By Kazim Alam, The Express Tribune
KARACHI: In one of his recent articles, editor of TIME Magazine Fareed Zakaria encouraged his American readers to invest in productive financial instruments instead of putting their money on unusable but reliable assets like gold. “Gold isn’t a stock with real earnings. It isn’t a bond with interest payments. It isn’t oil,” he wrote.
But perhaps Zakaria was preaching to the choir, as Americans already invest in financial instruments overwhelmingly. For example, their investment in mutual funds is over 80% of the US gross domestic product (GDP). In contrast, the total investment in mutual funds in Pakistan is only 0.49% of its GDP while the country is the 11th largest consumer of gold in the world. Why is that so?
“People are uncertain due to the ongoing political and economic crisis. Hence, financial planning has become short-term and limited to traditional mediums. Ordinary investors are unaware (of mutual funds), although they offer much higher returns with versatile features,” UBL Fund Managers CEO Mir Muhammad Ali told The Express Tribune.
A mutual fund is an investment programme funded by shareholders that trades in diversified holdings such as different stocks and is professionally managed by an asset management company. As of February 2012, Pakistan’s mutual funds industry is worth Rs360 billion with about 25 asset management companies operating in the country.
According to a conservative estimate, there are around 150,000 investors in the country’s mutual funds market. Saying that they offer both convenience and better returns on investment, Ali adds that mutual funds don’t require a huge lump sum investment and offer high liquidity. “Real estate is an illiquid investment and depends largely on the state of the economy. Gold is also becoming an expensive investment vehicle. But more importantly, the tangible nature of the metal itself poses a huge security threat.”
The returns are fairly high on mutual funds. Nonetheless, it is also a reality that after growing rapidly between 2001 and 2007, the mutual funds industry collapsed in the financial crisis of 2008. The fund size decreased from Rs390 billion as on April 2008 to Rs186 billion by December 2009. Investors panicked, as the total amount pulled out from the industry reached Rs467 billion in 2008 as opposed to Rs134 billion in the preceding year.
“The recession was a global phenomenon. It affected everyone. Our first and foremost priority was to ensure that our clients don’t panic. Naturally, there were clients who wanted to pull their money out. Even then, we managed the liquidity position very well, servicing all client requests for withdrawal of funds during the stipulated time. We coped with the situation by helping our clients see our institutional strength and maintaining their confidence in our management,” Ali said.
The industry has since consolidated its position. The month-on-month increase in the size of the mutual funds industry in February 2012 remained 5.6%. Similarly, during the first eight months of fiscal 2012 (Jul-Feb ’12), the mutual funds industry grew by 44%, as the size of the industry was about Rs250 billion in June ’11.
Ali says his marketing strategy is largely based on creating awareness about savings and investments through mutual funds. “We feel that 90% job is over if people are aware of investment opportunities in mutual funds because of their attractive benefits, such as attractive returns, tax benefits and easy encashment.”
Published in The Express Tribune, March 31, 2012.