in the markets.

Money: Do you have any support or are you looking towards the government to promote mutual fund’s sector?

Najam Ali: Mutual Funds Association of Pakistan is playing a pioneering role in the promotion of mutual fund sector in Pakistan by acting as a facilitator between the market participants and the regulators. It disseminates essential information on various funds, the fund managers, the stock market as well as the regulatory environment under which open and closed-end. MUFAP is also striving to achieve the following:
· To enhance the professional and ethical standards in all areas of operation of Mutual Fund industry to ensure that they are in line with international best practices
· To provide a centre of excellence for the development of knowledge and understanding of the Mutual Fund industry
· To promote public understanding of mutual funds and engage in promotional activities to ensure ongoing education of the public on Mutual Fund related issues.
 

Source : Money Business & Personal Finance, issue No. 14.