Introduction

Not too many years ago, mutual funds were simply broad-based investment instruments created to
simplify the intricacies involved in investing in separate securities. They also provided a greater measure
of safety through broad diversification and the kind of top notch professional management that is usually
out of reach for the small investor.

Today, however, mutual funds are highly specialized and offer almost unlimited diversity. The types of
mutual fund portfolios available run the gamut from conservative to aggressive, from stocks to bonds,
from domestic to international portfolios, from taxable to tax-free and from virtually no-risk money
market funds to high-risk options funds. The great variety of mutual funds available makes it possible to
select a fund, or several funds, which precisely various types of funds and their primary objectives are
described below. (They are arranged in order of increasing risk factors)

Types of mutual funds :( arranged in order of increasing risk factor)

1. Money Market Fund  

We begin with a discussion of money market funds for several reasons:

1. They are the safest for the novice investor;

2. They are the easiest, least complicated to follow and understand;
3. Almost without exception, every mutual fund investment company offers money market funds;
4. Money market funds represent an indispensable investment tool for the beginning investor.
5. They are the most basic and conservative of all the mutual funds available;

Money market funds should be considered by investors seeking stability of principal, total liquidity, and
earnings that are as high, or higher, than those available through bank certificates of deposit. And unlike
bank cash deposits, money market funds have no early withdrawal penalties.

Specifically, a money market fund is a mutual fund that invests its assets only in the most liquid of
money instruments. The portfolio seeks stability by investing in very short-term, interest-bearing
instruments issued by the state and local governments, banks, and large corporations. The money
invested is a loan to these agencies, and the length of the loan might range from overnight to one week
or, in some cases, as long as 90 days. These debt certificates are called "money market instruments";
because they can be converted into cash so readily, they are considered the equivalent of cash.

To understand why money market mutual funds is recommended as an ideal investment, let me
reemphasize just seven of the advantages they offer:

1. Safety of principal, through diversification and stability of the short-term portfolio investments
2. Total and immediate liquidity, by telephone or letter
3. Better yields than offered by banks, 1% to 3% higher
4. Low minimum investment, some as low as $100
5. Professional management, proven expertise
6. Generally, no purchase or redemption fees, no-load funds
 
 
 2. Income Funds

The objective of income mutual funds is to seek a high level of current income commensurate with
each portfolio's risk potential. In other words, the greater the risk, the greater the potential for
generous income yields; but the greater the risk of principal loss as well.

The risk / reward potential is low to high, depending upon the type of securities that make up the
fund's portfolio. The risk is very low when the fund is invested in government obligations, blue chip
corporations, and short-term agency securities. The risk is high when a fund seeks higher yields by
investing in long-term corporate bonds, offered by new, undercapitalized, risky companies.

Who should invest in income funds?

§ Investors seeking current income higher than money market rates, who are willing to accept
moderate price fluctuations
§ Investors willing to "balance" their equity (stock) portfolios with a fixed income investment
§ Investors who want a portfolio of taxable bonds with differing maturity dates
§ Investors interested in receiving periodic income on a regular basis.
 
3. Income and Growth Funds  

The primary purposes of income and growth funds are to provide a steady source of income and
moderate growth. Such funds are ideal for retirees needing a supplement source of income without
forsaking growth entirely.
 
4. Growth and Income Funds  

The primary objectives of growth and income funds are to seek long-term growth of principal and
reasonable current income. By investing in a portfolio of stocks believed to offer growth potential plus
market or above - market dividend income, the fund expects to investors seeking growth of capital and
moderate income over the long term (at least five years) would consider growth and income funds. Such
funds require that the investor be willing to accepts some share-price volatility, but less than found in
pure growth funds.
 
5. Balanced Funds  

The basic objectives of balanced funds are to generate income as well as long-term growth of principal.
These funds generally have portfolios consisting of bonds, preferred stocks, and common stocks. They
have fairly limited price rise potential, but do have a high degree of safety, and moderate to high income
potential.

Investors who desire a fund with a combination of securities in a single portfolio, and who seek some
current income and moderate growth with low-level risk, would do well to invest in balanced mutual
funds. Balanced funds, by and large, do not differ greatly from the growth and income funds described
above.
 
6. Growth Funds  

Growth funds are offered by every investment company. The primary objective of such funds is to seek
long-term appreciation (growth of capital). The secondary objective is to make one's capital investment
grow faster than the rate of inflation. Dividend income is considered an incidental objective of growth
funds.

Growth funds are best suited for investors interested primarily in seeing their principal grow and are
therefore to be considered as long-term investments - held for at least three to five years. Jumping in and
out of growth funds tends to defeat their purpose. However, if the fund has not shown substantial growth
over a three - to five-year period, sell it (redeem your shares) and seek a growth fund with another
investment company.

Candidates likely to participate in growth funds are those willing to accept moderate to high risk in order
to attain growth of their capital and those investors who characterize their investment temperament as
"fairly aggressive."
 
7. Index Funds  

The intent of an index fund is basically to track the performance of the stock market. If the overall
market advances, a good index fund follows the rise. When the market declines, so will the index fund.
Index funds' portfolios consist of securities listed on the popular stock market indices.

It is also the intent of an index fund to materially reduce expenses by eliminating the fund portfolio
manager. Instead, the fund merely purchases a group of stocks that make up the particular index it deems
the best to follow. The stocks in an index fund portfolio rarely change and are weighted the same way as
its particular market index. Thus, there is no need for a portfolio manager. The securities in an index
mutual fund are identical to those listed by the index it tracks, thus, there is little or no need for any great
turnover of the portfolio of securities. The funds are "passively managed" in a fairly static portfolio. An
index fund is always fully invested in the securities of the index it tracks.

An index mutual fund may never outperform the market but it should not lag far behind it either. The
reduction of administrative cost in the management of an index fund also adds to its profitability.
 
8. Sector Funds  

As was noted earlier, most mutual funds have fairly broad-based, diversified portfolios. In the case of
sector funds, however, the portfolios consist of investment from only one sector of the economy. Sector
funds concentrate in one specific market segment; for example, energy, transportation, precious metals,
health sciences, utilities, leisure industries, etc. In other words, they are very narrowly based.

Investors in sector funds must be prepared to accept the rather high level of risk inherent in funds that are
not particularly diversified. Any measure of diversification that may exist in sector funds is attained
through a variety of securities, albeit in the same market sector. Substantial profits are attainable by
investors astute enough to identify which market sector is ripe for growth - not always an easy task!
 
9. Specialized Funds  

Specialized funds resemble sector funds in most respects. The major difference is the type of
securities that make up the fund's portfolio. For example, the portfolio may consist of common
stocks only, foreign securities only, bonds only, new stock issues only, over - the - counter securities
only, and so on.

Those who are still novices in the investment arena should avoid both specialized and sector funds
or the time being and concentrate on the more traditional, diversified mutual funds instead.
 
10. Islamic Funds

In case of Islamic Funds, the investment made in different instruments is to be in line

with the Islamic Shairah Rules. The Fund is generally to be governed by an Islamic
Shariah Board. And then there is a purification process that needs to be followed, as
some of the money lying in reserve may gain interest, which is not desirable in case of
Islamic investments

 Pakistan’s largest mutual fund provider:

Following is the list of Pakistan's largest fund providers. They offer to public to invest in these mutual
funds. In these providers include the companies of banking sector, non-banking sector, insurance sector
and finance sectors. There are 10 Top companies who are the providers of mutual funds.

1st Al-Meezan Mutual Fund

Al Meezan Mutual Fund Limited (AMMF) was the first fund launched by Al Meezan Investments and is
one of the oldest mutual funds in the private sector. It is a closed end equity fund that invests in Shariah
compliant equity instruments to provide investors with Pure Profit. During its long and illustrious journey
of 12 year AMMF has been paying regular dividends to its investors. Maintaining that tradition, AMMF
announced 10% cash dividend i.e., Re. 1 per share for its shareholders for the year ended June 30, 2008.

2nd Asian Stocks Fund 

Asian Stocks Fund Limited is a public limited company incorporated in June 1994 under the Companies
Ordinance, 1984 and has been registered with the Securities and Exchange Commission of Pakistan
(SECP) as an Investment Company under the Investment Companies and Investment Advisers Rules,
1971 to carry on the business of a closed end investment company. The company is also registered under
rule 38 of the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (NBFC
Rules).

3rd Atlas Fund of Funds 

Atlas Fund of Funds (ATFF) is a closed-end fund established by a Trust Deed dated May 29, 2004
between Atlas Asset Management Limited (AAML), as the investment adviser and Central Depository
Company of Pakistan Limited (CDC), as the Trustee.

4th Dominion Stock Fund 

These DOMINION STOCK FUND company profiles provided detailed financial data and key credit
information. DOMINION STOCK FUND predominantly operates in the Investment Offices sector.
Investment Company under the Investment Companies and Investment Advisers Rules. 1971 to carry out
the business of a closed end investment company.

5th First Capital Investment ltd Mutual Fund 

First Capital Investments Limited (FCIL), a subsidiary of First Capital Securities Corporation, is a Non-
Banking Finance Company licensed to carry out Investment Advisory Services as under the NBFC Rules
2003 and is regulated by the Securities and Exchange Commission of Pakistan (SECP).

6th First Dawood Fund

The Fund has been established through a trust deed (Trust Deed or Deed) under the Trusts Act, 1882,
executed between Dawood Capital Management Limited (DCM), 1500-A Saima Trade Towers, I. I.
Chundrigar Road, Karachi-74000, which has been licensed to undertake investment advisory services
by the Securities & Exchange Commission of Pakistan (SECP), vide its letter No. NBFC-17/IA/02/2004
dated May 26, 2004 under Non-Banking Finance Companies (Establishment & Regulations) Rules, 2003
(the Rules) and Central Depository Company of Pakistan Limited (CDC) Karachi, duly approved by the
SECP to act as the Trustee, vide its letter No. NBFC-II/JD(R)/DCML-FDMF/976 dated December 2,
2004.

7th Golden Arrow

Golden Arrow Selected Stocks Funds Limited (GASSFL) is a Pakistan-based, closed-end mutual fund.
The Company’s principal activity is to make investment in marketable securities. The Company’s
investment manager is AKD Investment Management Limited.

8th Meezan Balanced Fund

Meezan Balanced Fund (the Fund) is a Pakistan-based closed-end balanced fund. The investment
objective of the Fund is to generate long-term capital appreciation, as well as current income. It invests in
equity securities and Islamic income instruments, such as Sukuk (Islamic bonds), Musharaka and
Murabaha instruments; Shariah compliant spread transactions, certificate of Islamic investments, Islamic
bank deposits and other Islamic income products. Al Meezan Investment Management Limited (AMIML)
serves as the Fund’s management company and Central Depository Company of Pakistan Limited (CDC)
is its trustee. 

9th JS Growth Fund

JS Growth Fund (the Fund) is a Pakistan-based, closed-end investment company. The Fund’s investment
objective is to enable the certificate holders to participate in a diversified portfolio by prudent investment
management (investment return being of a combination of capital appreciation and income). JS
Investments Limited is the management company of the Fund. 
10th Pakistan Premier Fund

Pakistan Premier Fund Limited (PPFL) is a Pakistan-based closed-end equity fund. The Company is
engaged in providing investors long term capital appreciation from investments primarily in Pakistani
equities. It primarily invests in shares of listed companies; term finance certificates and short-term reverse
repurchase transactions. Arif Habib Investments Limited is the Company’s investment advisor.

Mutual funds strategies:

A. How to pick a mutual fund:

Many investors try to pick mutual funds based solely on the funds' past performance. However the
advertised stellar performance is not a guarantee of future success, especially when it comes to relatively
new or small funds. When you pick a mutual fund you should also consider other factors such as:

 age and size of the fund;

Before considering investing in a particular fund read the prospectus to see since when it has been
operating and what its asset size is. Often while funds are still small just a few successful stocks
can have a great impact on their performance and lead to excellent short-term performance
records. However, as funds grow such great results are more difficult to sustain since a larger
number of stocks are owned by the fund and they cannot influence the fund's performance that
easily

 fund's risks;

You should be well aware with the risks the fund takes in order to achieve its results. Higher rates
of return are usually associated with higher risks, which may be beyond your comfort level or
inconsistent with your financial goals. Always take into account your risk tolerance and long-
term investment strategies when picking the right mutual fund for you.

 fund's volatility;

Typically, higher volatility means higher investment risk. Therefore if you are looking for a
shorter-term investment you should avoid funds with a volatile history since you will not have
much time to overcome eventual declines in the stock market.

 fund's fees, sales charges and expenses;

When you invest in a mutual fund you will be charged various fees and expenses. A low-cost
fund may perform worse than a high-cost fund and still generate the same returns for you. Take
 your time to calculate how the costs of different mutual funds will affect your returns since even
small differences in the fees and expenses may lead to large differences in the returns you get.

 taxes that are due when you receive a distribution;

Generally, you will owe taxes when you receive a capital gains distribution from a fund. Your tax
bill will be affected even if the return has been negative since you invested in the fund so you
should preliminarily find out when your fund will make its distributions and assess the right time
to invest in it.

 recent changes in the fund's operations.

If the fund has recently changed its investment strategy or its investment adviser, its performance
may change too. Therefore, always inform yourself about any recent changes in the fund's
operations before considering investing in it.

B. Mutual funds documents:

Before you invest in a mutual fund you need to read any information that is available to shareholders and
investors in order to know where you put in your money.  There are different documents you can use to
obtain such information.

 The mutual fund's prospectus

A mutual fund's prospectus contains valuable information about the fund's fees and expenses,
strategies to achieve the investment objectives, risk level, past performance, and more. An
investor should receive a prospectus once he or she purchases shares of a mutual fund

 Profile

Some mutual funds also provide a "profile" to investors. This profile summarizes key information
that is contained in the fund's prospectus, including principal investment strategies, investment
requirements, identity of the fund's investment adviser, etc.

 Statement of Additional Information (SAI)

Statements of Additional Information (SAIs) provide information that is found useful by many
investors but that is not necessarily needed in order to make an informed investment decision.
Thanks to SAIs funds can discuss further the matters described in the prospectus (such as the
financial statements of the fund) and provide additional information about the fund's history,
policies, performance measures, brokerage commissions, officers, directors, investment advisory
services, tax matters, etc.

Although funds are not required to provide SAIs to investors, they should provide them upon
request.
  Shareholder Reports

Mutual funds should provide an annual report (60 days after the end of the mutual fund's fiscal
year) and a semi-annual report (60 days after the fiscal mid-year) to their shareholders. The
reports include updated financial information as well as the fund's portfolio securities.

C. Fund of hedge funds:

A fund of hedge funds represents a portfolio of unrelated hedge funds that is characterized by a high
degree of diversification. On the other hand, the fund of hedge funds can be concentrated on either a
sector or geographic region or it can enjoy a high diversification among sectors and industries.

A fund of hedge funds tends to generate higher levels of returns than stock portfolios, mutual funds and
even individual hedge funds. This type of investment has gained wide popularity among pension funds,
insurance companies, endowments, private banks and etc. thanks to the many benefits they offer relative
to other investment tools.

Another characteristic of a fund of hedge funds is that it provides its investors with the possibility to
apply more strategies, styles and use the services of more hedge fund managers. All of these greatly
facilitate the management of the portfolio.

Funds of hedge funds are more beneficial than standard investment funds in term of higher predictability
of returns. Additionally, they are preferred as means of achieving higher diversification in an investment
portfolio.

D. Mutual fund tax advices:

In order to make the most of your mutual fund in tax terms, you should be well-acquainted with the
tax regulations that are incorporated. Therefore, consider the following advices in order to avoid
paying more taxes on your mutual fund than needed.

Mutual Fund Tax Advice 1:

In order to determine the cost of your shares, select the most tax advantageous way.

When you sell the shares you possess in a mutual fund you are subject to capital gains tax. There are
several ways by which you can determine your cost basis.

1. Average Cost - Single Category Method

In order to get the average cost per share, you should sum the cost of all shares that you have
purchased and divide it by the number of all shares.
 2. Average Cost - Double Category Method

By using this method you should calculate two average costs:

o For long-term shares

o For short-term shares
3. First In First Out (FIFO) Method

Under this method the assumption that the first shares you have purchased will be the first to be
sold is made.

4.  Specific Share Identification

Gives you the opportunity to select the individual shares you want to sell.

Mutual Fund Tax Advice 2:

Don't throw away the supporting documentation.

Keep the reports you have been sent by the mutual fund in order to have a source of verification for the
share prices and other information, since you may possess funds that have been with you for longer
periods of time.

Mutual Fund Tax Advice 3:

Remember to include the dividends you have reinvested in the cost of your investment.

The automatic reinvestment of dividends leads to the increase in the share cost, which leads to an increase
in your cost basis. As a result you will be subject to fewer taxes when you decide that it is time to sell the
mutual fund shares.

Mutual Fund Tax Advice 4:

Use the check writing privileges provided by money market funds, and avoid those provided by other
types of mutual funds.

You may trigger a taxable event if you write a check against your bond fund account. Additionally, for
recordkeeping purposes, you should avoid writing too many checks.

Mutual Fund Tax Advice 5:

When you transfer from one mutual fund to another, you should examine the corresponding tax
implications.

Since the transference from one mutual fund to another represent the selling of the shares of the first and
the purchase of shares of the second, you will most probably be subject to taxation.
Mutual Fund Tax Advice 6:
In case you are about to execute a big sale, examine your withholding or estimated tax payments.

It is highly recommended to address your company payroll department when you are about to execute a
large sale. They should be able to adjust your withholding in order to accommodate the subsequent taxes
you will be liable to. You can also make an estimated tax payment, which will allow you to cover the
additional taxes.

Mutual Fund Tax Advice 7:

Advice 7: Make sure that you know the dates of the year-end distributions.

E. Diversification and assets classes cycles:

When constructing your investment portfolio make sure that you include assets from different classes. In
this way you will be able to enjoy the positive effects of diversification.

Different types of assets go through different cycles as regards their performance and prices. Therefore,
random changes in the performance of either bonds or stocks can be observed. These patterns of
movement can be quite unpredictable, guided by market conditions and many unforeseen factors.
However, in order to insure against losses due to such volatilities diversification is recommended

Generally, there are two major classes of assets - stocks and bonds. Even though often these two has acted
in an opposite direction, the trend has not always been this way. Many examples can be provided from
historical records.

It has been proven that all asset-class markets go through one and the same cycle regarding their prices -
an up, flat level, and a fall. Therefore, many financial experts claim that identifying the current condition
of the particular asset class may lead to the prediction of the next stage in the cycle and thus take
advantage of it. This do holds some validity, but what makes predictions difficult is the exact pace of the
movement from one cycle to the other. Thus, it is difficult to predict the end of one cycle and the
beginning of the next.

Another way for basing investment decisions different from predicting cycles, is the examination of past
performances. However, this tactic may result in the purchase of an asset class that is no longer profitable.
Additionally, basing your investment on past performance may result in the negative effect of the trend
turning in the opposite direction, which was not experienced during the past periods on which you have
based your decision. Such was the case during the long persisting bull market of the 1990s. This period
was followed by a continuing from 2000 to 2002 bear market. After this, the stock market experienced
sudden recovery.

Subclasses of assets also experience cycles. That is why subclasses within asset classes can also support
diversification in your investment portfolio. Therefore, you can use asset subclasses as a tool to further
diversify your portfolio.
F. Building a successful investment portfolio:

Every person strives to the achievement of a particular lifestyle they have built in their minds. You have
probably decided in which neighborhood you want to live, what car you want to have in your garage and
what cloths to hang in your wardrobe. Unfortunately, you need money to buy all these things and if you
fall in the category of the average person, you constantly make calculations on how much money you
need to sustain such a lifestyle.

The first step toward the achievement of the dreamed lifestyle is the building of an investment portfolio.
The main components that should be included are:

 Retirement plan
 An emergency cash reserve that will sustain your living for at least six months
 Investments that are diversified enough to ensure you risk insurance

Your investment portfolio should be debt-free and should include assets from different classes. Once you
have made a general plan on the construction of the portfolio, you should embark on its realization.

Mutual fund growth and performance in Pakistan:

In Pakistan Mutual Funds were introduced in 1962, when the public offering of National
Investment (Unit) Trust (NIT) was introduced which is an open-end mutual fund. In 1966
another fund that is Investment Corporation of Pakistan (ICP) was establishment. ICP
subsequently offered a series of closed-end mutual funds. Up to early 1990s, twenty six (26)
closed-end ICP mutual funds had been floated by Investment Corporation of Pakistan. After
considering the option of restructuring the corporation, government decided to wind up ICP in
June, 2000. In 2002, the Government started Privatization of the Investment Corporation of
Pakistan. 25 Out of 26 closed-end funds of ICP were split into two lots. There had been a
competitive bidding for the privatization of funds. Management Right of Lot-A comprising 12
funds was acquired by ABAMCO Limited. Out of these 12, the first 9 funds were merged into a
single closed-end fund and that was named as ABAMCO Capital Fund, except 4th ICP mutual
fund as the certificate holders of the 4th ICP fund had not approved the scheme of arrangement
of Amalgamation into ABAMCO capital fund in their extra ordinary general meeting held on
December 20, 2003. The fund has therefore been reorganized as a separate closed end trust and
named as ABAMCO Growth Fund. Rest of the three funds were merged into another single and
named as ABAMCO Stock Market Fund. So far as the Lot-B is concerned, it comprised of 13
ICP funds, for all of these thirteen funds, the Management Right was acquired by PICIC Asset
Management Company Limited. All of these thirteen funds were merged into a single closed-
end fund which was named as “PICIC Investment Fund”. Later on the 26th fund of ICP (ICP-
SEMF) was also acquired by PICIC Asset Management Company Limited. The certificate
holders in extraordinary general meeting held on June 16, 2004 approved the reorganization of
SEMF into a new closed-end scheme renamed as PICIC Growth Fund. The Securities and
Exchange Commission of Pakistan subsequently authorized PGF on July 30, 2004. Initially there
was both public and private sector participation in the management of these funds, but with the
nationalization in the seventies, the government role become more dominant. Later, the
government also allowed the private sector to establish mutual funds. Currently there exist
Thirty-three funds by the end of Financial Year 2005. Twelve open-ended mutual funds are:

• Public sector, 01;

• Private sector, 11;

Twenty-one close-end mutual funds in Pakistan are:

• Public sector, 0;

• Private sector, 21.

Performance evaluation of mutual funds is important for the investors and portfolio managers as
well. Historical performance evaluation provide an opportunity to the investors to assess the
performance of portfolio managers as to how much return has been generated and what risk
level has been assumed in generating such returns. In this way the investors can also compare
the performance of fund managers.

On June 2004 the net asset value of close-end mutual funds was Rs 48 billion and open-end
funds net asset value was Rs 63.86 billion. Whereas on June 1997 the net asset value of closed-
end mutual funds was Rs 04 billion and open-end mutual funds net asset value was Rs 25 billion.
Total net assets value in 1997 was Rs 29 billion and at the end June 2004, raised to Rs 112
billion. There is a big increase of investment (entrusted amount) in this sector since 1997 to 2004
which necessitate the performance evaluation of funds free of manipulation.

In the last few years mutual fund industry has shown significant progress with reference to
saving mobilization and important part of the overall financial markets. But still we are far
behind the developed countries mutual fund industry. Growth in mutual funds worldwide is
because of the overall growth in both the size and maturity of many foreign capital markets.
These nations have increasingly used debt and equity securities rather than bank loans to finance
economic expansion. The Pakistan economy can prosper because of the benefits of new
investment opportunities arising from economic reform, privatization, lowered trade barriers and
rapid economic growth.
 Assignment

Presented to sir Maqbool ur rehman

Presented by Osama siddiqui

Course: money and capital market

Topic : mutual funds