FINANCIAL MANAGEMENT

ASSIGNMENT #:
4

SUBMITTED BY:
MUHAMMAD ARSLAN
JUNAID REHMAN

REG NO:

FA08-BBA-057

FA08-BBA-081

DATE OF SUBMISSION:

NOVEMBER 11, 2010

SUBMITTED TO:

MA’AM FAIZA SAJJAD

TOPIC:

MUTUAL FUNDS
What are Mutual Funds and how does this work?

MUTUAL FUND DEFINITION: 

A mutual fund is made up of money that is pooled together by a large number of

investors who give their money to a fund manager to invest in a large portfolio of stocks and / or
bonds.

      Mutual fund is a kind of trust that manages the pool of money collected from
various investors and it is managed by a team of professional fund managers (usually called an
Asset Management Company) for a small fee.   The investments by the Mutual Funds are made
in equities, bonds, debentures, call money etc., depending on the terms of each scheme floated by
the Fund.   The current value of such investments is now a day is calculated almost on daily basis
and the same is reflected in the Net Asset Value (NAV) declared by the funds from time to time. 
This NAV keeps on changing with the changes in the equity and bond market.   Therefore, the
investments in Mutual Funds is not risk free, but a good managed Fund can give you regular and
higher returns than when you can get from fixed deposits of a bank etc.

You can make money from a mutual fund in three ways:

1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all
of the income it receives over the year to fund owners in the form of a distribution.
2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds
also pass on these gains to investors in a distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares
increase in price. You can then sell your mutual fund shares for a profit.
Funds will also usually give you a choice either to receive a check for distributions or to
reinvest the earnings and get more shares.

HISTORY OF MUTUAL FUNDS:

 History of Mutual Funds has evolved over the years and it is sure to appear as
something very interesting for all the investors of the world. In present world, mutual funds have
become a main form of investment because of its diversified and liquid features. Not only in the
developed world, but in the developing countries also different types of mutual funds are gaining
popularity very fast in a tremendous way. But, there was a time when the concepts of Mutual
Funds were not present in the economy.

There is an ambiguity about the fact that when and where the Mutual Fund
Concept was introduced for the first time. According to some historians, the mutual funds were
first introduced in Netherlands in 1822. But according to some other belief, the idea of Mutual
Fund first came from a Dutch Merchant ling back in 1774. In 1822, that idea was further
developed. In 1822, the concept of Investment Diversification was properly incorporated in the
mutual funds. In fact, the Investment Diversification is the main attraction of mutual funds as the
small investors are also able to allocate their little Funds in a diversified way to lower Risks.

After 1822 in Netherlands, the Mutual Funds Concept came in Switzerland in

1849 and thereafter in Scotland in the 1880s. After being popular in Great Britain and France,
Mutual fund concept traveled to U.S.A in the 1890s. In 1920s and 1930s, the Mutual Fund
popularity reached a new high. There was record investment done in mutual funds. But, before
1920s, the mutual funds were not like the modern day mutual funds.

The modern day mutual funds came into existence in 1924, in Boston.
Massachusetts Investors Trust introduced the Modern Mutual Funds and the funds were available
from 1928. At present this Massachusetts Investors Trust is known as MFS Investment
Management Company. After the glorious year of 1928, Mutual fund ideas expanded to different
levels and different regulations came for well-functioning of the funds.

Still today, the funds are evolving and improving in order to offer people much
wider choices and better advantages for fulfillment of their various investment needs and
financial objectives.
ADVANTAGES OF MUTUAL FUNDS:
• Professional management:

The primary advantage of funds is the professional management of your money.

Investors purchase funds because they do not have the time or the expertise to manage their own
portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time
manager to make and monitor investments.

• Diversification:

By owning shares in a mutual fund instead of owning individual stocks or bonds,

your risk is spread out. The idea behind diversification is to invest in a large number of assets so
that a loss in any particular investment is minimized by gains in others. In other words, the more
stocks and bonds you own, the less any one of them can hurt you (think about Enron). Large
mutual funds typically own hundreds of different stocks in many different industries. It wouldn't
be possible for an investor to build this kind of a portfolio with a small amount of money.

• Economies of Scale:

Because a mutual fund buys and sells large amounts of securities at a time, its transaction
costs are lower than what an individual would pay for securities transactions.

• Liquidity:

Just like an individual stock, a mutual fund allows you to request that your shares be
converted into cash at any time.

• Simplicity:

Buying a mutual fund is easy! Pretty well any bank has its own line of mutual
funds, and the minimum investment is small. Most companies also have automatic purchase
plans whereby as little as $100 can be invested on a monthly basis.
DISADVANTAGES OF MUTUAL FUNDS:
• Professional Management:

Many investors debate whether or not the professionals are any better than you or
I at picking stocks. Management is by no means infallible, and, even if the fund loses money, the
manager still gets paid.

• Costs:

Creating, distributing, and running a mutual fund is an expensive proposition.

Everything from the manager’s salary to the investors’ statements cost money, those expenses
are passed on to the investors. Since fees vary widely from fund to fund, failing to pay attention
to the fees can have negative long-term consequences. Remember, every dollar spend on fees is a
dollar that has no opportunity to grow over time.

• Dilution:

It's possible to have too much diversification. Because funds have small holdings
in so many different companies, high returns from a few investments often don't make much
difference on the overall return. Dilution is also the result of a successful fund getting too big.
When money pours into funds that have had strong success, the manager often has trouble
finding a good investment for all the new money.

• Taxes:

When a fund manager sells a security, a capital-gains tax is triggered. Investors

who are concerned about the impact of taxes need to keep those concerns in mind when investing
in mutual funds. Taxes can be mitigated by investing in tax-sensitive funds or by holding non-tax
sensitive mutual fund in a tax-deferred account, such as a 401(k) or IRA
WHAT ARE VARIOUS TYPES OF MUTUAL FUNDS?

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)

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 six 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

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 are 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.

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.

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 accept
some share-price volatility, but less than found in pure growth funds.

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.

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.

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.
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!

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.

Islamic Funds

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

with the Islamic Shariah 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.

NOTE: All these types are explained in the context of Pakistan’s market.
NAMES OF MUTUAL FUNDS IN PAKISTAN:

 ABAMCO LIMITED
 AKD INVESTMENT MANAGEMENT LTD.
 AL FALAH GHP INVESTMENT MANAGEMENT
 AL-MEEZAN INVESTMENT MANAGEMENT LIMITED
 AMZ ASSET MANAGEMENT LTD.
 ARIF HABIB INVESTMENT MANAGEMENT LTD.
 ASIAN CAPITAL MANAGEMENT (PVT) LTD
 ASKARI ASSET MANAGEMENT LTD.
 ATLAS ASSET MANAGEMENT LTD.
 BMA ASSET MANAGEMENT LTD.
 CROSBY ASSET MANAGEMENT LTD.
 DAWOOD CAPITAL MANAGEMENT LTD.
 FAYSAL ASSET MANAGEMENT LIMITED
 FIRST CAPITAL INVESTMENTS LTD
 HABIB ASSETS MANAGEMENT LTD.
 HBL ASSET MANAGEMENT LTD
 JS GROWTH FUND
 KASB FUND LIMITED
 NATIONAL ASSET MANAGEMENT COMPANY LIMITED
 NATIONAL FULLERTON ASSET MANAGEMENT LIMITED - NAFA
 NATIONAL IINVESTMENT TRUST LTD.
 NBP CAPITAL LIMITED
 NOMAN ABID INVESTMENT MANAGEMENT LIMITED
 PICIC ASSET MANAGEMENT COMPANY LTD
 PRUDENTIAL FUND MANAGEMENT LTD
 SAFEWAY MANAGEMENT LTD.
 UBL FUND MANAGERS LTD.
 WE INVESTMENT MANAGEMENT LIMITED
These all are the Mutual funds provider in the Pakistan but we will discuss only two or three
important companies

ATLAS ASSET MANAGEMENT LTD:

Atlas Asset Management Limited (AAML), sponsored by the Atlas Group of Companies
was incorporated on August 20, 2002 and is registered as an investment adviser and asset
management company with Securities and Exchange Commission of Pakistan (Commission) on
October 08, 2002 to manage open-end and closed-end funds. It has a paid up capital of Rupees
250 million, of which Rupees 220 million is subscribed by Shirazi Investments (Pvt.) Limited
and Rupees 30 million by Atlas Bank Limited (Formerly Dawood Bank Limited).

The principal activity of the Company is to manage various investment schemes with the
aim to provide investors a one-window facility to invest in diversified and secured funds offering
advantageous returns. These products are designed to provide investors with the convenience and
flexibility that meets their individual needs.

Rating: The Pakistan Credit Rating Agency (PACRA) has assigned an asset manager rating of
"AM3+" to the Company. The rating reflects the Company's strong capacity to master the risks
inherent in asset management and the asset manager meets high investment management
industry standards and benchmarks.

NATIONAL IINVESTMENT TRUST LTD:

NITL was incorporated as an unquoted public limited company in 1962. The Government
of Pakistan established NIT, in order to encourage the broad basing of the ownership of the
growing Industrialization in the Country. The principal activity of the company is to manage
NI(U)T, an open end mutual fund. The fund is the largest open-end mutual fund in Pakistan, with
investments in approximately 600 of the 706 listed Pakistani Companies. NIT’s portfolio has
over 90 percent correlation with the Karachi Stock Exchange all Share Index and is as such the
nearest proxy to an Index fund in Pakistan. NI (U) T is valued at approximately Rs. 26 billion.
The fund has a 93% weighting in equities and 7% weighting in fixed income securities. NITL’s
objective is to provide its Unit-holders with a balance between their regular income needs and
long-term capital appreciation. NITL has approximately 62,000 unit holders and over 19
branches and 2 booths across Pakistan.

JS GROWTH FUND

Founded in 1995, JS Investments Limited (JSIL) is the oldest and one of the largest
private sector asset management companies in Pakistan with assets under management spread
across various mutual funds, pension funds and separately managed accounts.

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.

Its founding partners include INVESCO PLC (formerly known as AMVESCAP PLC) -
one of the world's largest fund managers with global reach and International Finance Corporation
(IFC) - the private sector arm of the World Bank Group.

JSIL is part of the Jahangir Siddiqui Group, one of Pakistan's most diversified and
prestigious financial institutions. The Jahangir Siddiqui Group maintains a strong presence in the
nation's investment banking, corporate finance, equity market operations, and debt factoring and
insurance sectors.

The group has offices throughout the major cities in Pakistan and manages its
international operations from its London and Dubai offices. The group comprises businesses
with over 18,000 employees and profit after tax of $510 million in 2007.