How To Start Investing My Money – If you’ve never invested before, but have money in your pocket to hold for at least three years, we’d like to introduce you to an easy way to invest called a “mutual fund.”
For most people unfamiliar with investment products, the name mutual fund can be intimidating. Mutual funds have the following advantages:
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Mutual funds are collective investment schemes that pool the money of many investors. An Asset Management Company (AMC) duly licensed by the Securities and Exchange Commission of Pakistan (SECP) invests your money in securities or other financial assets for profit/income and return on your behalf.
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In Pakistan, most of the mutual funds are open-end funds. Each issued unit represents an investor’s proportional ownership of the fund’s unallocated portfolio; each unit owner contributes equally to the allocation as other investors. Investors buy mutual fund units from the fund itself or from a bank/financial company authorized to act as a distributor/sales agent. Mutual fund units are not traded on secondary markets such as the PSX.
By regulation, an independent manager registered with the SECP maintains custody of all assets of a mutual fund. The trustee manager is obliged to ensure that the asset management company invests in fund assets in accordance with the approved investment policy and investment fund franchise investment method, and all assets of the investment fund, including cash, are registered in the name of the asset management company. trustee or trustee’s order.
Fund managers at asset managers are supported by a dedicated research team that monitors the performance of the fund’s portfolio.
You don’t have to worry about day-to-day management of your portfolio. The diversification offered by mutual funds cannot be achieved only by small investors with limited investment capital.
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Mutual funds can provide you with regular income and the opportunity to grow your savings through reinvestment. Here are the benefits of investing in mutual funds:
Asset management companies (AMCs) evaluate investment opportunities by researching, selecting and monitoring the performance of the securities purchased by funds. AMC employs qualified investment professionals who make informed investment decisions on your behalf. It is not an easy task for someone without specialized knowledge.
By spreading your investments across a range of securities and investments, mutual funds can help reduce your risk should a company or industry fail. Diversification can be summed up succinctly as: “Don’t put all your eggs in one basket
Mutual funds cater to investors who do not have large amounts of money to invest by setting a relatively low amount of rupees for initial and monthly purchases. For example, you can add a fixed amount of money like PKR 1000-5000 per month or other time intervals. Mutual funds buy and sell a large number of securities at the same time. Your transaction costs and management fees are shared with unit partners
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Unitholders of a mutual fund can convert their units into cash on any working day. They get immediate access to the current value of their investment within six business days. Investors don’t have to look for a buyer, the fund buys units at current net asset value (NAV).
Mutual funds are continuously monitored by the SECP through reports that mutual funds must submit to the SECP on a regular basis. In addition, the China Securities Regulatory Commission also conducts on-site inspections of asset management companies.
The performance of mutual funds is scrutinized by publications and rating agencies, allowing investors to easily compare fund performance. As a unitholder, you will receive regular updates such as daily NAV, as well as information on the fund’s holdings and the fund manager’s strategy.
Investing in mutual fund schemes entitles investors to take advantage of tax credits, thereby increasing the total return on their savings.
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In Pakistan, the SECP, in consultation with the Mutual Fund Association of Pakistan (MUFAP), developed the classification criteria and investment limits for open-end mutual funds. In general, the higher the potential return, the higher the risk of loss. The SECP has approved the following mutual fund categories:
Equity funds invest in stocks, commonly referred to as shares/shares, which are subject to the volatility risks associated with the stock market. Although the fund is the riskiest, it offers the greatest growth through capital appreciation. By classification, equity funds must invest at least 70% of their net assets in listed equity securities. The remaining net assets of the stock plan can be invested in cash or near-cash instruments.
These funds are designed to provide investors with a steady stream of income. They invest in short-term and long-term debt instruments such as term finance certificates (TFCs) issued by corporations and government securities such as treasury bills and Pakistan Investment Bonds (PIBs). Income funds are considered less risky than equity funds. Therefore, opportunities to raise funds are limited. Income funds must maintain at least 25% of net assets in cash and/or cash instruments to meet liquidity requirements.
These funds invest in short-term income securities such as Treasury bills, government bonds, certificates of deposit, and commercial paper. Money market funds aim to maintain high liquidity by investing in short-term, low-risk instruments and are generally a safer investment. Money market funds can earn less volatile returns than other types of mutual funds. Money market funds are ideal for new investors because they are the easiest to follow and understand.
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Balanced funds provide investment growth and regular income by investing in equities and fixed income securities. The regulatory framework mandates that balanced funds invest between 30% and 70% of their net assets in listed equity securities. The remaining balance can be invested in other permitted investments.
Funds of funds invest in other mutual funds. The funds in each fund should be classified according to investment objectives, such as funds in stock funds, funds in income funds, and so on. These funds manage a diversified portfolio of equity, fixed income, fixed income and money market funds.
Islamic funds invest in Shariah-compliant securities, namely equities, Sukuk (Islamic bonds) and GOP Ijara Islamic bonds etc., which may be approved by the Shariah advisors of such funds. These funds can be offered in the same categories as regular funds.
Such funds may invest their net assets in a variety of securities and investments specified in their offering documents. Asset allocation funds are generally considered high-risk funds because of their ability to invest up to 90% of their net assets in stocks at any given time.
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Under a hedge fund, the original investment amount is protected. The fund deposits a large part of the investment amount in the bank in the form of time deposits, and the remaining net assets are invested in accordance with the investment methods permitted by the proposed documents. Unlike other funds, capital protection funds have an agreed term.
Index funds invest in securities that reflect a market index, such as the PSX KSE 100. Index funds buy and sell securities to reflect the composition of a chosen index. The activities of the Fund follow the main indicators. It is necessary to invest at least 85% of net worth in securities comprising the selected index or a subset thereof. Net asset balances are held in cash or near-cash instruments such as bank deposits (excluding term deposit receipts (TDRs) and treasury bills with maturities not exceeding 90 days).
Aggressive income funds aim to generate high returns by investing in fixed income securities while having exposure to average and lower quality assets. These funds typically invest in a portfolio of various securities, including government securities, income debt securities, bank deposits, investment certificates and commercial paper, among others. At least 10% of net assets held in cash or near cash. Instruments such as bank deposits and treasury bills with maturities not exceeding 90 days.
Commodity funds allow small investors to profit from commodities and commodity futures contracts, such as gold, by investing in each other. During the year, at least 70% of net assets must be invested in commodities or commodity futures contracts based on the quarterly average investment calculated daily.
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Mutual funds vary in their objectives, strategies, risks, and investment costs. Before you can choose the right mutual fund category for your savings, you need to understand your investment goals. Your financial goals depend on factors such as your income and spending levels, financial independence, age, lifestyle, family obligations, and more. Here are some questions and possible answers you should ask yourself to help you choose the right mutual fund.
Possible answers: I need a steady income; I need to buy a house, organize a wedding; educate my children; or a combination of all these needs.
Possible answer: I am not willing to take any risk or accept short-term losses for long-term gains.
Possible answers: I need regular cash flow; or I want to grow on my own
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