Muf Invest

7/31/2019 Muf Invest

1/15

I N S I D E MUFAP Activities

Meeting of the Board of Directors

Meeting of the CommitteesMeeting with SECP

Events

SECP Updates

SECP begins redrafting of Company

Law

SECP proposes changes in NBFC

Regulations, 2008

SECP issues the first draft of Debt

Securities Trustee Regulation

SECP gets taxation regime reformed

SECP allows investment in Futures

Contract

SECP amends the format of Statement

in Lieu of Prospectus issued by a

private company on its conversion into

public companyStandardized Trust Deed for Mutual

Funds

Market Development in Q4-FY11

Equity Market

Money Market

Debt Market

Mutual Funds Industry

Interview

Chairman of MUFAPs Public Aware

Committee; Mr. Farid Ahmed Khan

Articles

The Alternative

(By Mr. Muhammad Sohail)

Implications of National Savings

Schemes on the Economy and

Financial Sector

(By MUFAP)

Industry Statistics

Net Assets Open-Ended Schemes

Net Assets Voluntary Pension Funds

Net Assets Closed-Ended Funds

Industry-wide - Net Assets

Sales

Redemptions

Net Sales

Open-Ended Schemes Return

Voluntary Pension Funds Return

Closed-Ended Funds Return

The Team:

Editors

Ms Shafaq Khuram

Mr. Zulfiqar Azam

Researcher

Mr. Siraj Ali

For any feedback or comments

[email protected]

Dear Readers,

Welcome to the June edition of our quarterly e-Newsletter.

Almost a year back, the Board of Directors of Mutual Funds Association of Pakistan(MUFAP) decided that MUFAP should publish a Year Book and quarterly Newsletter. The

first Year Book for the year ended June 30, 2010 was published last year and the first

Newsletter covering the period July 2010 to December 2010 (six months) was put on

MUFAP web-site in January 2011. Since then MUFAP is regularly issuing the Newsletter on

a quarterly basis. This is the third issue and hopefully this process will continue in future.

The objective of these publications is to provide the first hand industry information to the

readers, who may be industry members, other financial institutes, researchers, investors,

stakeholders and the general public. It is also our aim to keep our readers informed

regarding the developments in the industry, capital market and on the regulatory front.

From the day one MUFAP has been in forefront to bring transparency and good

governance in the industry and we hope to continue this process with greater vigor.

During the year ended June 30, 2011, the industry witnessed a growth of 23.95%.

However, this growth is mainly in money market funds. There is a need to educate

investors (and particularly individual investors and retirement funds managed on behalf of

its members who are individuals) to invest a portion of their savings in equity related

funds. This is important, as one of the objectives of long term savings is to be a hedgeagainst inflation.

On December 24, 2010, Mr. Mohammad Ali took charge as Chairman, Securities and

Exchange Commission of Pakistan (SECP). He visited MUFAPs office on January 28, 2011

and was the first Chairman of the SECP to do so. Mr. Asif Jalal Bhatti, Mr. Shahid Nasim

Executive Directors and Mr. Rashid Piracha, Director accompanied the Chairman SECP on

the visit to MUFAP. The Chairman, SECP had emphasized on the need for MUFAP to

prepare a five years plan. This was done by the MUFAP. In MUFAPs five year plan MUFAP

had strongly emphasized on the need to increase the savings rate and to invest the

savings prudently for better return for investors and for productive purposes for the

development of economy and not for budget support. MUFAP in the five year plan has

specially emphasized on the need to promote retirement funds, as they promote long

term savings and have a lasting effect on boosting the savings rate and contribute to

public good. MUFAP also submitted concrete proposals for removal of tax anomalies

among retirement schemes and setting up a regulatory regime for retirement schemes.

MUFAP also submitted proposals for development of bond market, REITs and

improvement in corporate governance, including governance at stock exchanges. A

summary of MUFAPs proposal is given in the Newsletter.

MUFAP fully agreed with the Chairman, SECP that a five year plan (subject to constant

review) was essential for the capital market. With the support of the Government of

Pakistan and the commitment of the Commission, this plan will put MUFAP and the

mutual fund industry on track for progress. We are happy that the SECP has considered

our proposal and an active dialogue is now in place between MUFAP and the SECP. As a

result of MUFAPs continuous follow-up and SECPs support, the Government removed

some of the tax anomalies in the retirement schemes by amending section 63 of the

Income Tax Ordinance (ITO). The Government also agreed to extend the holding period for

tax credit under section 62 of the ITO from one year to three years. These measures will

contribute towards promoting savings for the longer term and post retirement welfare.

Savings for retirement helps towards self sufficiency in the post retirement years when the

retired person may not have other sources of income. In addition to savings for

retirement, one needs to save for other expenses, like health care, housing, and children

education. We believe that both sections 62 and 63 are important and Government should

encourage long term savings. We are very happy to note that the SECP has been playing

an active role in the development of bond market and working towards introducing

regulations which will bring about protection for investors.

Public awareness remains a pressing long-term issue and MUFAP has been investing

resources in building awareness. Our interview with the Chairman of the Public Awareness

Committee for Mutual Funds gives a briefing on the recently launched Money Market

Funds campaign.

I hope you enjoy reading this issue and find it interesting and insightful. I would like to

take the opportunity to thank all the participants who have contributed to the success of

this Newsletter. I would also request the readers to give their recommendations for the

improvement of the newsletter.
mailto:[email protected]:[email protected]:[email protected]


2/15

Page 2 of 15

MUFAP ACTIVITIES Overview

Meeting of the Board of Directors

The Board of Directors held five meetings during the quarter April 2011-

June 2011.

LIST OF NO. OF BOARD MEETINGS HELD AND ATTENDED DURING THE

QUARTER APRIL TILL JUNE 2011

Name of Directors

Dates Total

(Out

of 5)22-

April

16-

May

30-

May

15-

June

30-

June

1Mr. Shahid

GhaffarYes Yes Yes Yes Yes 5

2Dr. Amjad

WaheedYes Yes Yes Yes Yes 5

3Mr. Babar Ali

LakhaniNo No No No 3 0

4 Mr. Farid AhmedKhan Yes Yes Yes Yes 4 4

5Ms. Maheen

RahmanNo No No Yes No 1

6Mr. Mir Adil

RashidYes No Yes Yes No 3

7Mr. Mohammad

Habib-Ur-RahmanYes Yes Yes No Yes 4

8Mr. Mohammad

ShoaibYes Yes Yes 1 No 3

9 Mr. Nasim Beg No No No No Yes 1

10Mr. Rashid

MansurYes No Yes No No 2

11Mr. Wazir Ali

KhojaNo No No 2 No 0

12 Mr. Yasir Qadri No Yes Yes No Yes 3

13Mr. Shamshad

NabiYes Yes Yes No Yes 4

1. Meeting was attended by Mr. Muhammad Owais Wasti (CFO) from Al

Meezan Investment Management Ltd. for Mr. Mohammad Shoaib.2. Meeting was attended by Ms. Rubina Rizvi (Senior Law Officer) from

National Investment Trust Ltd. for Mr. Wazir Ali Khoja.

3. Meeting was attended by Mr. Amir Mobin (CFO) from Lakson

Investment Ltd. for Mr. Babar Lakhani.4. Meeting was attended by Mr. Faisal Mangroria (CFO) from ABL Asset

Management Co. for Mr. Farid Ahmed Khan.

The activities undertaken by Board are as follows:

Five Year Plan

MUFAP, in consultation with its member institutions, identified the need

for a strategic plan to ensure sustainability and growth of mutual fund

industry. The 5-year comprehensive plan is designed with a view to achieve

long-term strategic goals by providing consultation to SECP in framing

effective regulatory guidelines that can help bring best practices to the

industry. The plan identified restrictions to growth and development of

mutual fund market, and recommended specific areas of improvements for

the current regulatory and supervisory framework. The key

recommendations in the plan included:

1. Pension reformsa. Mandatory legal requirement to offer funded retirement

schemes

b. Scope of SECP Regulationc. Removal of Tax Anomalies in Retirement Schemesd. Tax Incentives for long term savingse. Legislation for SECP to regulate Retirement Schemes

2. Saving and Related Issues--a. MUFAP Codes (Advertising Standards and Code of

Qualification for Distributors)

b. Rationalization of current taxation lawsc. Creation of enabling environment for mutual funds to

access government corporations and departments

d. Educating Investorse. Increasing investment options and creation of alternative

products

f. Reducing cost of intermediationg. Removing pricing and tax anomalies on National Savings

Schemes (NSS)

h. Developing the Bond/TFC Market3. Bond Market

a. BATS Tradingb. Listing Regulationc. Legal Framework

4. Real Estate Investment Trust (REITs)a. Amendments in REITs Regulationsb. Review of Real Estate Laws and practicesc. Review of Real Estate Tax Laws Particularly relating to

Transfer Duty on sale

d. Regulation of Brokers5. Corporate Governance

a. Auditing Standardsb. Capacity building of stock exchangesc. MUFAP Code of Ethics and Standards of Professional

Conduct

d. Performance Measuremente. Capacity building of the regulator


3/15

Page 3 of 15

Top

MUFAP Proposals incorporated in Finance Act 2011

Following proposals submitted by MUFAP to Federal Board of Revenue (FBR) through the Securities and Exchange Commission of Pakistan were incorporated

in the Finance Bill 2011, which was later adopted by the National Assembly.

Amendments in the Income Tax Ordinance 2001 through Finance Bill, 2011

No. Finance Bill ReferenceIncome Tax Ordinance Reference

(ITO)Amendments

1. 1(b) Section 2(11c) new clause Definition of Collective Investment Scheme incorporated for better

clarity

2. 4 Section 62 The investment limit in new issues and mutual funds enhanced from

10% to 15% of taxable income with maximum raised from Rs.

300,000 to Rs. 500,000. Life Assurance also included as eligible

investment. The holding period of investment extended from one

year to three years.

3. 5 Section 63 The maximum limit of Rs. 500,000 for contribution to Voluntary

Pension Scheme (VPS) for eligibility to tax credit removed. With this

in respect of contribution, level playing field has been achieved

between VPS and pension/ gratuity schemes offered by employers.

4. 21 Section 156 B On retirement 50% of accumulated amount withdrawn from VPS

shall not be subject to withholding tax. As withdrawal of 50% of

accumulated amount from VPS on retirement is exempt fromincome tax under Clause 23A of Part I of Second Schedule of the

ITO, the withholding regime and chargeable clause brought in line.

5. 32 Clause IIA, Part IV of 2nd

. Schedule, VPS has been exempted from minimum tax in line with mutual fund,

provident fund, pension fund, etc., to remove the anomaly.

6. 33 Rule 6 of Seventh Schedule Dividend to be received by banking companies from its associated

asset management company to be taxed at 20%.

7. CVT on debt instruments removed in order to develop the nascent

debt market.

Following proposals made by MUFAP were not incorporated in the Finance Bill, 2011.

1. Transfer of accumulated balance from gratuity and superannuation fund to VPS to be allowed tax free. MUFAPs view point presented before FBR wasthat VPS and employers managed retirement schemes should compete with each other and it should be left to employees to decide which scheme they

should join. MUFAP had no objection if transfer of balance is allowed from VPS to employer managed schemes.

2.

The transfer of accumulated balance from provident fund scheme (PF) to VPS is allowed under Income Tax Rules. MUFAP proposed that any subsequentwithdrawal of balance transferred from PF to VPS should not be subject to tax, as no tax credit is applicable on contribution to PF.

3. MUFAP proposed that all retirement schemes should be taxed under EET regime {(i) exemption from income tax of amount contributed to retirementschemes, (ii) exemption of investment income from income tax and (iii) pension to be taxed}. MUFAP emphasized that EET was its preferred choice,

being equitable; if that was not possible, then it is only fair that VPS should also be brought under EEE tax regime, like rest of the emplo yers retirement

schemes. Both options were not accepted by FBR. Considering that on retirement, fifty percent of the accumulated balance withdrawn from VPS is not

subject to income tax and tax withholding and the remaining amount drawn as monthly pension may be subject fifty per cent rate of tax, if the aggregate

income of the individual after reaching the superannuation age is below one million rupees annually, VPS is also partly tax exempt at the third stage.

Meetings of the Committees

MUFAPs Committees held many meetings to finalize important, well planned proposals on behalf of industry. The key findings and recommendations are

outlined below:

Rules and Regulations Committee

On May 5, 2011, SECP released notification of proposed amendments to Non-Banking Finance Companies and Notified Entities Regulations, 2008 in order to

solicit public comment on the regulation. The committee reviewed the proposed amendments in detail and suggested changes to regulations relating to

Trustee, fee payable to the Commission, minimum size of open-end scheme, maximum holding in open-end scheme and suspension period of redemption.

Among other things, MUFAP also addressed other long-standing issues not covered in SRO such as approval of related party transactions, requirement to make

minutes of Investment Committee meetings, inclusion of investment plan, charging of Shariah fee, uniformity of Investment permissibility across different

structures, requirement of obtaining ranking of CIS, regularization period when CIS is in breach of prescribed investment limits, investment limit for Index

Tracker funds, charging of license fee for ETF/Index Tracker funds, requirement to prepare statement of changes in equity, minimum equity requirement for

AMC and existing fee structure of commission.


4/15

Page 4 of 15

Mr. Mohsin Ali Chaudhr Left , Mr. Khawar Ansari Ri ht

Money Market Public Awareness

Campaign Print Ad.

Mr. John Micklethwait, Editor-in-Chief of The Economist

addressing at the ICI Annual Conference in Washington DC, USA

Top

Top

Top

Top

Top

Public Awareness Committee

Public Awareness Committee officially

unveiled the long-awaited money market

awareness campaign on June 7, 2011. The

multi-faceted awareness campaign, co-

financed by 12 AMCs, aimed at increasing

the awareness of the benefits of money

market funds to inculcate financial literacy

to potential investors to help them make

informed decisions. The campaigns

participating companies include ABL Asset

Management Limited, Al Meezan Asset

Management Limited, Arif Habib

Investments Limited, Askari Investment

Management Limited, Atlas Asset

Management Limited, HBL Asset

Management Limited, JS Investments

Limited, Lakson Investments Limited, MCB

Asset Management Limited, NBP Fullerton

Asset Management Limited, PICIC Asset

Management Company Limited and UBL Fund Managers Limited.

Phase I was a one month long campaign. The Committee has been working

to evaluate the results of Phase I in order to develop the media tools for

Phase II of the campaign which is scheduled to go out at the end of

October.

Meeting with SECP

A meeting was held between Board of Directors of MUFAP and SECP

representatives on the 3rd July, 2011 at the SECPS Karachi Office to

discuss the issues related to amendments in Non-Banking Finance

Companies and Notified Entities Regulations, 2008.

Events

ICI Annual Conference in Washington DC, USA

The Investment

Company Institute

(ICI) General

Membership

Meeting took

place in May 4-6 in

Washington DC at

the Marriott

Wardman Hotel.

What made this

event special was

that it was actually

a combination of

four conferences

in way in which participants could attend any plenaries or sections of any

of the four different conferences: ICIs 53rd Annual General Membership

Meeting, Mutual Funds Compliance Program Conference, Operations &

Technology Conference and Investment Companys Directors Workshop.

The objective was to reconnect with other IIFA members around the world

as well as hear topical and prominent speakers like the newly appointed

Editor-in-Chief of The Economist Mr. John Micklethwait and Chairman of

the U.S. Securities and Exchange Commission Ms. Mary Schapiro. This

insight into the strategies, thoughts and concerns of world trailblazers and

decision-makers gave a very clear snapshot of world economics. Special

sections of the conference on Risk Management as well as on the special

needs of small versus medium versus large asset management companies

were also very edifying.

Overall, it was a very successful conference that was great value add. The

Conference was attended by Ms. Tara Uzra Dawood, CEO of Dawood

Capital Management Limited.

IFC WORKSHOP ON CORPORATE GOVERNANCE

The International

Finance Corporation

(IFC), a member of

the World Bank

Group, held an Inter

Active Workshop on

on June 21, 2011 at

MUFAP. This half-day

workshop was

designed to provide aplatform to build capacity of MUFAP member Institutions to improve

techniques for assessing and contributing to the improvement of

Corporate Governance practices of investee companies. The opening

session of the workshop was addressed by Mr. Khawar Ansari who stressed

the significance of good corporate governance to optimize operational and

financial efficiency and outlined the need for fostering accountability,

fairness, transparency and responsibility to streamline business processes

effectively. The second session of the workshop was delivered by Mr.

Mohsin Ali Chaudhry, in which he elaborately explained the corporate

governance methodology and discussed various diagnostic tools to assess

corporate governance of a company. The workshop was concluded with a

dynamic participatory session included case studies, group discussion and

open questioning. Conference was attended by 15 senior professional staff

members from MUFAP Member Institutions and MUFAP.

SECP UPDATE

SECP begins redrafting of company law

The Securities and Exchange Commission of Pakistan (SECP) has initiated

re-drafting of the Companies Ordinance 1984 to make it compatible with

the best global practices. The new law, under the guidance of the

Corporate Law Review Commission, is planned to be finalized within the

next 12 to 18 months so that global regulatory regime should prevail in the

corporate sector of Pakistan.

SECP Proposes Changes in NBFC Regulations, 2008

Securities and Exchange Commission of Pakistan (SECP) vide S.R.O. 350

(I)/2011 dated 5th May, 2011, as part of its continuous efforts for

development of the capital markets, has proposed certain amendments in

the NBFC & Notified Entities Regulations, 2008 (the Regulations) aimed

at encouraging the growth of mutual funds and also placed these

amendments on its website to solicit comments from the public and

concerned quarters. MUFAP proposed its comments on the amendments

in the NBFC & Notified Entities Regulations, 2008. SECP also heard

MUFAPs proposal in a meeting held on July 3rd

, 2011 at the SECP office in

Karachi.
http://www.laksoninvestments.com.pk/http://www.picicamc.com/http://www.picicamc.com/http://www.picicamc.com/http://www.picicamc.com/http://www.laksoninvestments.com.pk/


5/15

Page 5 of 15

Source: KSE

Source: KSE

Source: KSE

Top

Top

Top

Top

Top

SECP issues the First Draft of Debt Securities Trustee Regulations

The first draft of Debt Securities Trustee Regulations (DST Regulations) has

been notified in the official gazette to solicit public opinion as required

under Sub-section (1) of Section 506 (A) of the 1984 Companies Ordinance.

The DST Regulations are aimed at safeguarding and protecting the interest

of the investors in the debt securities; ensuring that provisions of the Trust

Deeds executed between the issuers and the trustees are not breached; to

monitor compliance by the issuers of the terms and conditions of the

respective trust deeds; to monitor maintenance of the security, if any; to

monitor the payment of profit/markup/interest to the holders and

redemption of the securities; and to redress the complaints of debt

securities holders.

The key areas covered in the DST Regulations are the eligibility

requirements for registration; seeking registration and renewal; duties and

responsibilities of Debt Securities Trustees; maintenance of records and

documents; suspension/cancellation of registration; compliance with the

code of conduct; and list of minimum contents of the Trust Deed. Under

the DST Regulations, registration has been made compulsory to act as

trustee and only scheduled banks, development finance institutions and

investment finance companies can act as Debt Securities Trustees.

SECP gets taxation regime reformed

For details see page 3.

SECP allows investment in Futures Contract

SECP has taken an in-principle decision to allow equity/equity oriented

CISs to invest in futures contracts. However, before proceeding with the

investment the concerned AMC shall seek approval of the Commission as

mandated by the constitutive documents of the relevant CIS.

SECP amends the format of Statement in Lieu of Prospectus issued by a

private company on its conversion into a public company

SECP has amended the Statement in Lieu of Prospectus which is contained

in Part III of Second Schedule of the Companies Ordinance, 1984, required

to be filed with the registrar by a private company converting into a public

company. Previously, Prospectus required to be filed by public unlistedcompanies for obtaining Commencement of Business Certificate was

substituted with new one. Relevant information regarding the company,

i.e., Corporate Universal Identification Number, Registered Office and

contact details have been added keeping in view the requirements of all

the stakeholders. Previous format contained some cumbersome and

difficult information. Amended format contains more detailed and

simplified information on authorized and paid-up capital of the company,

particulars of directors, chief executive, secretary etc, remuneration

payable to these persons, number and amount of shares and debentures

issued or agreed to be issued, amount of discount, if any, allowed on issue

of any shares, details of every agreement entered, preliminary expenses,

rate of dividends in previous years etc.

Standardized Trust Deed for Mutual Funds

CDC-MUFAP finalized Standardized Trust Deed for Mutual Funds. The CDCand MUFAP teams had been working together for more than a year

towards finalizing a Standardized Trust Deed for Mutual Funds. The

finalized draft of the Standardized Trust Deed for Mutual Funds was

submitted to the SECP on the 22nd

July, 2011. The Standardized Trust Deed

for Mutual Funds once approved by the SECP will help in saving a lot of

time and money in the approval process for the Trust Deeds for Mutual

Funds set up in the future.

Market Developments in Q4 FY11

Equity Market

The KSE-100 index waved a cheerful farewell to the fiscal year 2011 as it

climbed 2,300.34 points, or 26%, to 12,300.44. The stock market staged animpressive rebound in the first two quarters, bringing the return of the

index to 23.66% for the first six months, while in the latter ones market

volatility rose sharply and index posted a subdued gain of 2%. During the

last quarter of FY11, index moved in a narrow band of 909 points touching

a high of 12,508.42 and slipping to a low of 11,599.28 with thin volumes

across the board amid limited foreign and institutional interest. The

lackluster activity dominated the market throughout the trading sessions

of April, however, finishing the month with 248.90 points up, or 2.1%, to

12,057.54. Rising inflation, widening fiscal deficit, energy and gas shortfall,

security concerns, increased power tariffs, circular debt issue and higher

global commodity prices kept investors on the sidelines. However,

encouraging corporate earnings, rising foreign exchange reserves, current

account surplus and recovery in global stocks and commodities drove the

modest improvement in the last few trading sessions of the month. Due to

the volatile law and order conditions, the market continued to move at a

snails pace in May to close marginally up 65 points, or 0.5% at the

12,123.15 level. The market crawled up towards the later part of the

month on the back of positive budget related news particularly relaxation

in CGT and intactness of deemed duty as well as assurance about no

imminent foreign aid withdrawal and sovereign rating revision. The last

month of fiscal year 2011 presented a non-descript pattern as the index

edged up 372.88 points, or 3.08%, to 12,359.36. Despite low-volume

market environment, index managed to record light gains amid

cancellation of flood tax surcharge, unchanged corporate taxation on the

banking sectors, phased withdrawal of FED on cement, deregulation of oil

prices and discovery in exploration sector. The market is in need of fresh

catalysts to regain momentum.

Q1-FY11 Q2-FY11 Q3-FY11 Q4-FY11

KSE-100 Index 10,013.31 12,022.46 11,809.54 12,496.03

KSE-30 Index 9,674.34 11,588.24 11,561.50 11,586.49

Market Cap. (PKR bn) 2,772.38 3,268.95 3,147.55 3,288.66

Net Foreign inflow (US$ mn) 106.19 143.80 52.38 (22.19)

Avg. daily vol. (mn shares) 62.04 124.19 122.08 74.02

Q1-FY11 Q2-FY11 Q3-FY11 Q4-FY11 ALL TIMEHIGH

KSE-100(Highest Close)

10,519.02

(Jul 30, 10)

12,031.46

(Dec 30, 10)

12,681.94

(Jan 17, 11)

12,508.42

(Jun 23, 11)

15,676.34

(Apr 18, 08)

KSE-30(Highest Close)

10,483.36

(Jul 30, 10)

11,588.97

(Dec 30, 10)

12,476.12

(Jan 17, 11)

11,955.21

(Jun 08, 11)

18,996.33

(Apr 17, 08)


6/15

Page 6 of 15

Source: Monetary Policy Information Compendium, SBP

Source: SBPSource: Monetary Policy Information Compendium, SBP

Top

Top

Money Market

SBP adopted various policy measures aimed at controlling the growth of

monetary aggregates in order to achieve monetary and price stability.

Open Market Operations (OMOs) remained the major tool for liquiditymanagement. The liquidity constraint forced SBP to increase money

injection into the market. SBP injected Rs. 220.85 billion and mopped up

Rs. 375 billion during Q4-FY11 through OMOs.

Strong export earnings and robust growth in remittances, expansion in

foreign exchange reserves, increase in NFA of the banking system,

relatively disciplined government borrowings from the central bank,

favorable external current account position and stable financial markets

allowed SBP to keep the key policy rate unchanged at 14 percent in the last

monetary policy review during the fourth quarter of FY11.

However, the debt burden combined with inflation has created challenges

for private productive activity and needs satisfactory implementation of

fiscal reforms.

Movement in KIBOR

Treasury Bills

A total of 7 T-bill auctions were held by SBP during the quarter in which a

total amount of Rs 1,235.33 billion was raised. No change in the SBP policy

rate has led the banks to diversify their investment in all tenors of T-bills.

T-Bill Auctions (Amount in PKR billion; rates in %)

3-Month

Cut-off Rates

6-Month

Cut-off Rates

12-Month

Cut-off Rates

Amount

Accepted

07-Apr-11 13.30% 13.69% 13.87% 200.9821-Apr-11 13.25% 13.62% 13.87% 232.65

05-May-11 13.07% 13.48% 13.79% 254.19

19-May-11 13.21% 13.60% 13.84% 158.83

02-Jun-11 13.53% 13.76% 13.91% 135.49

16-Jun-11 13.49% 13.74% 13.91% 180.36

30-Jun-11 13.49% 13.74% 13.91% 72.83

A total of 6 T-bill auctions were held by SBP during the quarter in which a

total amount of Rs 962.30 billion was raised. No change in the SBP policy

rate has led the banks to diversify their investment in all tenors of T-bills.

Pakistan Investment Bonds

The Government compensated the earlier shortfall in borrowings through

PIBs by accepting more than targeted amounts in the last three auctions as

it raised a net amount of Rs 80.66 billion through PIB auctions against the

target of Rs 80 billion during the quarter. Investors seemed to be most

interested in 10 year PIBs, as about 52.07% of the money was raised

through this tenor.

PIB Auctions (Yields in % and Face Value in PKR billion)

Cut-off rate Offered Accepted Target

27-Apr-11

3-Year 14 9.28 5.48 4

5-Year 14.07 4.85 3.45 4

7-Year R 0.65 R 1

10-Year 14.1 25.8 14.53 8

15-Year R 0.05 R 1

20-Year R 1 R 1

30-Year R 0.95 R 1

Total - 42.58 23.46 20

25-May-11

3-Year 14 16.23 12.57 4

5-Year 14.06 4.93 2.53 4

7-Year R 0.25 R 1

10-Year 14.1 18.3 12.7 8

15-Year 14.11 0.15 0.1 1

20-Year 14.14 0.1 0.1 1

30-Year R 0.1 R 1

Total - 40.06 28 20

22-Jun-11

3-Year 14 12.21 10.96 4

5-Year 14.05 3.72 2.87 4

7-Year R 0.1 R 1

10-Year 14.09 19.67 14.77 8

15-Year 14.1 0.5 0.2 1

20-Year 14.14 0.2 0.2 1

30-Year 14.19 0.2 0.2 1

Total - 36.6 29.2 20

GoP Ijarah Sukuk

The Government accepted a total of Rs. 45.80 billion against received bids

of Rs. 51.25 billion in the latest Ijara Sukuk auction held on May 9, 2011.

Tenor Q1-FY11 Q2-FY11 Q3-FY11 Q4-FY11

3-month 12.25%-13.09% 12.97%-13.46% 13.46%-13.80% 13.22%-13.57%

6-month 12.35%-13.27% 13.19%-13.62% 13.64%-13.90% 13.56%-13.79%

12-month 12.30%-13.73% 13.31%-14.12% 14.13%-14.34% 14.02%-14.26%


7/15

Page 7 of 15

Top

Debt Market

The table below summarizes the TOP 15 traded TFC/Sukuk during the Q4-FY11:

TFCs / Sukuks Detail Face Value

(PKR million)

Trade Value

(PKR million)

Transactions Trade Price

Range

Pakistan Mobile Communication Ltd. - 889.45 817.65 27 87.00 - 94.23

United Bank Ltd. IV 616.11 620.64 11 96.75 - 99.00

NIB Bank Ltd. I 312.72 301.32 13 96.00 - 96.50

Engro Corporation Ltd. I 283.35 281.22 4 98.70 - 100.0

Allied Bank Ltd. II 179.89 176.82 4 97.00 - 98.75

Bank Al-Habib Ltd. II 128.94 133.64 9 103.0 - 104.0

Optimus Ltd. - 124.83 100.36 3 78.00 - 82.00

Bank Alfalah Ltd.-Fixed IV 121.94 121.08 6 98.13 - 98.25

Engro Fertilizer Ltd. III 107.35 102.97 6 93.00 - 97.50

Askari Bank Ltd. III 99.96 103.28 3 103.0 - 103.65

United Bank Ltd. I 78.05 73.79 8 94.00 - 94.75

United Bank Ltd. III 76.82 77.77 7 101.0 - 101.7

Soneri Bank Ltd. I 49.88 49.93 1 100.1 - 100.1

Bank Al-Habib Ltd. I 49.87 46.57 3 90.78 - 96.00

United Bank Ltd. II 44.34 40.19 6 87.05 -91.00

State Bank reduces policy rate by 50 bps to 13.5%

The State Bank of Pakistan (SBP) has decided to reduce its policy rate by 50 basis points to 13.5 percent with effect from August 01, 2011. This was announced

by Mr. Yaseen Anwar, Acting Governor, State Bank of Pakistan, while unveiling the Monetary Policy Statement.

Mutual Funds Industry

The total net assets expanded by 7.87% quarter over quarter. This growth applies to open-end funds, pension funds and closed end funds. The open-end funds

went up by 9.79% to Rs. 222.537 billion, pension funds went up by 9.67% to Rs. 1,557.85 million and closed end decreased by 7.32% to Rs. 23.917 billion.

Net Assets - (PKR in millions)

Open-End Funds Closed-End Funds

Asset Type Q3-FY11 Q4-FY11Growth

Rate

Q3-FY11 Q4-FY11Growth

RateAsset Allocation 3,091.59 3,065.70 -0.84% 445.49 434.53 -2.46%

Balanced 3,811.16 3,524.98 -7.51% 1,352.65 1317.25 -2.62%

Capital Protected 4,564.27 3,368.47 -26.20% - - -

Equity 49,973.76 52,458.09 4.97% 19,793.56 17,809.9

-10.02%

Income 47,056.85 47,503.60 0.95% 1,081.63 1,124.76 3.99%

Money Market 62,932.22 77,304.26 22.84% - - -

Islamic Asset Allocation 1,299.35 1,263.06 -2.79% - - -

Islamic Balanced 781.62 766.58 -1.92% 1,474.80 1,523.43 3.30%

Islamic Capital Protected 708.60 - -100.00% - - -

Islamic Equity 4,897.64 5,319.98 8.62% 1,657.75 1,707.32 2.99%

Islamic Income 16,330.71 20,792.83 27.32% - - -

Islamic Money Market 6,815.58 7,169.87 5.20% - - -

Total 202,263.35 222,537.44 9.79% 25,805.87 23,366.2

-7.32%

Source: MUFAP

Source: MUFAP


8/15

Page 8 of 15

Mr. Nasim Beg

Mr. Farid Ahmed Khan

Top

Funds launched during the quarter Q4-FY11

The following fund was launched during the quarter:

Fund Name CategoryInception

Date

HBL Islamic Money Market Fund Islamic MoneyMarket 9-May-2011

HBL Islamic Stock Fund Islamic Equity 9-May-2011

MCB Islamic Income Fund Islamic Income 19-June-2011

Meezan Capital Protected

Fund-II

Islamic Capital

Protected07-July-2011

UBL Government Securities

FundIncome 25-July-2011

Pak Oman Government

Securities FundIncome 28-July-2011

Funds Matured during the quarter Q4-FY11

The following funds have been dissolved after completing their fixed

duration:

Fund Name Category Maturity Date

JS Capital Protected Fund IV Capital Protected 30-May-2011

MCB Sarmaya Mehfooz Fund-1 Capital Protected 25-June-2011

Meezan Capital Protected Fund Islamic Capital

Protected

29-June-2011

JS Principal Secure Fund II Capital Protected 27-July-2011

A Note of Appreciation for Services rendered to the Industry

Mr. Nasim Beg resigned from the Board of Directors

of MUFAP on the 27th

June, 2011 on his

appointment and elevation to the position of

Executive Vice Chairman of Arif Habib Investments

Limited. We would like to place on record the

valuable services always very willingly and

generously provided by Mr. Nasim Beg to MUFAP

from its early years both as a Director and Chairman

of MUFAP in recent years. He has always made himself available to

MUFAP to serve on the professional Committees of the Board both as a

Member and Chairman of the Committees and has contributed very ably

and significantly on industry issues and for industry development matters.

With his qualities of leadership, his high ethical and professional standards

he has been a role model for all of us. We are looking forward to Mr.

Nasim Beg continuing to make himself available to help and guide us

whenever needed.

Rejoining of National Asset Management Limited (NAMCO)

The General Body Meeting of MUFAP approved the re-admission of the

National Asset Management Company Limited (NAMCO) with effect from

the 18th May, 2011 as a member of MUFAP. We welcome NAMCO on its

resuming its membership of MUFAP.

KASB Funds acquires Crosby Asset Management

KASB Funds Limited (KFL) announces the successful completion of

acquisition of Crosby Asset Management (Pakistan) Limited (CAMPL) and

its simultaneous merger with and into KASB Funds Limited.

As per the approval of SECP, Crosby Asset Management Limited merged

into KASB Funds Limited and the rights to manage Crosby Dragon Fund,

Crosby Phoenix Fund and AMZ plus Income Fund have been transferred to

KASB Funds Limited w.e.f July 20, 2011.

Review of compliance with the mandatory disclosure requirements of FMR

Since the beginning of the exercise to review the FMRs for compliance with

the mandatory disclosure requirements, weve witnessed a considerable

improvement. The following companies are conforming to the

recommended format as per our verification of FMRs for the month of

June 2011:

- Al Meezan Investment Management Limited,

- Arif Habib Investments Limited (a subsidiary of MCB Bank Limited),

- Atlas Asset Management Limited,

- BMA Asset Management Company Limited,

- Crosby Asset Management (Pakistan) Limited,

- Habib Asset Management Limited,

- HBL Asset Management Limited,

- JS Investments Limited,

- Pak Oman Asset Management Company Limited,

- PICIC Asset Management Company Limited

From our next issue we plan to mention names of those AMCs who are

NOT compliant with the standardized format of the monthly FMR.

Interview with the Chairman of MUFAPs Public Awareness Committee;

Mr. Farid Ahmed Khan

To improve awareness among investors that there

are several investment options available in the

market place, and making investors aware of the

risks and rewards associated with such investment

avenues, MUFAP established a Public Awareness

Committee to accomplish its goals by drawing and

activating campaigns. We decided to speak with the

Chairman of MUFAPs Public Awareness Committee

to discuss the recently launched campaign, its goals,

challenges and accomplishments.

What inspired you to lead the Public Awareness Committee? What would

you like to accomplish as a committee chair?

I really wanted to work with a team to create some difference in whatever

way I could and when I shared the view with Chairman MUFAP, he

suggested that perhaps the awareness committee is one of the platforms

where it can be achieved. Thats how I ended up here. To be honest, I feel

that one year is too short a period of time in order to achieve our strategic

objective as it requires a sustained collaborative effort of 25 AMCs and

bringing everyone together on a single common platform to achieve

shared goals takes some time. What we can accomplish and want to

accomplish may be in this short period of time:

a)To start rebuilding the image of funds which was tarnished during

2008/09.b) Focus on initiatives aimed at enhancing investor education to bring back

the investors who seemed to be shying away from the industry.

c) Work with regulators, stakeholders and other key market participants to

spread the message as wide as possible to promote savings and

investments in the market and thereby contributing to the economic

progress. The idea is to build mutual cooperation and understanding with

the major stakeholders (KSE, CDC, NCCPL, and SECP) for the effective

regulation and development of capital market with a clear direction.

Source: MUFAP

Source: MUFAP


9/15

Page 9 of 15

Can you put forward your thoughts on how the mutual fund industry can

further create awareness for its products and also build the trust and

respect of the general public?

Trust and respect will only come with time and performance. If you keep

performing and delivering quality on time, people will come to respect you.

Its true that our industry has gone through some tough times but so has

been the stock market. Track record of consistency and performance can

earn the trust. The first and foremost thing to create awareness is to

develop investor education programs for both urban and rural areas.

Through comprehensive public awareness program like face-to-face

interactions, road shows, public forums and seminars, we can educate our

investors about what our products are, how we can help them and

eventually earn their trust. The next step to create awareness of our

different products, risk profile, merits and demerits of each fund category

is to give participants an opportunity to speak directly to experts.

Do you think one day we can be at a place where we can be as popular as

banks?

When we look at banks in Pakistan, they have a rich history of 60-65 years.

A lot of them are like households names with a massive distributionnetwork while mutual fund industry is only a few years old. Most people

are unaware of mutual funds, money market fund is perhaps the simplest

of our product but people dont even know about it. It requires relentless

work and incessant efforts at creating awareness to hammer the message

down that mutual funds are an important part of their saving portfolio like

national saving schemes and bank accounts and it should rank somewhere

near that spectrum. It is a long journey but as long as we keep moving in

that direction, we will eventually achieve our goal.

Do banking groups that have asset management affiliates help in

distributing funds or they see mutual funds in competition with their own

products?

It varies from company to company. Some get a lot of support, some get

some support, some do not get any support, and it depends on where the

priority line lies for the AMC business and for the bank. With big banks wedo face this problem that their bottom-lines are huge and its very difficult

for us to make an impact or gain their attention. Therefore, we have to

regain our shareholders as charity begins at home. If the shareholders

understand, they will put it on the right priority lane. Its absolutely correct

that mutual funds are in direct competition with some of their products

but banks do have other products as well. Some banks have 5 different

credit cards, each one of them is competing with other but at the same

time each has one different feature which differentiates. So we are like

that. Similarly, people keep their money in long-term deposits but at the

same time they do keep their money in saving accounts also where they

withdraw at will, may be some part of it can come into our money market

and income funds. There will be some cannibalization but at the end of the

day the money will remain in the group/system. We have to send this

message across that there is value addition for banks as people are

becoming more and more aware of these products and if one bank does

not offer it the customer will go to some other bank. The best way is to

keep customers informed, offer them choices so that at the end of the day

its their choice which product they want to choose. Our job is to ensure

that whatever the product they choose, it remains in the group.

Money market funds now have the largest weight in fund categories

surpassing both equity and Income funds AUMs, Do you think that Money

Market Fund Category can continue to grow keeping in mind the

unchanged key policy rate in last three Monetary Policy reviews?

Money market funds are now the preferred vehicle for risk averse

investors and their growth indicates the psyche of our customers. Its just

the reflection of how the industry and market has fared over the last two

years.

Money Market category will continue to grow for as long as investors have

a low risk appetite. The moment investor risk perception changes, for

instance, if the stock market starts running again and after 6 months

people realize that stock market is up 25%, we will see a sharp growth in

stock funds as well. Money market category probably is not heavily

dependent on how the interest rate environment moves; it is more aligned

with investor risk perception and performance of other asset classes.

Investing is about making money and meeting your financial goals. What

are the key differences between investing in bank deposits and Money

market funds? What advice would you give to the general public at large to

increase odds of achieving their investments goals?

People should consider our money market funds as an alternative to bank

deposits. They are not a replacement of bank deposits. One cannot get his

salary credited to a money market account, the person needs a bank

account for it. It is certainly an option as a saving alternative. Instead of

leaving money in a saving account or current account, money market fund

is a better product which offers superior returns with a lot of flexibility.

This is how we will pitch it Use your bank account for transactions to get

credits & debits but for your savings, consider money market fund.

Can you please throw some light on goals and objectives of recently

launched Money Market awareness-building Campaign? What is your

campaign slogan? Is the campaign clearly focused on the target audience?

The objectives of this campaign were to educate investors about AMCs and

their funds. We wanted to introduce money market funds as aninvestment option next to the bank deposits and highlight the fact that this

is a vibrant industry that can work together for a common objective. It is

also an effort towards the investor education and outreach where we tried

to explain the thought process behind these funds and what benefits they

can offer to investors. We wanted to differentiate it very clearly that funds

are not just about stock market or stocks; there are different categories

available. It was a short campaign for about a month. We tried to make the

slogan as simple as possible People who think smart, invest smart. We

didnt incorporate any financial jargon because one doesnt need to be a

financial wizard to understand this product. All you need to do is perhaps

act; you dont have to think a lot about it. Its only your laziness which can

prevent you from not taking advantage of it.

My regret is that perhaps it was targeted mostly towards urban

population. Given the budget constraints and the fact that it was the first

attempt we wanted to keep it focused otherwise we would have stretched

ourselves in a major way. The objective was to target businessmen,

professionals, housewives and retired personnel. The way the response we

got, the leads that started to come through, the number of hits received on

website, it highlights that the message did go across.


10/15

Page 10 of 15

Top

What were the key challenges faced by the committee in launching the

awareness campaign?

Initially, the biggest challenge was to define this campaign because this

effort has been going for a long time. It was not delivered because

whenever you have 20 people sitting at a table, there are 20 ideas. The key

challenge was to cut it down to the bare minimum level where everyone

agrees. It was the defining moment when we decided this is what we have

to do and we got everyone around the table agreed to it. Once that was

done, coordination was the key challenge at the execution stage but we

had a very good team of volunteers who did fantastically well. Once the

goal was clear that what we have to achieve, things started falling into

place. Other challenges were regulatory approvals.

How are you going to measure the success of the campaign?

The results can be measured along several factors, the leads; the number

of hits on website and fans on our face book page. We cannot measure the

impact in short-term as the hits tend to multiply over time. SECP and KSE

liked the idea that industry is coming together and giving a message from a

common platform. The credibility goes many folds when 12 companies are

appearing together to achieve common objectives in newspaper. Time willtell how successful it was.

What would be your strategy or advice that you would convey to the

person who will take the lead of this committee?

I would recommend that the strategy for next 3 years is to create

awareness from grass root level and keep things simple because when we

have to explain something to lay men, sometimes we take certain things

for granted that they already know that its a money m arket fund and it

does not invest in stocks. So we should keep things really simple and at

basic level where we just have to hold their hands and guide them. Once

we agree to that we just need to convey the features and benefits of

mutual funds, what they can do for you, how you can invest, how you can

reach us. Once your investor interaction starts, once he steps inside your

domain than after 1 or 2 years when he has a good experience with simple

products, he will listen to you and will look at other investment options orplans as well.

What future plans do you have to expand outreach efforts?

We want to put some publications in magazines and newspapers about

mutual funds and explain how mutual funds complement banks and other

saving products. Investor road shows seminar is next thing on our agenda.

We are planning to initiate our second phase of campaign after ramazan.

Our plan is to use this campaign and its momentum to appear on several

print and electronic media to further give the message out about our

industry achievement. We are planning to make a resource booklet

representing fundamentals of investing in mutual funds on MUFAPs and

Money Market funds website.

ARTICLES

Disclaimer: The opinions expressed in these articles are the views of the

author of the articles and not necessarily the views of MUFAP.

The AlternativeBy Muhammad Sohail

Director, KSE and CEO Topline Securities

Mounting fiscal deficit with no major external inflows has forced the

government to take steps that will defer real investment and

industrialisation in the country. The government has been promoting

investment in state-backed securities like treasury bills, Pakistan

Investment Bonds and different products of National Saving Schemes

(NSS).

NSS alone has raised Rs20 billion a month for the government for the last

three years. With some products offering returns higher than the

prevailing interest rates and inflation, a wise investor will not bother

working hard to make more returns in the economy hit by stagflation.

Lower tax on government securities

The Finance Bill, 2011 allows a taxpayer, other than a company, to bring

profit earned on government securities in Final Tax Regime. After this

amendment, the individual can avoid filing returns under the section

115(4) of Income Tax Ordinance. As a double benefit, the investor of

government securities can pay less tax (only 10%) and, that too, without

any hassle of filing tax returns.

This shows the governments desperation to raise funds at the expense of

actual investment in different sectors that can generate employment and

contribute to the overall economic development of the country. This has

negative repercussions on the already dying stock market where the

overall volume has collapsed to a 9-year low in FY11. After the tax

relaxation, investors have been provided with a window of opportunity to

make easy money by shifting their funds from stocks to government

papers.

Good returns with no risk

In the last 20 years, average annual return on benchmark 6-month treasury

bills was 10 percent. After the deduction of 10 percent withholding tax, the

net return turns out to be 9%. Most of the high net worth individuals fall in

20% tax bracket. For them the after-tax return was 8 percent a year.

In comparison, the stock market posted an average yearly return of 20%

(including 5 percent dividends) in the last 20 years. With no tax on capital

gains and a 10 percent levy on dividends, the actual after-tax return comes

to 19 percent after commission and other charges. Thus, on after-tax basis

the return on government papers, at 1,100 basis points or 11%, is less than

the equity earnings.

The situation is no more the same now. The government has announced a10 percent full and final tax on government papers in the Federal Budget

2011/12. And now the capital gains tax has been brought under the tax

ambit with no facility of it being considered as full and final for individuals.

As a result, if someone buys 6-month benchmark T-Bill, his after-tax return

will be 12.35 percent compared to 17.5% in stocks (after the deduction of

10 percent tax and 0.5% other charges). This estimate is based on the 20-

year average annual gain of 20 percent. This 5 percent additional return on

equity is far less than the historical premium of 11% that an investor used

to get for taking additional risks.


11/15

Page 11 of 15

Top

Furthermore, the government has been kind enough to fixed-income

investors by placing them under the presumptive tax regime where the 10-

percent levy will be full and final. On the other hand, a stock investor

needs to keep all the records and hire a tax consultant to file yearly return

of investment in the stock market.

Behbood Scheme: the best bet

Another reason to invest in government securities is the attractive yield

being offered by saving schemes. NSS has attracted around Rs700 billion in

the last 3 years. On an average, Rs20 billion net investments are being

made in these products on a monthly basis. Behbood certificates offer the

highest rate of 15.4 percent and are exempt from taxes. This product is

designed for widows and senior citizens aged 60 years and above.

Interestingly, close to Rs200 billion has been invested in this product alone

in the last 3 years. With NSS still not being computerised, many investors

have touched the maximum limit of Rs3 million for an individual in sheer

violation of the rules. And the mounting inflows in this scheme justify the

decision of a smart investor, who deposits all of his funds in the product

where the after-tax return is close to the stock market earnings, with no

tax and botheration to file returns.

In FY11, the so-called benchmark KSE-100 Index rose 20 percent excluding

illiquid Nestle Pakistan. After tax and other costs, the return is close to 17.5

percent compared to risk-free, tax-free 15.4 percent profit generated

through Behbood.

Shift the focus please

The government must focus on bridging the fiscal deficit through

innovative methods rather than relying on costly debt that obviously has to

be repaid. By imposing a 25 percent tax on gas bills, the government can

raise Rs100 billion. Economic theory suggests taxing the product in

demand. Gas in Pakistan is being sold in the range of $1-$6 per Million

British Thermal Unit (MMBTU) compared to the equivalent cost of oil

which is $15 per MMBTU. Gas is preferred by everyone because it's

cheaper than oil. Housewives in Karachi enjoy uninterrupted gas supply at

nominal charges at a time when the industry is desperate for gas at a

higher cost. Many people prefer to use gas generators at their homeamidst power outages. This tax on gas or similar kind of price

rationalisation will help curtail the rising gas demand.

Similarly, if the government charges one rupee a day from mobile users,

they can raise Rs40 billion a year to help finance the deficit in the short

run. The government can also rely on the stock market to raise funds

rather than depending totally on interest bearing debt. The government

has raised more than Rs100 billion through the stock market in the past.

Thus, a vibrant capital market can help generate funds that the

government is now raising at a high cost.

Implications of National Savings Schemes on the Economy

& the Financial Sector

By Mutual Funds Association of Pakistan (MUFAP)

National Savings Scheme (NSS) plays an important role in mobilization of

savings for meeting the Governments financing needs. However, pricing

and tax anomalies in NSS need to be addressed. Addressing these

anomalies can save the Government of Pakistan up to Rs 100 billion per

annum through reduction in debt servicing costs and increase in taxes and

penalties on early withdrawal from NSS. Presently government debt

servicing at around Rs 800 billion equals about 50% of the entire

government tax revenues. These costs can be significantly brought down.

This will also reduce the interest rate risk for the government and help in

bringing the interest rates down in the country which will promote

economic growth.

MUFAP analysis indicates that there is very substantial mis-pricing in

Bahbood scheme and Special Savings Certificates. Behbood presently

offers a rate of 15.4% p.a.with zero percent tax on it. Over 90% of Pakistani

retirees do not have the savings to invest in the Behbood Scheme. They

can hardly meet their day to day expenses. The investors who invest in the

Behbood Scheme are rich and it is not right that they be provided subsidy

by the government. It is also widely believed that individuals open multiple

Behbood Deposit Accounts at different NSS Centers. There is a need to

investigate this fraudulent availing of Behbood subsidy. It is not justified to

provide subsidy to the very rich through payment of very high interest

rates and also making the rate of return paid (15.4 % per annum) on the

Behbood deposits tax free.

MUFAP has compared the NSS rates in Pakistan with similar Small Savers

Scheme in India. In India the average bank deposit rate is about 7.5% p.a.

and the average return on Savings Schemes is about 8% p.a. In Pakistan the

average bank deposit rate is around 6% p.a. and the average return on NSSis about 14% p.a. (calculated based on the prevailing rates of returns).

Thus, the Pakistani government is paying too high a rate on savings

schemes, despite the fact that the credit rating of the Government is much

higher than banks. The wide spread of over 8% between NSS rates and

bank deposits has a negative impact for the banking system. State Bank of

Pakistan has stated in its F inancial Stability Review 2009-10: more net flow

towards NSS tend to shift medium term fund or fixed deposits away from

the banking system that limits the banks ability to invest in the medium

term projects.

The Penalty structure on NSS is also very low and inconsistent. The penalty

on 10- Behbood Savings Certificate averages only 0.625% in the first 4

years and 0% in the last four years. On the 3-year Special Savings

Certificate there is almost no penalty if a saver redeems after completion

of 6-months period. Thus in reality this is a 6-month instrument providing

the return of a 3-year instrument. Low penalties on withdrawal from NSSalso exposes the Government to high interest rate risk as investors switch

at any time the interest rates rise. The Effective Penalty rates on exit for

saving schemes in Pakistan are much lower versus India.

For all schemes excluding Behbood Savings certificate there is a flat 10%

full and final tax rate on income irrespective of the income level of the

saver. In India, by contrast, the tax rate is 10% on Income level of upto INR

500,000, which rises to 20% for income levels between INR 500,001 and

INR 800,000, and 30% for income levels above INR 800,000. Behbood

Savings Certificates are completely tax exempt in Pakistan whereas in India

for Senior Citizens Savings Scheme the tax rate rises with the income levels

of the savers and reaches 30% for savers with income levels above INR

800,000.

Very high rates on NSS have a strong negative affect on the Private Sector

and on the economy. With NSS offering returns of 12%-15% per annum,

the Private Sector is forced to borrow at an even higher rate. The very high

rates on NSS are slowing down private sector borrowings as the high

interest rates become a barrier for business and industrial investment and

expansion, thus slowing down economic growth rate of the country.


12/15

Page 12 of 15

Top

Recommendations for the Government of Pakistan

The NSS should be targeted towards small savers and as in Indiainstitutions should not be allowed to invest their company cash

or employees funds in NSS

As in India, NSS rate of return should be linked to bank depositrates of the same maturity, and not to sovereign bond yields.

Penalties on NSS for premature redemptions should be raisedsubstantially to reduce interest rate risk of the Government

Higher tax rates slabs should be applicable on all NSS and bankdeposits based on the income levels and tax bracket rates of the

investors. In India, the tax slab on NSS and banks rise to 30%

versus 10% in Pakistan.

Rate of Return on Behbood Saving Certificates and DefenceSaving Certificates, both having a 10-year maturity, should be in

line with 10-year bank deposit rate.

Know Your Client (KYC) requirements should be madeapplicable to NSS as well as they are applicable to bank and

mutual funds. This will help reduce money laundering and

improve transparency and documentation of the economy.

Even if the Government gradually reduces NSS rates and raisespenalties, it will still be able to attract the target amounts as

banks / mutual funds returns are substantially lower than NSS

rates.

The above measures will help the government save about Rs 100 billion

per annum on account of reduced debt servicing costs and higher taxes

and penalties receipts. This will also revitalize the private sector resulting in

improving tax collection and exports, and reducing unemployment rate in

the country.

Mutual Funds Association of Pakistan

207- 209, 2nd

Floor, Kassam Court, Block-5, Clifton Karachi

Tel: 92-21-35293103, 35293136-7, Fax: 92-21-35293104

Email: [email protected]

www.mufap.com.pk
mailto:[email protected]:[email protected]:[email protected]://www.mufap.com.pk/http://www.mufap.com.pk/http://www.mufap.com.pk/mailto:[email protected]


13/15

Page 13 of 15

Top

Top

Top

TopSource: MUFAP

Source: MUFAP

Source: MUFAP

Source: MUFAP

INDUSTRY STATISTICS

Net Assets - Open End Schemes (PKR in million)

Schemes FY06 FY07 FY08 FY09 FY10 FY11Q1 FY11Q2 FY11Q3 FY11Q4

Asset Allocation 4,291 2,582 4,985 2,508 2,389 2,897 3,116 3,092 3,066

Balanced 6,574 7,459 12,353 7,100 5,182 4,536 4,041 3,811 3,525

Capital Protected - 2,617 5,019 6,194 7,147 5,443 5,583 4,564 3,368

Equity 71,191 113,147 104,162 61,542 39,374 39,621 50,877 49,974 52,458

Income 28,602 112,327 140,381 78,461 62,092 57,532 52,384 47,483 47,504

Money Market - - 114 3,282 32,046 41,293 50,378 62,932 77,304

Islamic Asset Allocation 1,378 1,073 1,832 1,520 1,178 1,223 1,360 1,299 1,263

Islamic Balanced - 965 1,916 1,358 911 833 753 782 767

Islamic Capital Protected - - 579 582 637 656 686 709 -

Islamic Equity 4,064 5,108 7,425 4,501 4,601 4,531 4,996 4,898 5,320

Islamic Income - 3,162 9,103 7,855 7,289 6,479 15,087 16,331 20,793

Islamic Money Market - - - 624 5,224 6,250 6,722 6,816 7,170

Total 116,100 248,440 287,870 175,528 168,071 171,293 195,983 202,690 222,537

Net Assets - Pension Funds (PKR in million)


Pension - - 305 349 572 535 576 606 655

Islamic Pension - - 466 530 729 721 786 814 902

Total - - 770 878 1,301 1,255 1,362 1,421 1,558

Net Assets - Closed End Funds (PKR in million)


Asset Allocation 629 646 592 283 345 374 425 445 435

Balanced 618 2,135 1,971 1,243 1,144 1,221 1,343 1,353 1,317

Capital Protected - 108 1,397 1,297 1,404 806 846 - -Equity 38,860 44,609 38,145 22,171 24,036 23,762 20,490 19,794 17,810

Income - 1,027 1,115 1,084 1,111 1,020 1,049 1,082 1,125

Money Market - - - - - - - - -

Islamic Asset Allocation - - - - - - - - -

Islamic Balanced 1,513 1,598 1,424 1,143 1,278 1,326 1,413 1,475 1,523

Islamic Capital Protected - - - - - - - - -

Islamic Equity 2,029 2,219 1,906 1,174 1,404 1,476 1,637 1,658 1,707

Islamic Income - - - - - - - - -

Islamic Money Market - - - - - - - - -

Total 43,649 52,341 46,549 28,394 30,723 29,986 27,203 25,806 23,917

Industry-wide - Net Assets (PKR in million)

FY06 FY07 FY08 FY09 FY10 FY11Q1 FY11Q2 FY11Q3 FY11Q4

Open End Funds 116,100 248,440 287,870 175,528 168,071 171,293 195,983 202,690 222,537

Closed End Funds 43,649 52,341 46,549 28,394 30,723 29,986 27,203 25,806 23,917

Pension - - 770 878 1,301 1,255 1,362 1,421 1,558

Total 159,749 300,781 335,189 204,801 200,095 202,534 224,548 229,916 248,013


14/15

Page 14 of 15

Top

Top

TopSource: MUFAP

Source: MUFAP

Source: MUFAP

Sales (PKR in millions)


Asset Allocation 8,562 2,943 6,538 849 461 135 187 350 199

Balanced 1,933 3,007 9,585 827 627 130 2 8 26

Capital Protected - 2,624 2,591 2,951 2,848 - - - -

Equity 10,580 21,609 39,580 14,638 11,825 3,104 3,049 1,898 5,234

Income 41,149 178,192 385,817 128,626 113,145 13,478 9,566 7,282 15,343

Money Market - - 115 4,813 84,831 24,004 33,642 30,869 45,001

Islamic Asset Allocation 1,598 594 2,049 458 387 18 89 22 25

Islamic Balanced - 1,310 2,507 255 526 36 20 37 30

Islamic Capital Protected - - 581 9 - - - - -

Islamic Equity 1,581 1,879 4,934 931 764 116 225 196 631

Islamic Income - 4,018 22,288 14,596 9,108 692 10,274 4,553 18,616

Islamic Money Market - - - 676 13,094 2,226 31 1,368 2,684

Total 65,402 216,176 476,585 169,628 237,618 43,938 57,084 46,583 87,791

Redemptions (PKR in millions)

FY06 FY07 FY08 FY09 FY10 FY11-Q1 FY11-Q2 FY11-Q3 FY11-Q4

Asset Allocation 4,829 5,119 3,621 2,166 1,164 83 284 448 136

Balanced 4,318 3,831 5,841 2,934 3,605 322 996 416 185

Capital Protected - 57 164 806 233 1,790 34 1,114 602

Equity 15,138 16,577 37,407 13,103 15,799 1,568 6,550 3,205 3,957

Income 26,705 104,836 369,510 180,573 133,660 18,870 16,392 12,468 15,092

Money Market - - 3 1,683 57,790 15,632 25,454 21,923 38,019

Islamic Asset Allocation 154 900 1,604 634 795 187 34 100 45

Islamic Balanced - 452 1,522 505 1,213 155 194 45 46

Islamic Capital Protected - - - 10 26 - 807 - 724

Islamic Equity 1,312 1,954 2,469 1,615 1,984 441 615 620 362

Islamic Income - 927 17,547 16,187 10,000 1,572 1,881 3,457 5,955

Islamic Money Market - - - 54 8,812 1,350 24 1,434 2,493

Total 52,456 134,653 439,689 220,269 235,081 41,969 53,264 45,231 67,616

Net Sales (PKR in millions)

FY06 FY07 FY08 FY09 FY10 FY11-Q1 FY11-Q2 FY11-Q3 FY11-Q4

Asset Allocation 3,733 (2,176) 2,917 (1,317) (703) 52 (98) (98) 63

Balanced (2,386) (824) 3,744 (2,108) (2,978) (192) (994) (408) (159)

Capital Protected - 2,567 2,427 2,145 2,614 (1,790) (34) (1,114) (602)

Equity (4,558) 5,032 2,173 1,535 (3,973) 1,536 (3,501) (1,307) 1,277

Income 14,445 73,356 16,307 (51,947) (20,516) (5,392) (6,825) (5,186) 251

Money Market - - 112 3,129 27,042 8,373 8,189 8,946 6,982

Islamic Asset Allocation 1,444 (306) 444 (175) (407) (169) 54 (78) (20)

Islamic Balanced - 858 985 (249) (687) (119) (174) (8) (16)

Islamic Capital Protected - - 581 (1) (26) (0) (807) (0) (724)

Islamic Equity 268 (75) 2,465 (684) (1,219) (325) (390) (424) 269

Islamic Income - 3,091 4,741 (1,592) (892) (881) 8,393 1,097 12,661

Islamic Money Market - - - 622 4,282 876 8 (66) 191

Total 12,946 81,523 36,896 (50,641) 2,537 1,969 3,821 1,352 20,175


15/15

Page 15 of 15

Source: MUFAP

Top

Top

Top

Source: MUFAP

Source: MUFAP

Open End Funds' Return**


Asset Allocation 62.90% 18.79% -3.29% -22.33% 9.23% 1.92% 12.13% 2.99% -0.43%

Balanced 28.98% 27.16% 1.87% -25.01% 14.24% 2.49% 12.00% 4.69% -3.15%

Capital Protected - 5.57% 5.26% 14.67% 8.96% 13.75% 12.88% 2.21% 3.10%

Equity 27.48% 44.11% -4.29% -39.31% 18.93% 1.64% 19.43% 1.85% 1.10%Income 7.49% 9.07% 8.58% 7.68% 8.95% 7.08% 9.21% 8.24% 7.49%

Money Market - - 8.75% 10.33% 10.68% 10.40% 11.49% 12.49% 11.96%

Islamic Asset Allocation -4.54% 23.38% 5.49% -2.63% 6.93% 7.36% 7.92% 1.43% -0.65%

Islamic Balanced - 14.86% -1.17% -15.11% 16.83% 6.29% 13.30% 5.25% 0.41%

Islamic Capital Protected - - -0.40% 0.76% 13.62% 12.41% 18.78% 3.32% -

Islamic Equity 30.68% 25.09% -0.70% -30.12% 29.34% 5.76% 19.33% 6.69% 2.84%

Islamic Income - 9.81% 7.52% 8.06% 5.64% 11.39% 8.36% 11.41% 11.73%

Islamic Money Market - - - 7.79% 10.10% 9.91% 10.11% 10.92% 11.63%

Pension Funds' Return**


Equity - - -4.40% -26.78% 20.32% 3.25% 19.54% 4.07% -0.43%

Debt - - 3.54% 12.67% 7.67% 9.05% 8.85% 11.93% 7.54%

Money Market - - 6.25% 10.00% 3.54% 9.87% 9.98% 11.27% 7.78%

- -

Islamic Equity - - 0.13% -8.72% 23.13% 4.11% 19.56% 6.18% 2.13%

Islamic Debt - - 6.71% 9.91% 8.87% 9.49% 7.74% 10.51% 8.92%

Islamic Money Market - - 5.96% 9.17% 6.69% 8.44% 8.42% 8.28% 8.98%

Closed End Funds' Return**


Asset Allocation 19.23% 17.32% 5.41% -45.64% 26.44% 9.53% 16.70% 5.84% 5.30%

Balanced 22.18% 14.95% 0.92% -29.19% 0.12% 5.79% 3.20% -0.84% -0.48%

Capital Protected 14.79% -4.25% -1.13% 8.16% 9.43% 18.88% - -

Equity 9.11% 29.22% 0.35% -37.80% 13.30% 2.79% 17.74% -2.87% 1.05%

Income 2.70% 12.15% 5.76% 12.46% 4.58% 11.28% 3.15% 16.94%

Money Market

Islamic Asset Allocation

Islamic Balanced 22.73% 24.94% 1.76% -10.86% 22.81% 3.76% 12.10% 4.33% 3.30%

Islamic Capital Protected

Islamic Equity 21.40% 9.38% -2.78% -31.63% 31.40% 5.09% 20.12% 4.79% 2.99%

Islamic Income

Islamic Money Market

Sources: MUFAP

* Annualized

** Average for the Industry

Documents

Muf Invest